Next Budget can provide largesse like no other

The latest exchequer returns for the first half of the year indicate that the Budget surplus at the end of the year could be as high as £5 billion (€6.35 billion). Official forecasters estimate that the surplus on normal revenues and spending will be £1.7 billion, while the rest will be made up by one-off receipts from the privatisations of Telecom Eireann and the ICC and ACC banks.

This means that the various ways of spending or investing the money will be at the centre of the negotiations around a successor to Partnership 2000. This year's Budget will be able to provide largesse like no other.

Of course the Department of Finance and indeed many other commentators believe that a cap should be put on the growth of day-to-day spending, which is already running at an extraordinary 10 per cent if the various accounting screens are removed. But capital spending and personal taxation cuts are another matter and the Minister for Finance, Mr McCreevy, is likely to be generous with both.

The three areas which are most likely to be tackled firmly in the 2000 Budget this December are personal taxation, infrastructure spending - including public transport and housing - and pension provision.

All the social partners are in broad agreement about the need for future personal taxation reductions, although there is still division over cutting the top rate of income tax. Reductions in the 2000 Budget could leave the Coalition meeting its commitments under the Programme for Government. In other words, 80 per cent of taxpayers could be taken out of the top rate, the standard rate could be cut to 20 per cent and the top rate of tax to 40 per cent for about £1 billion. At the moment around 40 per cent of people still pay tax at the top rate.

According to Mr Eoin Fahy, chief economist at Ulster Bank Markets, it is possible to do all this in one tax year - but it is probably politically unrealistic. The Government will be worried that this could be seen as favouring the better-off and - in any case - such a give-away package is more likely in an election year. It could cause some problems with the unions, with SIPTU stating that any top income tax rate reduction merely diverts resources away from taking people out of the tax net altogether.

But it ought to be possible for the Government to introduce a significant tax package, worth £500 million to £600 million in a full year.

IBEC and the unions believe that something will be done this year on childcare, although this may not be in the form of a tax credit. Large increases in child benefit may be more likely. The employers will be calling for some scaling back of employer's PRSI, insisting that the increases last year were uncalled for.

The other priority is, of course, infrastructure, with general agreement that the so-called "infrastructure deficit" is massive. However, while the Government could choose to spend much more on this area than this year's planned spending of £2.4 billion, it is probably unlikely. Because of planning delays, bringing investment spending on-stream takes a long time. But, as Mr Fahy points out, there is a lot the Government could choose to do with public transport, doubling the number of buses and DART trains, for example, as well as improving the main lines - measures which would feed through quickly to improved services.

All the social partners stress the need not just for roads and bridges, but also for water and sewerage supplies to enable further housing development. In fact, the housing issue is an area which the unions are particularly keen on and thus some of the major projects are likely to be in this area. SIPTU has recently called for a strategy along the lines of that outlined in the ESRI's, recent review which would involve building housing alongside new suburban rail routes.

After this comes the possibility of paying off various liabilities. The Department of Finance is of course most keen to pay off the debt and, in fact, it has pencilled in a provisional date of 2015 for having no debt whatsoever left on the books. It is keen to spend the £1 billion needed to sort out the Telecom and An Post pension funds, which the Minister has already indicated will happen.

But there is more controversy about paying off the debt. As Mr Fahy points out, even paying £1 billion off the debt only saves the State about £40 million because of very low interest rates. Thus, paying off the debt does not have the same imperative it had when interest rates were far higher. Rather, he suggests, money should be put away to provide for the population as its age profile increases.

The unions are seen as the least keen to pay off the debt, with the employers only slightly more positive. Instead, both favour a proposal along the lines of the national pension policy initiative. This would mean a move away from current funding of the exchequer's pension liabilities. At the moment the Government is the only employer which does not have to fund for its future provision and this is likely to cause problems in the future as the proportion of retired people grows and the proportion in work is reduced as part of the natural demographic pattern.

It is possible that not only will the Government choose to sort out the specific schemes, but it is possible that future funding of particular schemes such as those for nurses or the Garda could begin. On top of that, the Government is likely to honour its commitment to bring the old-age pension up to £100 a week.

One issue to be decided will be who will manage the funds, whether they are for future infrastructural spending or future pension provision. The National Treasury Management Agency will, of course, argue that it should manage the funds, but private investment managers will want some of the action and they will point to their possibly superior returns given that they have the expertise to invest in a broader range of markets, including equities.

At the moment an inter-departmental group is examining the issue and so no figures are available yet. There are issues around EU accounting law which may make the proposal difficult to implement.

Other issues which will be pushed by various partners over the coming months include profit sharing, which the unions believe must be at the base of any new agreement. However, IBEC is not so wholehearted in its support. The employers stress that any profit sharing has to be on the basis of changes in the workplace and productivity increases. According to SIPTU's head of research, Mr Manus O'Riordan, this is only likely to mean demands for larger pay rises given the large transfers from wages to profits over recent years.

Other issues which are looking as if they may be tackled this year include moves to update inheritance tax limits, to put them more into line with current house prices. Further moves are expected in the personal pensions area. All in all the Government hopes it can devise a package which will pave the way to a new national agreement.