* Future fiscal policy to focus on spending cuts
* Govt sees cost of living falling 5 percent this year
DUBLIN, April 23 (Reuters) - Ireland's government signalled on Thursday that it may cut social welfare payments next year as part of a wider squeeze on spending to tackle a ballooning budget deficit.
Finance Minister Brian Lenihan said a reduction in the cost of living as interest rates and energy costs drop would make it potentially easier to cut social welfare payments.
"When you take the 3 percent increase (in social welfare payments) provided for this year together with a five percent drop in the cost of living that we may have, (that's) a real increase in social welfare provision of 8 percent," Lenihan told parliament.
At the time of the April 7 budget the finance ministry forecast a 3.9 percent fall in the consumer price index this year, followed by a 0.3 percent rise in 2010. It reiterated on Wednesday that the forecast had not changed.
Dublin unveiled a five-year austerity programme this month to get its budget shortfall below 3 percent of Gross Domestic Product (GDP), the EU limit, by 2013 from an estimated 10.75 percent this year and next.
Economists said there was too much emphasis on tax increases, which could compound an already severe recession this year, but Lenihan said spending cuts would be the focus from next year.
"In future the work will have to focus on expenditure because there is a limit to the amount of taxation which can be exacted in any economy and there is a limit to the amount of borrowing any economy can undertake," he said.
"Welfare accounts for 21.5 billion (euros) of our total expenditure; that is a very substantial sum of money," Lenihan told a parliamentary debate on scrapping a Christmas bonus for welfare benefit recipients.
(Reporting by Carmel Crimmins; editing by David Stamp)