By-election realpolitik set to queer McCreevy's tax pitch

Despite an unprecedented economic boom and surging tax revenues, the Minister for Finance, Mr Charlie McCreevy, faces intense pressures as he endeavours to frame December's Budget. On one side, he faces growing calls from trade unions and business organisations for tax breaks while on the other he is coming under increasing political pressure to deliver ahead of two vital by-elections.

He also needs to keep public spending tightly controlled in the run up to EMU, particularly if he is to reform the tax system.

On the tax side, it now seems quite clear that Mr McCreevy will have to deliver around £500 million of tax cuts. Of course, this is substantially more than had been bargained for in Partnership 2000, where £900 million was promised over three years - and more than £400 million has already been "given away" in the 1997 Budget by the previous minister, Mr Ruairi Quinn.

There is still a major question mark over how these tax cuts will be implemented. The coalition fought the election on the promise to cut tax rates and that is what is in the Programme for Government. The Tanaiste, Ms Harney, also recently said the Government recognised it was "payback time" and the cuts would be delivered; once again, she emphasised the plan for cuts in the actual income tax rates.

However, the largest trade union SIPTU has already marked the Government's card, warning that it will do everything in its power to fight for a widening of the bands, rather than any cuts in the income tax rates. The unions have been joined by unlikely bedfellows, ISME, which has also called for tax cuts to be directed at the lower paid in its pre-budget submission and has called for the allowances to be raised towards the existing income tax exemption limit.

Most commentators now believe that the Government may attempt to do both, although there will be pressure, from the PDs in particular, for the top rate of tax to be cut. It is clear it is better for the majority of workers for the thresholds and allowances to be raised, rather than for the actual rates to be cut. After all, the biggest problem with personal taxation is that the marginal rate of tax hits at too low an income level.

At the same time, the Minister is under severe pressure to deliver on the spending side. He is currently in the middle of the Estimates round with all the Departments making their way up to Merrion Street for their bilateral meetings. Mr McCreevy is adamant he is holding firm on his promise to keep spending increases within a 4 per cent limit, well below what is being demanded by many of his colleagues.

Nevertheless, it will prove politically difficult for the Minister to refuse his colleagues in days when the Exchequer is effectively awash with money.

He will also be under increasing pressure to deliver on a whole raft of public sector pay claims ahead of the by-elections, the winning of which is seen as very important for the future of the coalition.

A winter of discontent in the public service is already being threatened with strikes over both pensions and pay possible. In addition, more than 50,000 workers could become embroiled in a dispute over pay parity for craft-workers in local authorities. The claim considerably exceeds the limits set out in the national agreement but many people feel the Government may bow to the pressure in the light of the by-elections.

The dispute in TEAM could also have some impact with pressure to settle ahead of the vote in Dublin North where many of the workers live.

It has to be hoped that, despite these pressures, the Minister manages to keep within his own 4 per cent guideline. He should be helped by the inclusion of the central fund which the last Government did not have and the likely reduced funding for unemployment next year as the dole queues continue to fall back.

To do otherwise would be to start down an unsustainable path. Now is probably the best time in the history of the State to reform the tax system - after all there is no guarantee that revenues will keep growing as they have been - and to do that expenditure must be kept under tight control.