The Minister for Finance said that any tax cuts introduced in next month's Budget to give relief to middle and lower income earners may have to be paid for by tax rises elsewhere in the economy.

As a result of strong growth in tax revenues this year, Michael Noonan confirmed that the budget adjustment to be announced next month will be considerably less than the expected €2.1 billion.

"I don't think I'll have to increase tax very much and Brendan Howlin won't have to cut spending as much" as previously thought, the Minister said.

Mr Noonan said the budget deficit target for this year of 4.8% will be exceeded.

He said if the deficit came in at 4% then the gap to be closed next year - when the deficit must fall below 3% of GDP - would be "half way there".

He also indicated that any tax relief would be targeted at the point where single taxpayers start paying the high rate of tax - currently €32,800. 

The minister said the Government was looking at both the tax rate and the Universal Social charge.

But he defended the USC on equality grounds as it is extremely difficult for high income earners to avoid, even if they make use of tax relief schemes in, for example, the property or film production sectors.

Mr Noonan also cautioned against expectations of a giveaway budget, saying the country was still borrowing money for day to day running costs. 

Any tax cuts would follow the pattern in previous budgets - targeted tax relief such as the reduction in VAT for the hospitality sector or targeted tax breaks for the construction sector -  he said.

These reliefs were aimed at increasing the number of people at work, which in turn would add to government revenues, Mr Noonan added.

He said he would like to give an outline of where tax policy will go over the next three or four years, but said he was not promising tax breaks, but rather would provide a "roadmap" of where tax policy was going.

He said that Government policy has to avoid past mistakes of excessive tax cuts and spending increases, which led to a boom-bust cycle. "We cannot risk success by doing what we did before" he said.  

Mr Noonan said the economy could grow at a steady 3% a year for the next decade if the right policies are followed, which he said would sort out a lot of problems 

Speaking on RTÉ Radio, he defended government policy over the past number of years, saying recent good economic news and strong Exchequer Returns were the result of the right policies being followed, and were not accidents of nature or acts of God.

Mr Noonan, who will meet European Union officials next week to seek their approval to refinance its bailout loans from the IMF, also gave the first signal today that the Government was less concerned pursuing its long-standing goal of Europe retrospectively recapitalising its banks.

"If we were to give our bank shares to the European fund, they'd give us a lump of money to take off the debt. Now that's not as attractive a deal anymore because our bank shares have become very valuable," Noonan said.

"It will depend on the negotiating position but I'm coming around to the view that we will probably have a better option of selling AIB over time to the market than using the money to reduce the debt and we'd probably get more out of it," he said.

Government's Budget priority to cement recovery

Tánaiste Joan Burton has said the Government's priority in next month's Budget would be to cement the recovery of the economy.

Speaking on RTÉ's Morning Ireland, the Labour Party leader welcomed yesterday's figures showing that almost €1 billion extra has been collected in tax this year.

She said it showed that people were going back to work and that consumers were starting to spend again.

However she said the country was not out of the woods yet and warned against raised expectations.

"We're not going to be able to meet everybody's pent up expectations all in one Budget," she cautioned.

"What we have to do now is to plan to grow this recovery. The key to it is getting more people back to work, having consumer confidence such that people spend in the domestic economy and we also have to then create at budget time a capital investment programme that will particularly address the housing issues," the Minister for Social Protection added.

Meanwhile, the ESRI has said that despite better than anticipated economic conditions, some tax increases and cuts in expenditure will still be necessary in the October budget.

ESRI Research Professor John Fitzgerald said that the Government's planned budget adjustment of €2.1 billion, forecast at the start of the year, is no longer necessary.

Prof Fitzgerald said an adjustment of €1 billion or less is now required.

"If you're going to find money for tax cuts or if you're going to find money for increased expenditure somewhere else, you're going to have to cut expenditure or increase taxes in some other location," he said.

Sinn Féin's finance spokesperson Pearse Doherty said he does not think there will be any real clarity from the Government on its plans for cuts and savings in the run-up to the Budget.

Speaking on RTÉ's News at One, Mr Doherty said the Government had not yet said what type of adjustment is necessary to meet its target, agreed with the Troika, of getting the deficit below 3% of GDP in 2015.

Deputy Doherty said it suited the Government's agenda to have a debate about the scale of the budget adjustment.

However he said the real debate needed to be about the measures and proposals, not just about deficit reduction but also rebalancing the economy.