GOVERNMENT tax policy is changing. When it took office, the coalition promised tax reform aimed at the low paid and said it would concentrate on measures such as widening the standard rate band, reforming PRSI and increasing personal allowances. Helping the low paid was to be the target.
Worthy goals, but not ones to excite the electorate. Two budgets later and the view in Government is that while most taxpayers have gained from measures such as the widening of the standard rate band, they were simply not noticing.
So the next Budget - the last before an election - is likely to see a higher profile approach. For the first time in recent years, an income tax rate cut looks certain to be part of the Budget package.
Ministers feel they are not getting credit for what they have done. This is right, but only up to a point. For if the Government had stuck to its own self imposed spending targets, then considerably more resources would have been left for tax reductions. What has been granted has simply not been enough for taxpayer's to notice. In fact, many measures, such as the restriction of mortgage interest relief, have cut back gains substantially. Also, many of the measures have been aimed at the lowest paid and the general body of taxpayers has not done as well.
The Government partners must now address two issues. One is how much they should allow spending to increase in the 1997 Budget. This will determine how much will be left in the kitty for tax cuts. The second issue is how to manage the tax reductions so as to ensure the maximum electoral impact.
Initial sparring on the spending issue has already started, although the real fight will be in the autumn. As a first shot the Minister for Finance, Mr Quinn, asked the other ministers to reduce 1997 spending plans they had already lodged by £150 million, or 1.2 per cent, as part of a medium term planning exercise.
However, a lot of other factors have also entered the spending mix for next year. The Government's crime package, for one, would require extra resources, although most of the major capital cost would not come on stream until late 1997. Higher than expected unemployment is also putting pressure on spending, while the Government must also account for the full year cost of this year's welfare package. Finally, public sector pay increases must also be accounted for, although negotiations on a replacement for the PCW have yet to get underway.
Holding spending to the Government target of a 2 per cent real increase will not be easy. But it will be necessary to do so, if money is to be available for a substantial tax package. The Government will argue that it must also allocate money to fight crime and increase social welfare. Ministers also pointed out that the rate of increase in spending is slower than under previous administrations, particularly the Fianna Fail/Progressive Democrat coalition. But the unfortunate political fact remains that to win votes the Government will have to pull off the two card trick of directing spending to areas where it is seen to make a difference, while at the same time reducing taxes.
The Government parties have already informally discussed the tax part of the package. The decision by Fine Gael party chairman, Mr Phil Hogan, to float the idea of reducing the two income tax rates to 45 and 25 per cent, from 48 per cent and 27 per cent, is significant. Fine Gael will press strongly for cuts in the two rates. Labour would certainly be amenable to reducing the standard 27 per cent rate and it remains to be seen whether Mr Quinn can be persuaded to reduce the top rate. Democratic Left's attitude is unclear, although it will no doubt press for measures to help the lower paid.
The business sector should also not be forgotten. With many companies under pressure from the pound/sterling rate and EMU on the horizon, cutting employers' PRSI or corporation tax will also be considered.
