The Minister for Finance Mr McCreevy has admitted that he does not know how the economy will perform next year - and neither does his esteemed counterpart in the US, Mr Alan Greenspan. And he will not be assuming the downturn is only a temporary blip, as to do so could prove calamitous for the public finances in the long term.

He is equally concerned not to be a harbinger of doom and says that anyone who is certain that things will be worse in 2002 and 2003 is equally foolish.

"No one can say with any certainty what the economic situation will be in 2002 and onwards. The Fed chairman, Mr Alan Greenspan, has said that his guess is no better than anyone else's and I too have no better a crystal ball than anyone else," Mr McCreevy admitted.

"But one thing is for certain: this is the first time in a long time that the US, EU and Japan are all in a downturn together." But all is not lost, according to the Minister. He pointed out that there is great coordination to ensure that there is no global slowdown.

"If you see the actions that Mr Greenspan has taken in cutting rates, the action that President George Bush has taken with tax cuts and the billions of dollars in expenditure as well as the action the ECB has taken in cutting interest rates, there is reason to be hopeful."

He adds that many of the big European countries are planning expansionary policies this year. In a display of his noted forthrightness about public expenditure, he insists that this recipe of tax cuts and spending is no longer appropriate to the Republic, despite the proximity of the upcoming Budget to the general election.

The Irish economy, he says, operates under different rules and now is the time to take a prudent course. Asked if there was a danger that we could talk ourselves into recession, he said that it was best to both prudent and realistic.

But he also pointed out that the public finances were in a very strong position compared with 20 years ago when debt was much higher. Now hundreds of thousands more people have jobs, the economy is more flexible and, even in a worst-case scenario, is likely to do better than the rest of the EU. "Ten years ago I would have been laughed at if I had said unemployment would reach 4 per cent. But we benefited when the world economy was on the way up and when it is coming down we will also suffer."

He added that if we moderated expectations and with prudent management not only from Government but private business, we could "ride out the world storms".

But he was also quite dismissive of recent draft OECD predictions that the economy would not be badly hit. "Those forecasts for the most part were done pre-September 11th and are often revised downward a number of times. I would treat all those forecasts with a fair degree of caution."

While contemplating the state of the public finances, the Minister is also involved in drafting the upcoming Budget. This week he received all the main social partners to hear their pre-Budget submissions. In customary fashion, he is giving nothing away but says it would not be unreasonable to expect innovation in some areas.

One possible area is PRSI. Last year Mr McCreevy surprised everyone by eliminating the PRSI ceiling for employers, the self-employed and proprietary directors. This year could see the Minister eliminating the ceiling for employees.

Mr McCreevy said the removal of the ceiling for employers' PRSI should have been forseen because such a move had already been put in train before - he had increased the ceiling in previous years. Yet, IBEC and other employers' groups have conducted a sustained campaign to have the decision reversed. A reversal is not on the cards.

However, it is likely that the current 12 per cent rate that employers pay for employees' PRSI will be cut to 10 per cent. The Minister said that the PRSI changes were something he wanted to introduce for the best part of a decade.

He pointed out that, under the old system of a floor and a ceiling, employers only paid out for middle-income earners and not those on high or low pay. "That did not strike me as equitable at all." Asked how it was equitable to retain it for employees, he said he would "have to address that in future" and it could be considered in an overall budgetary context. "You're right though," he added.

He pointed out that while eliminating the ceiling for the self-employed and proprietary directors, he also reduced the PRSI rate from 5 per cent to 3 per cent. If he was to make similar reductions for employers and employees in this Budget, such a move could soften the measure's impact considerably.

Squaring the circle on spending will be more difficult. Day-to-day spending by Government departments is running 21 per cent ahead of last year and that was in addition to substantial increases in previous years. Mr McCreevy said he had warned his fellow ministers in no uncertain terms that he would simply not partake in the usual "ridiculous" estimates process. Initial demands for spending increases of 20 per cent plus will simply not be met and many departments will only see increases in single digits.

However, he also admitted that the bulk of spending emanated from a few large departments such as health, education and social welfare, and the bulk of the money goes on pay. Given that the Government will have to allow for pay increases and there will be no staff cuts, it is difficult to see how growth in current spending can be substantially curbed.

The worry of many observers, from the ESRI to IBEC, is that the easier target will be capital spending on infrastructure projects. But the Minister insists that this is an ongoing priority.

One innovation he regrets not implementing is so-called multi-annual budgeting. This would give ministers an envelope of spending over a few years and allow them to allocate it, while making it more difficult to keep returning to the Minister for Finance to seek additional funding.

"If I come back as Minister for Finance I hope to go that way, although it will be a culture shock for line departments, managers and ministers," he said.