The Government is planning for significant tax concessions and spending increases in next week's Budget as official forecasts show that the Exchequer finances next year will be even healthier than anticipated.
The latest figures, contained in the pre-Budget White Paper of the Government's finances, predict that the Exchequer is set to record its highest surplus to date of revenue over spending next year. Before any Budget changes, the Department of Finance forecasts that the surplus will be £1.37 billion, as strong growth continues to boost tax revenues.
As a result, the Minister for Finance, Mr McCreevy, is likely to be able to deliver a tax-cutting package worth over £500 million in a full year, spend £120 million or more on social welfare and other spending increases, and still target an Exchequer surplus next year of well over £1 billion.
His Budget sums will benefit, as the cost of a tax package of £500 million in a full year is only about £150 million to £200 million because the reductions do not come into effect until April and the tax cuts will in themselves boost economic growth, offsetting some of the reductions.
The final shape of the tax package will be completed this weekend and early next week between the two Government parties.
The Minister is expected to cut the 24 per cent standard income tax rate and, sources believe, could still reduce the top 46 per cent rate. The centrepiece of the income tax package will be a substantial increase in personal tax allowance, which gives the greatest benefit to lower earners by removing income from the tax net. Mr McCreevy will also widen the standard income tax band to ensure less income is taxed at the higher rate.
Depending on the outcome of this weekend's negotiations, it is possible Mr McCreevy may signal an overhaul of the entire system of tax allowances. The Government has had lengthy discussions on moving to a system of credits, offering the same cash write-off from tax bills for all taxpayers.
One option is that next year the PAYE allowance may be allowed only at the standard rate, in the same way as mortgage and VHI allowances were changed in recent years. There is still support in Cabinet for a more radical move and a final decision will not be made until early next week.
There will also be a substantial package for older citizens following intense lobbying by the Minister for Social Welfare, Mr Ahern, with a weekly rise of between £5 and £6 expected in the old-age pension and higher taxfree allowances for over-65s. The carers' allowance - paid to those who look after elderly people - is also set to rise and some of the restrictions placed on qualifying for it will be loosened or removed. For example, the restriction that the carer must live in the same house as the person being looked after will be changed.
Measures to curb rising house prices are also expected, with the Government determined to follow up on the Bacon Report. Capital gains tax of 20 per cent is likely to be available to all sellers of zoned land, whether or not it has planning permission in an attempt to speed up the development process. Moves are also likely to increase the supply of student accommodation. The Government is likely to announce it will part-fund campus accommodation through a public-private partnership.
Most of the additional revenue available to Mr McCreevy is due to far less conservative estimates of future tax revenues than is usual from the Department. It is now officially predicting that tax revenues will grow by around 9.5 per cent next year.
The substantial surplus at over 2 per cent of Gross National Product is likely to defuse criticism from the European Commission or European Central Bank of Government finances.
In contrast, the out-turn for the Exchequer surplus this year is lower than the Department's previous predictions of £668 million.