BASIC economic theory suggests that if consumers are facing high current and expected future inflation, they will (a) save less today, (b) spend their income faster, and (c) fast-forward their borrowing plans so as to benefit from the lower but rising interest rates and to avoid paying the inflationary tax.

Then again, basic economic theory has little time for the deeper nuances of human behaviour.

In particular, economists are rarely keen on treating in-depth the trivial issue of uncertainty.

What we do know about people's behaviour in the case of an uncertain future suggests that people may become irrationally prudent when their perception of times ahead becomes gloomier than their perception of the present conditions.

The latest exchequer returns illustrate this problem. As was widely expected by analysts over a month ago, Q1 2007 exchequer returns came in on target. This is bad news to our finance heads, who are accustomed to revenues running ahead of expectations.

It is good news to taxpayers, who for the first time in a number of years, are putting some disciplinary pressure on government spending.

According to the figures, in Q1 2007, revenue and spending were marginally ahead of the budget forecast.

The revenue exceeded the original predictions by a slim 29m . . .or 0.2% . . . which compares unfavourably to last year's surplus of 436m.

The expenditure was 0.8%, or 76m, above the forecast, which once more compares unfavourably to 2006, when government spending exceeded projections by 56m.

These figures confirm that once government gets its hands on surplus revenue, it will revise its expenditure plans upwards regardless of the underlying economic fundamentals. Effectively, the government acts like an economic junkie . . . every increase in the dose of a drug requires a simultaneous revision of the future demand for the drug upwards . . . classic addiction behaviour.

However, the main difference in Q1 2007 compared to the figures from a year ago is on the revenue side.

The basic problem here is that our tax receipts are now running virtually on a par with budget projections. The days of unexpected windfall gains in revenues are over.

This is a serious cause for concern for the government. Our state spending plans rest on two basic foundations. First, there is a crucial assumption that windfall revenue gains will be able to absorb any unanticipated cost increases. Second, there is a set of assumptions concerning economic fundamentals, such as the projected rate of growth for Irish economy, for the length of the particular expenditure programmes.

The first assumption is now being challenged by the reality of falling personal spending and cooling in the housing markets.

The second set of assumptions is also under severe strain.

Both the budget and the longerterm expenditure plans, such as the NDP 2007-2013, assume that economic growth in the Republic will be around 5% on average annually for the foreseeable future.

The latest figures from the ESRI and other Ireland-based researchers released last week suggest that this is no longer valid.

Instead, the ESRI finally decided to fall in line with international analysts who for some time have been predicting economic growth in Ireland to slow down to around 3.3%-3.5% per annum in 20082011. Only someone with access to the magic Amsterdam brownies would build national infrastructure plans on the 5% growth assumption through to 2013.

The downward revision of the consensus forecasts for Irish economic growth for the period of the NDP implies that, in order to implement our ambitious infrastructure plans, the government will have to either rely on surplus tax revenue or on trimming the fat off its current expenditures.

The former, as the exchequer revenues clearly indicate, is increasingly improbable. The latter is politically impossible.

Thus, the first conclusion from the latest exchequer results is that our long-term spending plans are now highly questionable.

The second lesson to be learned relates to our opening proposition. According to the exchequer results, excise duties and VAT fell 106m or 1.8%, in Q1 2007.

These sources of revenue, linked to consumer spending, account for over 40% of all tax receipts. In Q1 2006 these revenue streams were up 1.4% and 10.3% respectively. In at least one major segment of the market . . . new car sales . . . Irish consumers all but stalled, with new purchases rising by only 6.8% in the worst performance since 2004.

In the other, even more important segment of revenues . . . capital gains tax and stamp duties . . .

revenue was 81m below the target in Q1 2007.

These figures are a signal of worse things to come, as the current revenue reflects home sales from Q4 2006. Figures released over the past few weeks show marked declines in prices and turnover in the housing markets across Ireland since then. The bad news has yet to feed through to exchequer returns.

Overall, the data shows that Irish consumers are very uneasy about making big ticket purchases. This unease has now spread deeper than the maturing SSIAs.

At the end of 2006 it became increasingly clear that SSIA maturity will not be feeding as much consumer spending as we could have expected. By the end of Q1 2007 this negative trend was further reinforced by the rising savings rates for consumers who do not have SSIAs. This suggests that Irish consumers across the board are saving more from their income than ever before . . . a proposition that points to their feeling terribly uneasy about the prospects for the future.

Dr Constantin Gurdgiev is an economist and editor of Business & Financemagazine