The government has left itself room to introduce a major package of tax reductions in the December Budget after Ministers agreed to hold the rise in day-today spending to about 4 per cent next year. The spending decision, confirmed at a Cabinet meeting yesterday, will leave scope in the budgetary arithmetic for significant tax reductions aimed at the PAYE sector.
The decision on the 1998 spending plans means that the Minister for Finance, Mr McCreevy, has secured Cabinet approval which he will say holds spending growth in line with the target set down in the Programme for Government. The programme set a 4 per cent target for spending growth and the 1998 estimate for spending growth will be close to this figure.
The Cabinet agreement on the spending estimates follows lengthy and difficult discussions with the major spending Ministers, many of whom were seeking larger spending increases. Health is believed to be among the areas gaining a significant increase, while Social Welfare recipients will receive an increase ahead of the rate of inflation.
The Government has also agreed to implement some priority measures in the other major spending area of education, including some special measures for the primary sector.
The Cabinet also agreed yesterday on the broad direction of the budgetary tax package. However, the details have still to be agreed by the Coalition partners and will be the subject of lengthy discussions over the coming weeks.
The trade unions have insisted that Mr McCreevy should reduce taxes by up to £500 million. However, the Minister has warned in recent weeks that he will have to show some caution and it now appears that the overall tax reductions may be closer to £350 million to £400 million, which would still allow for generous rebates to the PAYE sector.
Reductions in the two main income tax rates of 27 per cent and 48 per cent are anticipated, with the Progressive Democrats expected to press for cuts of some two percentage points in both rates. Government officials are also thought to be examining the introduction of a new 20 per cent income tax rate. This would provide a target towards which the standard rate could be reduced over a number of years.
The Government is also expected to increase the standard rate income tax band to ensure that more taxpayers are levied only at the basic rate. It has promised that the increase in tax allowances will at least match the rate of inflation; but, given the room for manoeuvre in the 1998 budgetary arithmetic, an increase well ahead of inflation is expected for next year.
The Budget will be presented by Mr McCreevy on December 3rd, the first time a Budget has been announced before the start of the year to which it applied. Full details of the 1998 spending plans - or estimates - will be published next month, at least a fortnight before Budget day. While the increase in current spending will be held to 4 per cent, capital spending is expected to increase more rapidly, aided by the continued availability of EU funds.
Mr McCreevy is expected to aim for an overall surplus for 1998.
