Exchequer returns for August, to be released on Wednesday afternoon, will show further deterioration in the tax revenue available to government, with the Department of Finance now likely to miss its deficit target by at least €1bn as consumers withdraw from the high street and unemployment rises further.

The government has forecast a deficit, as a percentage of GDP, of 10.75% by year end, but continuing shortfalls in tax revenue will make this impossible. It's now likely the deficit, as a percentage of GDP, could rise to 11.5% if not 12%.

The government set a series of targets in the April budget and these have been submitted to the European Commission. However, by the end of September, the Department of Finance will have to revise the deficit targets upward, although it is confident this will not spook bond traders who want Ireland to show signs it can implement a full fiscal consolidation plan.

Tax revenues dropped short of target by €575m in July and this is expected to worsen by potentially €200m in August. However, the deficit figure is not likely to be revised until the September returns are in.

Economists believe a tax shortfall of €700m could be on the cards when figures are issued this week. The Department of Finance is looking at an exchequer borrowing requirement target of €20.4bn for the year, according to economist Alan McQuaid of Bloxham Stockbrokers.

The government is now depending on robust VAT and income tax receipts to reach its end-of-year targets. While income tax is fairly predictable (excluding the effects of unemployment), there is a worry about VAT. While price wars in the main retailers benefit consumers, they reduce VAT receipts and a large number of basic staples either have no VAT or a discounted rate.

Brian Devine, an economist with NCB Stockbrokers, said the government might have underestimated deflation, and consequently VAT and in­come tax would continue to fall behind target. He estimated the exchequer could miss its deficit target by about €1.5bn for the full year.

Economists will also be watching the interest rate decision of the European Central Bank next week. It is not expected to raise rates but the language used by the head of the bank, Jean-Claude Trichet, will be closely watched. Trichet has ruled out rate increases in recent comments, but he has signaled a willingness to remain in "readiness" if the eurozone shows inflationary pressures.