The Minister for Finance is facing into perhaps the most important and most challenging Budget of his career. Not only is the future health of the economy dependent on his choices but also the re-election prospects of the Coalition.

Mr McCreevy could not have wished for a worse time to be framing a pre-election Budget. There is less money in the kitty than at any time in his tenure and while he may have more room for manoeuvre than his predecessor in the Rainbow Coalition, the economic outlook is far more uncertain than it has been for many years.

But there is still scope for the Minister to deliver a vote-winning combination of tax cuts for the low paid and more money for pensioners and families with children, as well as fund the health strategy and additional spending on infrastructure.

All of this should be achievable within the broad framework of a so-called neutral Budget sought by organisations such as the Economic & Social Research Institute (ESRI) and the Central Bank.

Spending announced by the Minister so far has been directed mostly at meeting costs of pay rises agreed under the Partnership for Prosperity and Fairness.

Further spending on the health strategy, expected to be launched today, has yet to be funded. The Department of Education is also expecting further monies to be delivered in the Budget, while other issues at the centre of the battle for the spoils include social welfare and infrastructure, along with employers' demands for a cut in their PRSI rate.

A key consideration for Mr McCreevy in balancing these competing objectives is deciding how much he can borrow. The Minister would certainly prefer not to have to borrow at all, and politically it is likely that he will wish to minimise the actual amount involved and to keep the overall figure below €1 billion (£790 million).

The ESRI has estimated that the Minister has around £900 million to give away without overly stimulating the economy. This would lead to a £500 million (€635 million) deficit on the Exchequer's books.

Therefore, a social welfare package of around £400 million next year could be possible, as well as a £500 million tax package. However, that does not take account of the health strategy or the need for further infrastructure spending. One possibility is that health could be funded through a combination of increased excise duty on cigarettes, as well as borrowing. The costs of additional expenditure on capital projects could be met through more borrowing, or through receipts from sources such as the sale of ACC.

This combination would leave the issue of employers' PRSI outstanding. IBEC and others have been lobbying hard for cuts, and technically, the Minister could use the huge surplus on the social insurance fund for this purpose. But he may be reluctant to face charges of raiding the fund for this purpose just as unemployment has begun to climb again. The Minister can certainly point out that tax policy over recent years has been good to employers, with ongoing cuts in corporation tax and capital gains tax.

This surplus can also be used to increase contributory social welfare payments such as pensions, without actually increasing the Exchequer deficit.

Within these sort of broad guidelines, the Minister then has a number of choices to make. The Tβnaiste is understood to be keen to take all those on the minimum wage out of the tax net. This could be done by increasing either the PAYE or personal credit by just over £400, which would ensure the first £183 a week was tax-free. That would cost £374 million if funded through the PAYE credit.

If the Minister was then to index the bands, allowances and exemptions, he could increase them by 4 per cent to £20,800 for a single person, at a cost of £150 million.

That would not go very close to the individualisation target of £29,000, but this objective no longer appears to be a political priority. A band around that level would also ensure that no more than 20 per cent of taxpayers were on the top rate.

If there was no change to the tax rates, then the full cost of the changes to the bands and allowances would be just over £500 million, about one third of which the Minister could expect to get back through economic buoyancy - leaving £350 million to be funded through the Exchequer.

On social welfare, the cost of simply indexing all allowances and benefits to prices would be £169.7 million. This would mean the old-age contributory pension could be increased to £109.71 a week and the long-term unemployed benefit to £88.49. Given the large surplus in the social welfare fund, at least one third of this could be funded without recourse to the Exchequer. Thus an increase in the old-age pension to £113 and long-term benefit to £92 could be funded with around £226 million.

This would still leave money for child benefit increases. In last year's budget, Mr McCreevy pledged increases to £117.50 for first and second children from £67.50, and to £146 for third and subsequent children from £87.

If he was to go half way towards those targets this year - with increases of £25 for first children and £30 for third and subsequent children - the cost would amount to £326 million for a full year or around half that for 2002 if the benefit was not payable until June. A total social welfare package could thus be just more than £400 million, although smaller rises in child benefit are on the cards.

Broadly then, the Minister can take those on the minimum wage out of the tax net, increase many social welfare payments by more than inflation and pay promised child benefit increases in a £900 million package part-funded by borrowing of perhaps £500 million.

Budget on 'The Irish Times'

The website of The Irish Times, www.ireland.com, is launching its Budget 2002 site today. The site will build up extensive pre-Budget coverage including a breakdown of the Estimates, pre-Budget submissions from the main interest groups and online polls.

Sponsored by PricewaterhouseCoopers, it will deliver comprehensive news and analysis of the Budget package as it is unveiled by the Minister for Finance on Wednesday, December 5th.

On Budget day, the site will carry a live video stream of Mr McCreevy's speech and the responses from the Opposition.

An online tax calculator developed in association with PricewaterhouseCoopers will allow users to assess the impact of the Budget on their own situations.