The prospect of a much bigger budget giveaway in October than previously anticipated helped seal last night's historic agreement between Fine Gael and Fianna Fáil.

Following the agreement, Enda Kenny is next week expected to be re-elected taoiseach at the head of a Fine Gael-led minority government, with Fianna Fáil TDs abstaining in the Dáil vote.

A number of Independent TDs are likely to be included in the new government.

Negotiators at the Fine Gael-Fianna Fáil talks were told last night the resources available to the next government for this year’s budget were likely to be considerably in excess of the €500 million estimated during the election campaign.

Sources said they expected the scope for tax cuts and spending increases in the budget to be well in excess of €1 billion.

Drafting on the final text of the agreement was continuing last night. It will be circulated to the two parliamentary parties for ratification at meetings to be held shortly, possibly tomorrow.

Two Independents

Discussions are also continuing between Fine Gael Ministers and Independent TDs to secure the 58 Dáil votes Mr Kenny needs to be re-elected taoiseach when Fianna Fáil abstains.

The Fine Gael leader has the support of his party’s 50 TDs, plus Independents Katherine Zappone and Michael Lowry. Government sources believe Mr Kenny will secure the required votes to be re-elected taoiseach when the Dáil meets next week. They also expect his new Cabinet to be approved by the Dáil.

Under last night’s political agreement, the first of its kind in the history of the State, Fianna Fáil has pledged “confidence and supply” support for a Fine Gael-led administration.

In return for a guarantee on certain policies, Fianna Fáil will either abstain or vote for the government on confidence votes and also on votes on money supply.

The agreement is due to last for three budgets – until the autumn of 2018 – after which it will be reviewed by both parties.

Public sector strikes

Crucially for Fine Gael, Fianna Fáil has promised to support the Lansdowne Road agreement on public sector pay.

With pay pressures building throughout the public sector and strikes threatened in several sectors, this was viewed as essential by Fine Gael for the stability of the next government.

It has been agreed that any disputes, including claims in relation to entrance pay in the public service, should be settled at the Workplace Relations Commission.

To explore a possible successor to the Lansdowne Road agreement, which expires in September 2018, the two parties have agreed to establish a commission on pay in the public sector.

While most of the agreement is couched in general terms, it is understood there is agreement to raise rent allowance by 15 per cent in the next budget. There is also believed to be an initiative on health service waiting lists.

Mr Kenny and a number of Ministers briefed members of the Independent Alliance on the deal last night.