Economics has long been known as the dismal science. Its practitioners have often resembled the mythical Greek character Cassandra who was fated to see her invariably correct forecasts of doom and gloom ignored. At no time were the Cassandras of the Irish economics profession more ignored than when it came to the topic of the public finances in the 1970s and 1980s.

However, in discussing the public finances today, I do not seek to tell a tale of impending doom and gloom and hopefully my conclusions will not be ignored.

Successive governments have run a budget deficit in every year since 1947. This deficit is known as the Exchequer Borrowing Requirement or EBR. The legacy of this continuous borrowing spree is that today the country has an enormous national debt of £30 billion.

The huge size of this national debt reflects, in particular, the extremely large budget deficits that governments ran between 1974 and 1987. Over this period the EBR generally amounted to between 10 per cent and 15 per cent of gross national product (GNP) and as a result the national debt rose from £1.5 billion to £24 billion.

Much progress has been made in reducing the Government's budget deficit over the past 10 years. The EBR has been maintained at less than 3 per cent of GNP since 1988. Consequently the rise in the national debt has slowed considerably.

In the Budget last January, the Government set an EBR target of £637 million for 1997, an increase of £200 million on the 1996 deficit. However, the Exchequer returns for the first seven months of the year indicate that the authorities are on course to record a budget surplus for the first time in 50 years. At the end of July, the Government finances were in surplus to the tune of £929 million. At the same stage of 1996 the Government was running a deficit of £36 million.

The emerging budget surplus is largely attributable to much stronger than expected tax receipts. Total tax revenue was up by 15 per cent for the first seven months of the year compared to a budget forecast for a rise of 6 per cent. Every 1 per cent overshoot of the forecast level of tax revenue yields an additional £125 million in receipts for the Government.

The Department of Finance's tax projections have typically erred on the side of caution in recent years. Only once in the past decade has the Department over-estimated total tax receipts. However, in both 1996 and 1997, the Department's tax forecasts have proved way off the mark.

In 1996 its forecasts were overshot by almost 5 per cent or £571 million. This year it looks as if total tax revenues will exceed target by some 8 per cent or around £1 billion.

There are two reasons for these tax overshoots. Firstly, the Department's economic growth forecasts have proved to be too pessimistic. Secondly, the tax elasticity assumptions (i.e. the impact on tax revenue of economic growth) underpinning the revenue projections have proved to be too low.

Typically the Department uses a tax elasticity relative to nominal GNP growth of less than unity. However, the tax elasticity ratio was 1.25 last year and is likely to be even higher in 1997.

This may partly reflect improvements in the tax collection system. However, more fundamental factors are also at work, particularly the marked rise in the employment intensity of economic growth. For the first time in recent decades, strong economic growth has been accompanied by equally impressive gains in employment.

This has seen strong growth in domestic demand in 1996 and 1997, especially consumer spending. Prior to this, upswings in activity tended to be dominated by export sectors and did not extend across the economy.

The good news is that buoyant economic growth, accompanied by strong employment gains, looks set to remain in place over the balance of the decade. Thus the domestic economy is likely to continue growing strongly and generate buoyant tax revenues which in turn should create bigger and bigger budget surpluses.

It is important that the Government adheres to the spending limits and tax concessions it has set for itself over the next couple of years. A real danger is that the sight of bulging Government coffers may result in additional pay demands from public sector employees, pressure from various sectional interest groups for increases in public spending and tax cuts demands by the PAYE sector over and above those agreed in Partnership 2000. Such demands must be resisted.

Although it is 50 years since the last budget surplus was recorded, prudent economic management demands that Ireland should be running large budget surpluses during the current phase of above trend growth. Other considerations also point in this direction.

Firstly, budget deficits will be capped at 3 per cent of GDP post EMU. To avoid an overly contractionary fiscal policy when the economy eventually slows down, the Government should be running large budget surpluses at the present time.

Secondly, the Exchequer currently benefits from large inflows of EU receipts which will be scaled back significantly from 1999. The public finances need to be positioned to deal with this eventuality by moving the budget into a significant surplus beforehand.

Thirdly, the national debt of £30 billion, which equates to 81 per cent of GNP, is still excessive. Some 18 per cent of tax receipts are absorbed in interest payments on the national debt. It would make good economic sense to reduce the level of the national debt now so that, when the economic cycle eventually turns downwards, the level of the national debt will not be as big a constraint on budgetary policy.

Overall, then there is a golden opportunity to move the budgetary situation into substantial surplus in the coming years thereby reducing the constraints on fiscal policy further down the road. Let's not blow it.

Oliver Mangan is chief bond economist at AIB Group Treasury