The rise in current Government spending will be held to four per cent next year, the Cabinet has agreed, following a day-long meeting where the Minister for Finance, Mr McCreevy, put the case for tight expenditure control.

Ministers also decided in principle that tax reductions in the next Budget will favour the lower paid, although the precise shape of the package was not established. Mr McCreevy spelt out the difficulties emerging in the run-up to monetary union and the care which needs to taken to avoid rising inflation. The meeting followed Thursday's publication of the latest inflation figures, which showed a 2.7 per cent increase in the year to May, the highest annual rate in three years.

The Minister for Finance has already been in bilateral meeting with many other departments on Government spending plans for next year and these will continue over coming weeks. With pay demands from gardai and other parts of the public service mounting, holding current spending below 4 per cent will not prove easy for the Government. However, while current spending is to be tightly controlled, no decision has yet been taken on the extent of capital spending. The special Cabinet meeting also agreed to focus the tax cuts in the 1999 package on the lower paid, according to a Government spokesman. All commitments under Partnership 2000 have already been honoured after largescale tax cuts over the past two years, he added. However, Mr McCreevy will still make further reductions, as promised in the Programme for Government.

Lower tax rates, which generally favour the better off, were the focus of the 1998 package. Measures such as increasing personal tax allowances are more likely in 1999 as they provide more benefit to the lower paid.