The Department of Finance is understood to be in favour of the introduction of a system of tax credits in the forthcoming Budget.

The credits, which would replace personal allowances, are seen as a more equitable way of distributing tax relief. The current allowances system gives a bigger advantage to higher rate tax payers.

A spokeswoman for the Department confirmed last night that they do not see any difficulties in implementing the changes, although it would mean a fundamental overhaul of the system.

The idea of tax credits has been in circulation for a number of years and is backed by the Conference of Religious of Ireland, the Irish National Organisation for the Unemployed, the Tanaiste, Ms Harney, as well as most of the major political parties.

However, it will be difficult to implement and will require a lot of work at the Department of Finance and the Revenue Commissioners.

The introduction of such a system would involve taxpayers all getting the same amount as a reduction on their tax bill. This compares with the current allowances system, where the deduction is made from taxable income, meaning those paying tax at the higher rate benefit more. The new system would be most favourable to those at the bottom of the pay scales.

According to former Progressive Democrat TD, Mr Michael McDowell, the time is now right for the Government to bite the bullet and change the system.

"It is best to make these sorts of changes when things are going well and not when cutbacks are the order of the day," he said yesterday.