Michael Noonan has up to €1.4bn for tax cuts and spending

The Government’s new economic plan will reserve between €1.2 billion and €1.4 billion for tax cuts and spending increases in the budget next October, its last before the general election.

Minister for Finance Michael Noonan wants funds available in future expansionary budgets to be divided equally between tax and spending measures.

Although the Cabinet has yet to sign off on the plan, such a policy would depart from the Coalition’s practice in a series of harsh “austerity” budgets in which spending was cut at a faster rate than tax was increased. In previous budgets, the Government settled on a 60:40 division between spending and tax measures.

The spring economic statement will be unveiled in the Dáil after a Cabinet meeting at which Minister for Public Expenditure Brendan Howlin will seek a formal mandate to enter pay talks with public sector unions.

The statement, which will set a five-year plan for the public finances, assumes the economy will expand this year by 4 per cent.

Growth rate

This marks a big rise from the official forecast in the 2015 budget, which assumed 2.9 per cent growth in gross domestic product. The wider plan is predicated on the achievement of a growth rate between 3 per cent and 3.5 per cent in each of the years between 2016 and 2020.

The release of the plan follows written confirmation from the European Commission that it will ease tight expenditure constraints on the Government in light of the economy’s growth. Mr Noonan is expected to outline a commitment to reform the tax system for self-employed workers over a number of years, with the intention of bringing income tax in the sector into line with PAYE rates.

The Minister has already called the difference between self-employed and PAYE workers “an anomaly that is hard to justify”.

Political attack

The move is designed to protect Fine Gael from political attack from opponents on the centre-right such as Lucinda Creighton’s Renua Ireland party.

Mr Noonan is also expected to indicate a broad plan for cuts to personal taxation, including changes to income tax rates and the Universal Social Charge. One option in play is to increase the income threshold at which workers start paying the USC.

Final work on the statement comes ahead of the planned completion tomorrow of a €525 million fundraising drive by Permanent TSB.

In light of this development, it is anticipated that Mr Noonan will in his statement tomorrow say that preparations can now be made for the State to start selling down its interest in the nationalised Allied Irish Banks.

He is likely to call the main banks in to meetings next month to express the Government’s expectation that their standard variable mortgage rates will be cut.

Mr Noonan and Mr Howlin have agreed on the parameters of a talks process in relation to public pay.

However, a senior Government source said there was a determination that the recovery must be sustainable and all policies including public sector pay must meet that requirement. Any pay increase is unlikely to take effect until next January.