Deficit level will shape package

How high a deficit is the Minister for Finance willing to run next year? This is the key question in determining the impact on taxpayers' pockets.

If Mr McCreevy is willing to let borrowing rise to 1.2 -1.5 per cent of Gross Domestic Product, then the pain imposed in last year's package should be avoided. However, a tighter borrowing target of less than 1 per cent of GDP would leave considerably less cash.

The other question is whether the Minister plans to advance a reform package in any area. If he does, then PRSI is the most likely, though great political risk lies in this area for the Government.

On borrowing, the pre-Budget White Paper showed that the general government deficit - the EU borrowing measure - will be just over €1 billion before any Budget measure, or around 0.7 per cent of GDP. A rise to 1.2 per cent of GDP would leave around €700 million in the Budgetary pot, while a sub 1 per cent target would leave €400 million or less.

With €200 million plus to go on social welfare - and maybe €100 million raised from excise duties - there will be limited cash for other tax concessions.

On tax, the package is expected to be "minimalist". Tax credits and the standard rate band are both likely to increase. Each 1 per cent increase in these would cost €87 million in a full year - so a 3 per cent inflation-matching rise would cost a hefty €258 million. The 2004 cost would be lower at €180 million.

If the Minister does not adjust the system to account for inflation, then taxpayers will find that wage increases push relatively more of their income into the tax net, or for the better off more income becomes taxable at 42 per cent. In fact, such is the upward move of average wages that the Department estimates that to maintain the percentage of taxpayers liable only at the standard rate at the current level of 69.5 per cent would require a hefty €2,450 increase in the 20 per cent rate band for a single person to €30,450, at a full-year cost of €244 million.

Some increase in the standard rate band is likely. However, with the minimum wage due to rise by 10 per cent to €7 next year, the betting must be that Mr McCreevy will concentrate some of his fire on increasing the basic and/or PAYE tax credits, to ensure that a substantial portion of the minimum wage remains outside the tax net.

While the best most PAYE taxpayers can hope for is not to face a higher tax take next year, questions remain about whether Mr McCreevy plans to reform PRSI.

Last year he announced that from next January, PRSI and the 2 per cent income levy would be applied to benefit-in-kind. There has been speculation that he would follow this by announcing a reform of the employee PRSI structure, possibly abolishing the ceiling and reducing the rate from the current 4 per cent.

As part of the Estimates, the Minister has already signalled an increase in the employee PRSI ceiling by 4.3 per cent to €42.160 next year. This would be a normal part of the Estimates process, however, and it remains to be seen if Mr McCreevy plans a reforming approach.