McCreevy steals the Rainbow's pot of gold

It was a Budget of which the "Rainbow" government would have been proud. Well, almost. Plenty of money for the lower-wage earner and a further push upwards in Government spending.

The only fly in the ointment for the centre-left was the small £3 a week increase in the general welfare payments.

From Fianna Fail and the Progressive Democrats the intent of cutting tax on the low-paid and limiting general welfare increases is clear - it pays more to go to work. The Budget - by far the most radical of recent years - should certainly help to maintain the downward trend in the live register moving into next year, provided the economy remains buoyant.

Whatever complexion the Government tries to put on it, the Budget is a complete U-turn from last year. In the last election campaign the outgoing Government had argued that the way to reform the tax system was to concentrate on increasing tax allowances and widen the standard rate income tax band. Fianna Fail and the Progressive Democrats, in contrast, stuck to the tried and tested - and more catchy - formula of cutting income tax rates.

True to their election promises, the Government cut two percentage points off the two income tax rates in the last December's Budget, providing by far the largest gains to the higher paid.

After wide criticism of this approach - and as it becomes clear that new measures to make it more attractive to work are essential in an economy experiencing labour shortages in some areas - the 1999 package changed direction.

There can be little argument that, from an economic point of view, the concentration on the lower paid is the correct approach. Employers looking for workers in areas such as the retail and restaurant trade and in lower-wage manufacturing complain that they cannot find people to fill the jobs. By making it more attractive to work, the Budget should help.

For example, many people now contemplating taking up part-time work will find that they may incur no tax liability, as the first £100 of weekly income is removed from the tax net. And the cut in the tax rate by £6 a week for a single worker earning between £6,000 and £10,000, while not enormous, will widen the financial gap between work and welfare. The relatively high tax rate on low incomes was one of the main faults of the Irish tax system and the 1999 Budget is the first time it has been seriously tackled. The other main problem in the system is the low level of income at which taxpayers move into the higher 46 per cent income tax rate. This mix of reforms in this Budget means that this problem remains.

One of the weaknesses of recent Budgets is that they spread themselves too widely and did not successfully address any one problem. This year, a significant impact was made in one area.

The move towards a system of tax credits, with the standard rating of the major allowances, means that the tax system is becoming a lot simpler. Everyone will soon realise that a single taxpayer moves to the higher rate at an income of £14,0009 and a married taxpayer at £28,000. The Government promises to change the remaining allowances to tax credits in next year's Budget.

So the Budget is to be applauded for starting to tackle at least one of the main problems in the taxation system. But what will it mean for the economy overall?

There is no doubt that, as the Department of Finance itself estimates, the economy is currently growing at a record pace. The official forecasters are hoping that we will move smoothly down a gear from growth of 9.5 per cent this year to an average of 6 per cent over the next three years. This would still represent an exceptional performance and would, the Department predicts, keep the Exchequer finances in strong surplus over the coming years. But real life never works quite as smoothly. There is a risk that the Budget, by injecting more money into the economy, will further spur economic growth. On the tax side, the concentration on helping lower-paid earners should limit this risk, although close to £600 million being injected into the economy in tax cuts is still significant.

Looking at Government spending, it is clear that the famous 4 per cent limit on current expenditure growth is abandoned in all but name. Despite all its promises, this Government is finding it just as difficult as all the others to keep a lid on spending. The 4 per cent limit was only still in sight because the Government was taking it as an average figure over the last two Budgets. And in the Budget the Minister only kept within the 4 per cent with a smoke-and-mirrors manoeuvre.

He restructured the health and employment levies, so that he will generate a much higher amount of revenue under the health levy. This levy is not counted as taxation - instead it comes in as an Exchequer receipt and can be offset in the books against Government health spending, lowering the recorded level of growth in overall Government spending.

This allowed the Minister to technically stay within his 4 per cent target, when he also counted in expected savings on national debt servicing.

However, a better picture can be obtained by looking at the gross amount of money spent on running Government departments and providing services to the public. This will rise by 9 per cent next year compared to this. It will not be a problem as long as economic growth remains strong. But if economic growth weakens, the high rate of spending growth could prove a problem.

Two other groups will be watching the Budget with interest. One is our EU partners, with which we will lock our currency next January. There may be criticism about the expansionary nature of the Budget - the theory is that with interest rates falling, Budget policy should be tightened to compensate.

In reality, this theory holds little water in a small open economy such as Ireland's. Such is the boost from lower interest rates, that an impossibly large increase in taxes or cut in spending would have been necessary to slow the economy - which would have been a nonsense policy to pursue. And by aiming at the lower-paid, the Government can point out that it is trying to attack some of the inflationary bottlenecks in the jobs market.

The other group will be the social partners. The unions and employers - who called for a concentration on allowances and increasing the tax band in an agreed pre-Budget document - are already saying that the way is now clear for another national agreement to follow Partnership 2000. And there is no doubt that this was a big factor in the shaping of Budget 1999.