Threshold for tax-free earnings expected to jump

A significant increase in the £144 (€183) per week threshold for tax-free earnings is expected in today's Budget. But the increase will fall short of the £183 per week threshold required if the Minister for Finance is to meet the commitment he gave last Budget day to take all minimum wage earners out of the tax net. It is expected the new threshold will be in the region of £165 to £175 per week.

Mr McCreevy may instead choose to focus on a related target he set last December of taking 155,000 tax payers out of the tax net this year through the measure. He should be able to make significant progress toward this goal, even if he does not meet the target of making the minimum wage tax free.

Government ministers have ruled out any cuts in income tax rates and Mr McCreevy will instead use tax credits to take more people out of the tax net. An increase of £400 per year across the two credits would be required to exempt the first £183 per week of income from tax. The net cost would be £374 million in the year, which would appear prohibitive if Mr McCreevy is to keep Budget day spending measures to the predicted €1 billion or £790 million

The increasingly limited room to manoeuvre available to Mr McCreevy was underlined by the end-November Exchequer statement issued last night by the Department of Finance. The figures show that Government receipts, including taxes, in the first 11 months of the year are running only marginally ahead of the same period last year at £22.4 billion.

Government expenditure by contrast is some £2 billion ahead of the same period last year and, as a result, the Exchequer surplus has shrunk to £1.9 billion from £3.8 billion this time last year.

Additional spending between now and the end of the year is expected to squeeze the surplus even further to £255 million. The Minister has already indicated that he will run a deficit next year of £515 million, before allowing for any spending that might be unveiled today.

The cost of increasing social welfare payments and the old age pension are expected to come to around £400 million. Simply indexing the various allowances and benefits would cost £169.7 million. This would see the old-age contributory pension rise to £109.70 per week and long-term unemployment benefit increase to £88.40.

Mr McCreevy has flagged additional spending infrastructure and health in the budget and these are likely to be the main features of today's budget.

Government sources stressed yesterday that the message the Government would try to convey was that it had done what it set out to do at the start of its term. The Budget would be about "underpinning" these gains rather than identifying any new goals. "That will be done in the context of the manifestos for the next election," said one insider.

Today's Budget will be presented as the last in a series of five that have fulfilled most of the promises made by the current administration in their 1997 programme for Government. Mr McCreevy will highlight that the Government has already substantially met all its promises on tax reduction. The target of cutting the lower band from 27 per cent to 20 per cent has been achieved, while the secondary target of reducing the higher rate from 48 per cent to 40 per cent was conditional on economic circumstances. The higher rate is currently 42 per cent.