McCreevy's Budget likely to disappoint the PAYE sector

 

Promises, promises! The Government is likely to keep a fair number of its pre-election pledges in the Budget on Wednesday. But in time-honoured tradition, others will be quietly shelved and yet more consigned to "further study" by working parties. And pre-Budget figures published over the weekend show that the Minister would be unable to keep everybody happy. However extra cash from the sale of State assets now look set to help the Budget arithmetic. Chief among the Government's commitments is its promise to cut taxes for the PAYE sector, one of the main planks on which the elections was fought.

Both Government parties are aware that the electorate is now expecting payback time and could be easily disappointed.

The pre-Budget figures show that trade-union demands for a £500 million give-away in tax cuts on Budget day are unrealistic. Unless he plans to run a large borrowing requirement after the Budget, Mr McCreevy will not be able to afford more than £350 to £400 million in tax reductions on Budget day. And even then he will have to try to get some cash back through excise-duty increases in areas such as tobacco.

The Minister is likely to opt to cut both income-tax rates, a strategy that was at the core of Fianna Fail's and the Progressive Democrats' manifestos.

The PDs have already stressed that the current strong rate of economic growth justifies the front-loading of tax cuts promised by the parties into their first Budget.

There has been significant discussion between the Coalition partners on the precise shape of the income tax package. It is understood that at least one percentage point, and possibly more, is likely to be cut off both the 48 per cent and 26 per cent rates.

Focusing too much, however, on reducing income tax rates - and particularly the top rate - would leave the Government exposed to the charge that it was favouring the better-off.

This might not bother the PDs too much, but Fianna Fail would be more sensitive.

And SIPTU's forceful statement last week that it would call for a withdrawal form Partnership 2000 if all the cash was directed towards higher earners will also have been a salutary reminder to Mr Ahern of the dangers of being seen to give more to the better-off in society.

So Mr McCreevy will also move to widen the standard rate band and increase personal allowances in an attempt to spread the tax gains across a wide range of income groups.

The Government has been coming under intense pressure from the unions, as well as bodies such as the Conference of Religious in Ireland and the Economic and Social Research Institute, to spend money in this way, on the basis that it is a far more equitable way to reform the tax system than cutting income-tax rates.

It must be remembered, however, that this Government made very specific commitments on taxation during and after the election campaign. Mr McCreevy will not want to be seen doing a U-turn ahead of the two vital by-elections in Limerick and Dublin North. So rates will have to fall too in order to persuade people that their tax bills are falling.

Businesses will also benefit, helped by demands from Brussels that reductions in corporate taxation be accelerated in a move towards a single rate for all businesses here. It is the one area of taxation which has caused significant problems in the negotiations between Mr McCreevy, the Taoiseach and the Tanaiste.

The Government has been coming under intense pressure from Europe to end what it sees as tax discrimination. This means that the EU wants to see some serious moves to cut corporation tax across the board, with a clear commitment to introduce 12.5 per cent rate for all companies by 2005.

While significant cuts in corporation tax will not cost the Exchequer anything in 1998, the impact from 1999 on could be significant. In fact, some commentators have warned that significant corporation tax cuts could be seen to shift the burden of taxation even more dramatically towards the hard-pressed PAYE sector.

Already workers have given up salary rises in favour of increased company profits and a further shift in this direction may not be the stuff to win elections.

But it now appears that Wednesday's Budget will unveil substantial cuts in corporation tax and a commitment to further cuts in the next two budgets. Even the mandarins at the Department of Finance have accepted this despite reservations about giving commitments to cut taxes in advance.

Some promises will be quietly buried. The option to introduce a new low income-tax rate of 20 per cent tax for low earners - trumpeted in the election campaign by Fianna Fail - looks as though it may have been dropped. It was seen as a good option to divert attention away from significant cuts in the higher rate. This is seen as being costly and unwieldy to administer. Mr McCreevy himself has not been keen, but the option had been backed by the Taoiseach.

The issue of tax relief for child-care also appears to have been kicked to touch. The Government has set up a working review on the issue which will not report until December 1998 and thus feels under no pressure to pre-empt the report.

Increases in excise duties can also be expected, although these may be smaller than in previous years, with the exception of tobacco, again set for a hefty increase. The Government will also have the benefit of the increased revenues for almost four months before any tax cuts kick in and six months before any social welfare rises are implemented.

On the spending side, Mr McCreevy has already been accused of driving "a coach and horses" through his commitments. Nevertheless, substantial extra spending on Budget day can also be expected. Two of the main beneficiaries will be pensioners and health-service waiting lists.

The Government has promised to work towards £100 a week for old age pensioners and is expected to make a substantial move in this direction.

It is understood that under the heading "social inclusion", the Minister will announce a package to benefit the long-term unemployed, social welfare recipients and pensioners, as well as cutting waiting lists in the health sector.

So as with all budgets, the 1998 version will try to offer a little to everyone. The danger, as the Minister will know, is that if he spreads his largess too widely, then many may be left dissatisfied. Whether these political fears will drive the Government off the road of financial prudence remains to be seen.

Commitment

Basic income tax rate to 20 per cent over five years

Higher income tax rate to 42 or 40 per cent economic conditions permitting over five years

Basic allowances increased by at least rate of inflation

Reduce PRSI/levies, particularly for those in low-paid employment

Corporation Tax to 10 per cent by 2010

Overall spending increase to be capped at 4 per cent

Eliminate Exchequer borrowing completely over 2-3 years

Tax allowance for childminding and mothers who stay at home

Introduction of a 20 per cent rate for lower earners

Prospect of Being Implemented

A move will be made in this direction with 1 or perhaps 2 percentage points off the basic rate on Wednesday.

A slower start will be on this objective with a maximum of a one point cut expected.

No problem with this undemanding commitment. However, the Minister is under intense pressure from SIPTU to deliver far more.

No clear indications yet but significant reductions are not thought to be on the cards. A 1 per cent cut in employee PRSI costs is still possible.

Almost no chance, as the EU Commission will not hear of it. A rate of 12.5 per cent now looks the lowest possible, after intense negotiations.

Depends whose definition you use. According to the Minister's own calculations he only increased spending by 1.8 per cent before the Budget and will keep to around a 3 per cent increase on the day. According to the Opposition spending has already been increased by 4.1 per cent before the Budget and something closer to 6 per cent is expected by next Wednesday.

Booming tax revenues mean Mr McCreevy may be able to announce a very small surplus for next year, the first time a finance minister has targeted a surplus for many years.

This appears to have been kicked to touch by the expert group investigation into the whole area.

This was not part of the joint programme but was an idea floated by Fianna Fail at the election. Now seen as unlikely given the difficulty of administering it.