Economics: The new Minister for Finance faces a broad range of positive options in framing his first Budget, as the fiscal outlook is much brighter than it appeared earlier in the year.

He has the resources available to simultaneously increase social spending, cut the income tax burden and influence next year's wage bargaining by reducing the headline inflation rate.

The scale of the spending and tax changes does depend on how much the Minister is prepared to borrow but, even on a conservative assumption, the options open to him are the most attractive faced by an Irish finance minister since the year 2000. They are certainly very different from those staring at his predecessor when he framed the previous budget.

Mr McCreevy had planned to increase borrowing in 2005, with a total of €3.4 billion pencilled in, against a projected 2004 total of €2.8 billion.

The increase in debt finance was partly required to offset a higher planned level of current spending despite a strong anticipated rise in tax revenue.

Gross voted current spending (including the contingency provision) was projected at €32.4 billion. This represents an increase of €2.3 billion, or 8 per cent, on the 2004 figure, with tax receipts set to rise by 7.5 per cent (€2.5 billion).

In the event, developments on the revenue side through the year mean that the tax base at the end of 2004 is now likely to be substantially higher than projected by Mr McCreevy.

He had expected tax receipts to rise by just 4 per cent in 2004 but, with 10 months of the year behind us, the growth in tax revenue is around 12 per cent, implying a substantial revenue overshoot.

The extent of this is still open to debate (capital taxes surged last November, a feat which may not be repeated) but it seems reasonable to expect a final tax outturn for the year over €2 billion, ahead of the original budget forecast.

It is true, as Mr Cowen has pointed out, that over €600 million of the overshoot is in the nature of a one-off bounty to the Exchequer, stemming from tax settlements arising from bogus non-resident accounts and undisclosed offshore accounts.

This still leaves over €1.4 billion of an underlying overshoot, however, reflecting a much stronger performance from the economy than expected and - as such - of a more permanent nature.

VAT, for example, is running over €350 million ahead of expectations, with excise duty over €60 million above target, despite falling sales of drink and tobacco.

Capital taxes and stamp duty are also substantially stronger than projected, with only one category, corporation tax, coming in behind expectations - and even that shortfall has narrowed of late, perhaps indicating an end-year outturn in line with the original target.

The upshot is that the tax base underpinning the 2005 Budget arithmetic may well be over €35 billion - rather than the €33.4 billion anticipated by Mr McCreevy.

The new Minister could simply choose to accept this and retain the €3.4 billion borrowing target, but I suspect that borrowing will be lower - perhaps around €1.5 billion.

This would leave the general Government position in broad balance, as it takes account of the money paid into the State pension reserve.

This would allow the Minister to increase gross voted spending by €2.7 billion to €32.6 billion while spending €5.6 billion on the capital side, so going some way to silence those voices calling for a much higher level of Government expenditure (although not those who think the Budget can solve world poverty).

On the tax side, this configuration would enable the Minister to reduce the direct tax burden by €800 million, enough to fund say, a €400 rise in the tax credit and a €3,000 widening of the standard tax band, raising it to €31,000 for a single person.

Alternatively, he could raise the PAYE credit, which does not benefit the self-employed and, as such, costs much less than a change in the tax credit.

There are now over 600,000 people paying tax at the top rate (42 per cent), so reducing this would, no doubt, be popular with the workers concerned - if not the chattering classes - although he is more likely to take some people out of the net by widening the standard band.

The Minister may also use the opportunity to leave excise duty unchanged as the yields on tobacco and drink are under some pressure at existing prices.

Moreover, the recent rise in oil prices has pushed the cost of petrol over €1 per litre, arguing against further punishment for the motorist and additional damage to the consumer price index.

Indeed, if he does leave indirect taxes unchanged, the December inflation rate will fall by 0.4 per cent and will lower the base for inflation in 2005, which will be a favourable backdrop for wage bargaining next year.

Some combination of higher spending and tax relief looks inevitable - whether it unfolds as above or not.

The precise mix chosen will tell us a lot about where the Government feels the best political advantage lies - people say they want better public services but they also like keeping more of their hard-earned income.

Dr Dan McLaughlin is chief economist, Bank of Ireland