Over the past week some senior Ministers started to throw shapes about the thrust of next year's budget. In crude terms Fine Gael is emphasising the need to avoid any further income tax increases, while Labour is more focused on the need to protect public spending at current levels in order to protect services.

Of course it’s not as simple as that. Most Fine Gael TDs are as uncomfortable as their Labour colleagues about defending sensitive spending cuts, while Labour TDs don’t relish imposing higher taxes on ordinary families. Still, the fault line between the two parties relates to the emphasis on tax or spending.

Joan Burton kicked off the public debate at the Tom Johnson summer school last weekend with a strong argument for maintaining welfare spending at its current levels. She based her case not only on the grounds of equity but also on the positive economic impact of putting money into the hands of people who were most likely to spend it in the local economy

Just for good measure she suggested that the minimum wage of €8.65 an hour should be increased as a way of incentivising people on welfare to return to the labour market. That was a red rag to small and medium business, an important element of Fine Gael’s support base.

Minister for Enterprise and Employment Richard Bruton was out of the traps a few days later to argue that cutting the tax burden on ordinary families was the most urgent budget priority in order to stimulate job creation.

Strong arguments
He had some strong arguments to back up his case. We now have a higher marginal tax rate of between 52 per cent and 55 per cent, which is higher than most of our competitors, but even more importantly the high rate of tax kicks in at a much lower level than in most other developed countries.

In Ireland a single person starts paying the higher tax rate at €32,800, while the average industrial wage is €36,000. There is eerily reminiscent of the 1980s, when the drive to get the deficit under control saw the tax burden on ordinary families raised to breaking point.

The political consequence of high income tax in the 1980s was the birth of the Progressive Democrats, which effectively kept Fine Gael out of office for a quarter of a century, apart from 2½ years of John Bruton’s rainbow coalition.

While rumours of a new party once again aimed at Fine Gael’s flank have been in the air for the past two years, so far nothing has happened. Nonetheless there is concern in the party that the private sector, middle-income taxpayers who are bearing the brunt of the budget adjustment are becoming disillusioned with the Government.

“There is a big cohort of people who are in jobs but are paying far more tax than they did a few years ago and are being hit with a whole range of things like higher VHI charges, the property tax and other stealth taxes and are just finding it hard to make ends meet. We have to do something for them,” said one strategist.

Minister for Finance Michael Noonan has given some broad hints that he appreciates the point. It looks as if he will have some leeway in the next budget but he will have to resist competing claims from big-spending departments like Social Protection and Health if he is to deliver anything at all on the tax front.

Sticking to the plan
Last year the proportion of spending cuts to tax increases was supposed to be two to one but in the event it turned out to be 50:50. That was because Social Protection and Health gobbled up resources. The Fine Gael argument for sticking to the original plan was undermined by the fact that Health needed extra resources.

Ironically Labour lost the propaganda war on the budget because TDs made a public pitch for a new higher income tax rate for those earning over €100,000. The party actually won a range of capital tax increases on the self-employed and higher social welfare spending than planned but that was obscured by the failure of the higher tax rate demand.

This year the public posturing has started early, although it is noticeable that the members of the core Economic Management Council have been more careful than some of their colleagues about raising their budget hopes in public. In any case it is still a little early to start staking out positions as a lot of key economic data on which the budget will be based is not yet available.

Whatever happens, the Government will have to stick to the core commitments to reduce the deficit to 5.1 per cent next year and 3 per cent the year after, although the promissory note deal has made the achievement of those targets considerably easier.

If the €1 billion savings from the deal is applied solely to reducing the deficit next year, it would be down to around 4.4 per cent of gross domestic product. Despite the wishes of the troika it is highly unlikely that the Coalition will apply all or even most of the saving to reducing the deficit.

The question is whether the windfall will be used to minimise cuts, avoid tax increases or even reduce them somewhat or go on capital spending. The likely outcome is that there will be something on all three with some deficit reduction as well.

Troika targets
Before the promissory note deal, the plan agreed with the troika called for tax further increases of €1.1 billion in next year's budget, along with a further €2 billion in spending cuts. Noonan is already more than half way to the target with measures from last year that will bring in an extra €600 million in a full year.

That leaves him in a good position to ensure that there are no further income tax increases next year but reversing the trend by giving some tax relief to middle-income earners is what his TDs want to see.