A host of recent data has confirmed that the economy is booming. Exports are surging ahead, house prices continue to rise strongly, consumer spending is buoyant and there is a steady increase in the number of people at work. The only cloud on the horizon is a steady rise in the rate of inflation, which accelerated again last month and looks set to move comfortably over an annual rate of 3 per cent in the months ahead.
The strong rate of economic growth is reflected in the Exchequer's financial position, leaving the Minister for Finance, Mr McCreevy, considerable leeway as he frames his Budget package. However, with the economy storming ahead, Mr McCreevy and his Cabinet colleagues need to consider their Budget strategy carefully. The tax package must be framed so as not to add to inflationary pressures; indeed, if properly constructed it could even help to improve conditions in the jobs market. Meanwhile, current spending - and particularly public sector pay - must be kept under tight control.
The Government has been subjected to repeated warnings from the European Commission and the European Central Bank that a tight Budget is essential in order to control inflation. Broadly, this advice is sensible. Mr McCreevy must aim for a substantial Budget surplus again next year and, crucially, must hold out against building demands for further big increases in public sector pay. The Government must also resist the temptation to introduce a "giveaway" tax package, bestowing large financial gains on higher earners, as this would risk adding to inflationary pressures.
There is no reason, however, why tax reductions aimed at lower earners should be inflationary, as the Tanaiste, Ms Harney, pointed out in a speech this weekend. In fact, if properly directed, such measures could help to control wage pressures by making it more attractive for people to move from the unemployment register into work. Ms Harney puts this approach in the context of a strategy also involving a more active approach in getting the unemployed back to work and the introduction of a national minimum wage.
The Government came to power on a policy programme promising sharp reductions in income tax rates and both the top and standard rates were reduced in the 1998 Budget package. The trouble with this strategy is that it directs benefits firmly at the better off.
Fortunately, the indications from Government - and from Ms Harney this weekend - are that the 1999 Budget will not take this approach and will instead concentrate on widening the standard rate income tax band and increasing personal allowances. Such measures benefit all taxpayers, but direct the greatest proportionate gains to lower-to-middle income earners.
If properly structured - and it must be remembered that the interplay between the tax and social welfare systems is complex - such tax measures can help to make it more financially attractive for the unemployed to move into the jobs market. It will be tempting for the Government to go for a populist package. But it is vital that they do not do so, as the economy is already facing an inflationary threat which must not be allowed to take hold as we head towards the single currency.