Brian Lenihan: no easy way out

FINANCE Minister Brian Lenihan will seek to raise extra tax revenue of up to €750m in December's budget and the largest chunk of this will come from bringing more lower-paid workers into the tax net, the Sunday Tribune has established.

Both Lenihan and Taois­each Brian Cowen stressed before the summer break that most of the €3bn in savings the government needs to secure in the budget would come from cutbacks and not tax increases.

However, the difficulty of securing such massive cutbacks makes it inevitable that as much as €750m will have to come from extra tax revenue, government figures said this weekend.

Some €1bn in cuts has already been pencilled in for capital spending, while €1.1bn in cuts in current spending in Social Welfare, Education and Health has also been identified.

However, some of the cuts in social-welfare expenditure will be offset by a rise in the number of unemployed and the belief in government is that getting beyond €1.25bn in net savings in current spending will be almost impossible.

To bridge the gap of €750m, tax revenue will have to increase. And prime targets will be the 50% of workers who currently pay no tax.

They will be brought into the tax net through reducing credits and/or the introduction of a new universal social contribution, which will replace PRSI, health and income levies.

All workers will have to pay this levy and while the amount will be relatively small for low-paid earners, the number of workers involved makes this a potentially lucrative way of raising revenue.

The Department of Finance believes that any further hikes in the top rate of tax would be self-defeating, particularly as it would hamper attracting foreign direct investment.

But there is likely to be further efforts to close down tax-relief schemes to dem­on­- strate that it is not just the lower paid who will be affected. "Tax loopholes will be targeted but the reality is that in revenue terms, because of the small numbers involved, we're talking about a pretty insignificant amount of money," one government source said.

The option of a temporary flat-rate household services charge – to be replaced ultimately by a property tax and water charges – is still regarded as a "possibility".

It would depend on whether such a charge was necessary to get to the €3bn target, which is being described in government as a "minimum figure" that has to be achieved.

There is concern within government that Ireland will develop a reputation as a high-tax economy but sources said raising additional tax revenue was unavoidable.

While Lenihan was at pains before the summer break to emphasise the €3bn in savings would have to come from spending cuts, sources say he wanted to get across the message that there was "no easy way out" for departments and they would have to deliver significant cuts.

But this is tempered by the reality that the tax base is currently far too narrow and cutting current spending by €2bn would create massive political fall-out for the government.