The Government is set to tell the European Commission at the end of the third quarter that it will not meet its forecast for the annual budget deficit and the forecast must be revised to a figure in excess of 10.75%. That target is now likely to be revised upward to at least 11.5% of GDP.

The move comes as tax receipts start to trail the Department of Finance's targets set out in the April budget. Last week the Department said it was confident the deficit figure would not be exceeded by much, if at all. But the Sunday Tribune understands the Department envisages revising the figure upward if the tax receipts do not improve within the next two months.

The only other option to remain within the 10.75% deficit figure given in the April budget would be to restrain public spending, most likely capital spending projects. Spending pressures continue to grow in certain departments, for example the Department of Health has been running over 4% ahead in terms of capital and current spending in July.

Asked last week could the deficit as a percentage of GDP go as high as 12% for 2009, a senior Department of Finance source said: "The 12% figure could be too high as there will likely be the usual savings on central fund services, etc. which will reduce the effect of the possible tax shortfall.''

However the department will be forced to change its forecast at some point, if even by a small amount.

The department has provided the European Commission and the European Central Bank with budgetary projections for the next five years and these projections clearly commit the government to keeping the deficit to 10.75% this year.

Next year the government is committed to a deficit ceiling of 10.75% again, with the deficit on the general government balance falling to 8.5% the year after. The government is hoping public expenditure cuts, rather than revenue raising, will help to bring the level of borrowing down.

Davy Stockbrokers last week forecast that the deficit would come in at just over 11% of GDP. But other economists think it will be higher. Observers of the bond market believe lenders will be relatively sanguine about a small overrun on the deficit as long as the government shows a willingness to get the budget under control in the long term.