The Government will announce its timescale for moving to a full tax credits system in the Budget next month, the Minister of State for Finance, Mr Martin Cullen, said.

"Tax credits will herald a major sea change in attitudes to welfare and work for many and an unquestionable improvement in the incentive to work."

Mr Cullen said he would not outline the measures the Budget would contain. "However, I can assure the House that the personal taxation measures are being carefully framed to continue on the programme of tax reform which has been so successfully advanced in the last two Budgets of this Government."

He was speaking during a debate on a wide-ranging Fine Gael motion calling for extensive tax reform, including the removal of the first £170 of weekly income from income tax.

A Labour amendment included a call on the Government to abandon its commitment to a 4 per cent ceiling in public spending increases.

The Government's amendment commended its progressive economic policies, and called for the continuation of its programme of tax reform through an appropriately balanced mix of measures in the next and subsequent Budgets.

Ms Breeda Moynihan-Cronin (Labour, Kerry South) said they could not talk about tax reform in isolation from public expenditure. The recent Irish Times/ MRBI opinion poll had demonstrated that the Irish people were deeply concerned about the level of expenditure on critical social services in the State.

"The Irish people are not clamouring to get a few extra bob in their back pocket when they know well that significant investment is needed in our schools, our health services, our services for people with disability, our legal aid system and many more."

Mr Jimmy Deenihan (FG, Kerry North) said the Government had come around to Fine Gael's way of thinking on taxation. "Any new national wage agreement will have to be driven by tax reductions rather than huge wage increases."

Mr Caoimhghin O Caolain (SF, Cavan-Monaghan) said that instead of tax cuts more revenue must be spent on redressing the economic imbalance within and between the regions in the State. "The Border counties still lag far behind the rest of the economy in real terms."

The Government amendment was carried by 75 votes to 51. The Independent TDs, Ms Mildred Fox, Wicklow, Mr Jackie Healy-Rae, Kerry South, Mr Harry Blaney, Donegal North-East, and Mr Thomas Gildea, Donegal South-West, supported the Government. Labour abstained.

When a vote was called on the motion, as amended, Labour voted with Fine Gael, but the Government won the division by 75 votes to 68.

After the votes, the Labour chief whip, Mr Emmet Stagg, said that the party's abstention in the vote on the Government amendment was a tactical device to show it disagreed with the tax policies put forward by both the Government and Fine Gael.