Budget 2007:A continued surge in property tax, together with a tight rein on spending, means Brian Cowen can run a budgetary surplus of €4.4 billion, writes Marc Coleman, Economics Editor

When stepping up to deliver his third budget next Wednesday, everyone suspects that Minister for Finance Brian Cowen is going to pull a rabbit out of a hat. While keeping the rabbit out of sight, Cowen's men yesterday pulled a very large hat out on to the budgetary stage.

Some weeks ago, Cowen announced that spending would increase by €4 billion. Predicated on initial pre-budgetary forecasts and - crucially - on the assumption of no additional spending projects or tax cuts, Cowen expected last October to run a budgetary surplus of around €720 million next year.

What a difference two months have made. A continued surge in property taxation, together with a reasonably tight rein on spending, means that surplus has now increased to €4.4 billion. Pulling rabbits out of hats is, it seems, just one of the magic tricks a minister for finance can perform. Increasing the size of the hat is another. Judging by the size of this one, next Wednesday's rabbit may look like it grew up around Sellafield.

For traditional reasons, some increase in the surplus was expected. Corporation taxes usually perform better in the final months of the year and the initial budgetary forecasts - usually finished in September - are undertaken too early to capture this.

But as noted by Ulster Bank chief economist Pat McArdle, the revenue take for 2006 is already a whopping €1.6 billion higher than what was expected in October and corporation tax cannot explain this. Add that €1.6 billion to the base used to measure the 2007 take and slap on a few percentage points of growth for good measure, and the expected take for next year turns out to be €2.1 billion higher.

Of the €1.6 billion bounce relating to 2006, half comes from capital gains tax, according to McArdle. Stamp duty, income tax and corporation tax have also done better than expected.

The Opposition are sceptical, however. According to Fine Gael finance spokesperson Richard Bruton, one-quarter of the Government's tax now depends on the property sector - a significantly higher percentage than at the start of the Government's tenure.

The Government appears to have accounted for this. Compared with 39 per cent in the first months of this year, the Government expects stamp duty revenue growth to slow to 6.6 per cent.

Capital acquisitions tax and capital gains tax grew by 46 and 66 per cent respectively in the year to October, but the Government expects these respective rates to slow to 5.7 and 4.4 per cent next year.

Of course, the budget surplus will not be €4.4 billion next year. Cowen has an election to win. But whatever its size it will be a surplus, leaving Cowen plenty of room to win votes.