The Minister for Finance, Mr McCreevy, will have less room to manoeuvre in framing a give-away pre-election Budget as slower economic growth and the effects of foot-and-mouth disease reduce tax revenue.
The Department of Finance now expects the surplus of income over expenditure to be £2 billion (#2.54 billion) at the end of the year, £500 million less that originally forecast.
The reduction is accounted for by a drop in income from VAT and excise duties as consumers adopt a more cautious approach to spending, against the background of the global economic slowdown, and the Exchequer counts the cost of restrictions to curb foot-and-mouth.
But the Department emphasised at the publication yesterday of Exchequer figures for the first six months of the year that the year-end surplus will still be very large. Some economists suggested, however, that meeting the revised £2 billion forecast would require a very substantial, and unrealistic, pick-up in tax revenues between now and the end of the year.
Mr McCreevy said that tax receipts should improve as the year progressed. "The outlook for the public finances for 2001 as a whole and into the medium term is for a continuation at a reduced level of the large Budget surpluses we have witnessed in recent years," he said.
A more buoyant economic picture emerged in the figures for 2000 from the Central Statistics Office which showed the Republic's boom met the highest expectations, fuelled by record growth, exports and consumption.
And while the increases in Gross Domestic Product of 11.5 per cent and Gross National Product of 10.4 per cent are not expected to be matched this year, the new figures prompted some economists to revise their growth forecasts upwards for 2001.
In contrast, the Exchequer returns for the first half of this year showed a sharp drop in the amount of money spent on new cars, petrol, cigarettes and alcohol. Overall tax receipts increased by 5.3 per cent, well below the 12.5 per cent forecast.
Corporation tax receipts were slightly weaker, but this is not viewed as a downturn in the business sector. The second secretary-general at the Department of Finance, Mr Donal McNally, attributed the figure to the timing of the payments which fall due at the end of June.
Since then, a further £150 million has been received, which brings the year's tax take from this source to around 50 per cent of the year-end target, the same as 2000. Income-tax growth also remained strong, increasing by 8.8 per cent, marginally ahead of Budget forecasts, reflecting the buoyant labour market.
Government spending on the National Development Plan is expected to be on target this year, but concerns have been expressed about the rate of spending on public services. In the first six months of 2001 expenditure on public services increased by 19.7 per cent ahead of the Budget forecast of 18 per cent.
The employers' group IBEC said yesterday this inflation in the cost of public services was a major concern in a slowing economy and could eliminate Exchequer surpluses quickly.