Unless social welfare rates keep pace with other incomes, those relying on benefits will become increasingly detached from ordinary living standards, the Economic and Social Research Institute (ESRI) has said.

In a report published this morning, the independent think-tank suggests the next Budget should continue to focus on tax cuts for the low-paid rather than cutting the top rate.

The document, Budget Perspectives, comes after comments by the Taoiseach, Mr Ahern, indicating that the Government does not regard reducing the 46 per cent tax rate as a priority in the forthcoming budget. He said on Friday that while he was committed to the reduction of the top rate as outlined in the Programme for Government, "the issue is that people on low incomes are paying too much of their salary at the top rate".

The ESRI says a new analysis, using its tax-benefit model, shows how gains from last year's Budget were distributed. The scale of economic growth since 1994 has allowed initial poverty reduction targets to be exceeded, the body says, but the way social welfare payments are increased from year to year requires urgent attention.

"Unless social welfare rates keep pace with other incomes, those relying on transfers will become increasingly detached from ordinary living standards," the document says.

Analysing the 1999 tax changes, the ESRI says the greatest proportional gains went to middle-income earners, with substantial gains for the low-paid and lesser benefits for high earners. The bottom 20 per cent was not affected significantly by the tax cuts, because incomes were below the income tax threshold.

"Budget 2000 could continue to focus tax relief on the low paid by increasing the new, standardised personal allowance rather than cutting top tax rates. It also has the opportunity to implement a long-overdue reform of the way couples are treated. Currently, single people and two-earner married couples face the top rate of tax at incomes close to the average industrial wage," according to the report.

Elsewhere in the document, the ESRI says social consensus had played an important role in the Republic's strong economic performance.

"The current fragmentation of the agreement could lead either to a collapse of the system of centralised agreements, or to a new agreement whose basic terms are relatively high, and covering those who have already achieved substantial increases," the ESRI says. "This could cause comparability claims that could sour the system in the future."