Aid for business and farmers key elements of Budget

REDUCTIONS in payroll costs for business and a special package for farmers will constitute an important part of next week's Budget.

The Budget will aim to cut the cost to employers of taking people on. These measures will come in addition to a package of income tax cuts worth around £290 million in 1997, or £400 million in a full year.

Reducing the standard 27 per cent income tax rate, probably by point, is designed to grab the voters' attention, while a combination of increasing allowances and expanding bands will add to take home pay.

There will also be moves to improve social welfare provisions, particularly in areas which increase the incentive to work.

The other headline move is expected to be a reduction in employees' PRSI, where the rate will fall by 1 per cent to 4.5 per cent.

New measures to cut employers PRSI are also expected. The income level on which the lower 8.5 per cent rate of employers' PRSI is payable is expected to be raised by £500 to £13,500, with a commitment for a further £500 increases in each of the following two years.

While 1-point cuts in both the standard income tax rate and the employees' PRSI rate are now expected, the Department of Social Welfare has been reluctant to see any cut in its own takings.

If it manages to hold out against the employees' PRSI cut, then a 2 percentage point cut in the basic income tax rate to 25 per cent is expected. This is a more expensive prospect and would also have lopsided effects married couples with one spouse working would do well, but single people on low wages would receive little benefit. A cut in the 48 per cent rate of tax is said to be completely off the agenda.

Part of the rationale of cutting employees' PRSI is to deliver a tax cut which will discriminate in favour of private sector workers. The better than expected public sector pay deal added impetus to this argument.

Apart from the PRSI reductions, business will also be targeted with a reduction in Corporation Tax. However, late last night it was still unclear whether it will be the 2 percentage point sought by Fine Gael off the standard 38 per cent rate or the 1 percentage point to which the Department of Finance is keen to limit the reduction. Similar argument surrounds the reduction in the lower 30 per cent Corporation Tax rate, which applies to the first £50,000 of profits.

The advantage for the Government parties is that any reduction in Corporation Tax would not affect the Exchequer until 1998. The cost, over the full year of a 1 point cut in the 38 per cent rate is close to £20 million.

The total package to the farming community is likely to cost £20-£30 million. One measure expected is an increase in the VAT rebate on livestock, which is now 2.8 per cent. A number of other tax measures directed at the farming community are expected to form part of the package.

A major part of the Budget arithmetic will be made up of social welfare increases. The final amount to be allowed is likely to be £100-£120 million.

Child benefit increases are also under negotiation. Mr de Rossa has proposed a large increase for the third child and above. This is seen as better than providing the benefit through unemployment compensation as it does not affect the incentive to work.

Large numbers of children are also associated with greater poverty. This would cost £9 million in 1997 and £28 million in the full tax year. Benefit for first and second children is likely to be raised by just £1 a week.

At the same time there will be increases in the family income supplement which tops up the income of low paid workers. The theory is that the supplement should be based on after tax income, but moving to this basis in one step would prove too expensive. The likely compromise will be a system based on income after the payment of PRSI and levies, which would increase the numbers eligible for the payment.

In addition, the rate of relief on unemployment benefit and disability benefit is likely to be increased. This will benefit seasonal workers in particular.

Rent and mortgage allowances will continue to be paid for up to a year after a person returns to work with the benefit slowly tapering off.

The Minister is likely to add something to petrol excise, but to keep a gap between the cost of petrol here and in Northern Ireland. Some increases in alcohol excises may also be announced.

However, many of the increases are likely to be small as the Minister has to keep a watchful eye on their effect on inflation.