There were two clear pointers about the 1999 Budget in the speech delivered yesterday by the Tanaiste, Ms Harney. First, the Progressive Democrats' view is that the Budget should include substantial tax reductions, despite international warnings that a tight Budget is required to control inflation.

Second, Ms Harney added to recent indications from Government sources that the Budget would aim to reduce the tax burden on the lower paid.

The 1999 Budget is, of course, still some months away. However, it is already clear that the Minister for Finance, Mr McCreevy, will have substantial financial resources at his disposal.

For the first time, the Exchequer will be in overall surplus this year, meaning that total Government revenue will exceed total spending by between £800 million and £1 billion. With economic growth likely to remain buoyant, these trends are expected to continue into next year. This means that the Government could afford a generous 1999 Budget, while still planning for a substantial Exchequer surplus. The indications are that the Tanaiste will push for a package as generous as last year's, which involved tax reductions costing over £500 million in a full year.

Would this be inflationary? A package injecting as much into the economy as last year's Budget would run the risk of adding to consumer spending and thus fuelling price pressures. However, Ms Harney argued yesterday that tax reductions need not necessarily add to inflation pressures, particularly if the cuts were aimed at lower wage earners.

The argument here is that tax reductions could make it more attractive for the unemployed to move off the live register and take up employment. This strategy could thus increase the number of people willing to take up jobs, at a time when demand is high for unskilled or semi-skilled workers.

Combined with the proposed minimum wage and the new more active approach to getting the unemployed back to work through training and other measures, the Tanaiste argues that this can achieve "a real change in the welfare to work calculation of those on low pay or unemployed". Ms Harney's speech is the clearest indication yet that the Government will put its strategy of cutting income tax rates on the back-burner - for the 1999 Budget at least. Last year the top rate was cut from 48 per cent to 46 per cent, while the standard rate fell from 26 per cent to 24 per cent.

However, Ms Harney indicated yesterday that the priority in the next Budget will be to increase the income at which people enter the tax net - currently £76 a week for a single person. This would be achieved through increasing personal tax allowances, the amount of income exempted from tax, which is a powerful way of targeting low earners.

Ms Harney indicated yesterday that she believed that the Government should aim to exempt the first £100 of weekly income from tax for a single person over a few Budgets - a measure which would cost the Exchequer £400 million plus in annual revenue.

She also said that taxpayers should have to earn more before moving to the higher income tax rate. This points to an increase in the standard rate income tax band, a measure which benefits middle-income earners most significantly and is of no benefit to the lowest earners.

This would represent a significant change of approach from the 1998 Budget, when income tax rate cuts gave gains to higher earners and irked the trade union movement. Remember we have already promised our EU partners that our 1999 Budget will have controlling inflation as its primary aim. The Government will sell the package - at home and in Europe - as a financially responsible package, aimed at promoting social inclusion and at keeping down inflation. Only time will tell whether this is, in fact, the case.