[*]During the interview stages, to truly understand their technical nous in web design and are the real deal, what are the keywords I should be listening for. In the sense of software packages, web design terminology etc?
In my opinion, there's nothing they can say that means they know what they're doing. I've recenntly been involved in the recrutiment of a web developer, and we had many candidates in that sounded like they knew what they were doing and they were being interviewed by techies. After the interview we gave practical tests and most of them proved to be a lot less capable than they had seemed.
[*]Same question as above, but what software packages in terms of digital manipulation, illustration, mailing etc?
There is no one single package that is correct for one job. It is largely down to preference, although Photoshop is the main package you'd expect someone to use for design work.
[*]Budgeting for hardware and software? Mac? Software? How much shall I budget to buy this person the tools they will need.
You can buy a very decent PC for 1K. They will probably need Photoshop, which can be rented for about £15 a month.
[*]Whats the hot stuff right now, all of this Web 2.0 talk, is it simply the use of flash etc? Again, buzz words I need please.
Well the main thing is you want the sites built to be responsive. Flash is a big no-no because it doesn't work on most phones and tablets.
Think about whether it is cost effective to be employing someone. If you have a company build a site for you, they can build it inside a CMS system like Wordpress, and that would allow you to edit the content yourself without any technical skills needed, including adding and removing pages.
If you do employ someone, look carefully at examples of their work. Also bear in mind, the subject of this thread mentions a web designer, and a web designer is not the same as a web developer. They are different jobs, although many people can do both and that's probably what you need.