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What can we expect from Mr Cowen in Wednesday's Budget 2007?
Shane Coleman



Everything that will be done will be with one eye onnext year's general election writes Shane Coleman

GOOD news and lots of it.

Brian Cowen has delivered two budgets to date and both of them have been exactly to Bertie Ahern's liking. They have had none of the big surprises (individualisation and decentralisation to name but two) so beloved of his predecessor Charlie McCreevy and, given the controversy that followed a number of McCreevy's seven budgets, that suits the Taoiseach just fine. If it wasn't for the distracting controversy surrounding Ivor Callely last year, it would probably have been possible to hear Bertie Ahern actually purring with contentment. The Budget did not contain one single piece of bad news . . . for the first time in a generation there was no hike in the 'old reliables' . . .and the generous social welfare and childcare packages, allied to a 900m tax giveaway, sent the government TDs home particularly happy.

So same again then on Wednesday?

Most definitely. Cowen could even go a lot further if he wished. On Friday, the Department of Finance published its estimates of receipts and expenditure for 2007 and it showed that the exchequer is awash with cash. The figures must make finance ministers the world over green with envy. On a pre-budget basis, the forecast is that the government will run a surplus of 4.4bn or 2.3% of GDP next year . . . a staggering amount of money. Brian Cowen could easily outdo Charlie McCreevy's giveaway budgets of 2000 and 2001 and still leave the finances comfortably in the black.

Will he go that far?

Almost certainly not . . . for a couple of reasons. Firstly, Fianna Fail wants to avoid being accused of trying to buy next year's general election. The government spent heavily and irresponsibly before the last general election and then had to seriously pull in the horses after that election because of difficult international conditions.

Those post-election cutbacks caused a widespread feeling among the electorate that they had been deceived in the run-in to the election and led to a four year long dive in the government's ratings. Having finally regained that ground . . . and looking extremely comfortable in the opinion polls . . . the last thing the government wants is to re-open old wounds. There is a view in government that, despite all the strong economic indicators, the rise in interest rates has made the electorate a little less bullish about the economy. All the more reason, therefore, to emphasise how fiscally responsible the government is.

The second factor is that Brian Cowen is a much more cautious finance minister than his predecessor.

McCreevy came into the job on a mission to radically change the tax system. Love him or hate him, he certainly did that, sometimes ignoring the advice of his civil servants in the process (most notably when halving capital gains tax). Cowen, meanwhile is much more cautious and political.

McCreevy's 'when I have it I spend it and when I don't, I don't' philosophy would be anathema to the Offaly man.

Everything will be done with one eye on next year's general election.

So what are the big issues of contention in this year's budget?

There are two: stamp duty and the top rate of tax. The PDs are pushing for changes to the stamp duty regime, which is pretty punitive, and a cut in the top rate of income tax from 42% to 40% as agreed in the programme for government.

It does look like some change is imminent in stamp duty, probably focused on reducing the burden for the first time buyer by increasing the threshold levels at which stamp duty kicks in. There would be a particular reluctance within Fianna Fail to go any further than that . . . there are worries that major reductions could re-ignite house price inflation and undermine the tax base.

The PDs are also very keen on paring the top rate of income tax to 40% . . . a move that would cost 450m a year.

There is some speculation that the PD pressure will succeed in getting a reduction to 41%, but it's hard to know how accurate this is. The logic for the PDs looking for a cut in the top rate is obvious. But Fianna Fail has spent the last two years shifting to the left after its Pauline conversion on the road to Inchydoney. It is worried that might be undone by a perception that it favoured the wealthy in cutting the top rate.

The reality, of course, is that half of those who pay tax do so at the top rate . . . and most of them are certainly not rich. But perception is everything in politics and Fianna Fail will be reluctant to give the opposition any ammunition. Cowen also needs to focus resources on widening the income tax bands to keep as many earners as possible out of the top tax bracket.

What about spending?

Expect very generous social welfare increases along the lines of last year's 1.1bn package. A 14 increase in the old age pension . . . as was given 12 months ago . . . will bring it up to around 208 per week. On social welfare rates, the government set the bar pretty high last year with a 17 rise, but it is hard to imagine it not at least matching that rise. Like last year, there should also be good news for parents of young children, while around 100m is expected to be given to the Department of Health to finance an elderly care initiative to provide for a range of services to keep people at home and out of residential care. Meanwhile, the healthy state of the public finances raises the possibility that for the second year running the 'old reliables' of drink, cigarettes and petrol will be left unchanged. With an election in May, that would certainly be attractive for the government.




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