The Tanaiste, Ms Harney, has indicated her support for significant income tax cuts in the December budget and said the Government should ignore warnings that they would fuel inflation.
Ms Harney wants to see two percentage points taken off the top and standard rates of tax, bringing them to 42 per cent and 20 per cent, and the removal of workers earning up to £150 a week from the tax net altogether. This could be achieved by increasing personal allowances or credits rather than by widening the tax band.
She also signalled that the Government would favour savings incentives to encourage people to put funds aside for a minimum of five years to help to curb inflationary pressures.
The Labour Party alleged that her comments showed she was at odds with the Taoiseach about who should gain from the budget. Mr Ahern has said tax cuts should be aimed at the lower paid. Cutting the top tax rate benefits higher earners.
However, a Government spokesman said there was no contradiction between the Taoiseach's and the Tanaiste's statements, as Mr Ahern did not say the higher paid would be ignored.
Meanwhile, the Irish Congress of Trade Unions has called for more than £1 billion in tax cuts and social welfare increases in the Budget, focused on easing the tax burden on the lower paid. Its general secretary, Mr Peter Cassells, warned that "failure to implement the bulk of our budget proposals will lead to the collapse of the Programme for Prosperity and Fairness".
In an interview on RTE's Five Seven Live, the Tanaiste said she disagreed with the Central Bank's cautious stance on tax cuts. She said if there were savings-related measures in the budget, there was no reason why the Government could not continue to lower taxes.
"It won't be a Santa Claus-type budget. It can't be that. The economy must come first. But we have to encourage more savings in the economy to curb inflation and prevent a wage spiral."
Ms Harney endorsed the ambitious targets recently set by Attorney General and former PD TD, Mr Michael McDowell, to bring the standard rate of tax to 16 per cent and the top rate to 33 per cent over a five years.
The Programme for Government aims to reduce the standard rate to 20 per cent by 2002 and the top rate to either 42 per cent or 40 per cent, depending on the economic circumstances.
The Tanaiste said there was no evidence that lowering taxes had fuelled inflation in the economy.
"The Government is addressing supply side causes of inflation, such as house prices and the skills shortage. It takes time to deal with the housing difficulties but I think the measures we have taken will bear fruit over the next 12 to 18 months."
She warned that the alternative to tax cuts was a huge hike in wages which would make the Irish economy very uncompetitive. "That would have a greater impact on inflation than reducing taxes," she said.