IT'S still six months away but already December's budget is shaping up to be a nightmare for the government. Getting to the €3bn figure of savings required is going to be phenomenally difficult – hence the government's decision to begin the estimates process unusually early this year. We know €1bn will come from capital spending but that still leaves another €2bn to come from cuts in current spending and new tax revenue.

That figure is particularly daunting because the two big measures the government used to get savings in last year's version – cutting public sector pay and reducing social welfare rates – are effectively off the table this time around. And after three cost-cutting budgets already, the cuts are going to have to come from a considerably smaller base next December.

So where is the €2bn going to come from? Social welfare will be squeezed – presumably by tightening up criteria on things like rent allowance and perhaps further cuts in children's allowance; health will take a big whack, though education may be largely unscathed. And across every government department, an axe will be taken to programmes.

But, as this newspaper pointed out last week, even with the help of the report of An Bord Snip Nua, it's going to be massively difficult to deliver too far north of €1bn in cutbacks. The very fact that the government can't and won't definitively dismiss the possibility of a cut in the old-age pension shows how little room it has for manoeuvre. There almost certainly won't be such a cut – politically it would be too unpalatable – but at this point, the finances are so tight that nothing can be ruled out.

Which is where new taxes come in. Finance minister Brian Lenihan is (rightly) stressing that the bulk of the savings have to come from spending cuts. It's clear by any measurement that we're spending beyond our means and trying to bring tax revenue up to meet that runs the risk of repeating the mistakes of the Fine Gael-Labour government of the mid-1980s.

But it's clear from any casual assessment of the budgetary arithmetic that €500m-€700m is going to have to come from new taxes. There are two obvious ways of raising this kind of money. Lenihan is anxious not to place too great a burden on labour from income tax. But the elephant in the room in the Irish tax system is the 50% of the workforce that are currently entirely exempt from tax. That doesn't happen anywhere else in the OECD.

The idea of low earners – and it is important to stress that these are low earners – not paying any tax is of course an admirable one. But sadly it is simply not sustainable. The tax base in Ireland is just too narrow. Workers in the UK, for example, start paying tax at less than half the income level at which people enter the tax net here.

That will inevitably change in the next budget. It can be done by reducing the tax credit and/or via Lenihan's plans to introduce a new universal social contribution. This would replace PRSI, the health levy and the income levy and, according to Lenihan's budget speech last December, it would be paid by everyone at a low rate "as a collective contribution to public services".

The idea is that everybody makes a contribution, although the level of that contribution varies according to income.

The second way Lenihan has of raising new tax revenue is to introduce a property tax and or water charges. Despite the inevitable unpopularity of such a move, the government has signalled that it will introduce both at some future point.

In the revised programme for government, Fianna Fáil and the Greens committed to introducing a site valuation tax on non-agricultural land. There is much to be said for this form of property tax. It has the effect of reducing speculative land holding and encourages the development of under-used and vacant land. But it also requires every parcel of land in the state being valued and there is no way that is going to happen before next December (even ignoring the potential difficulties with establishing legal ownership of certain sites).

The same goes for the government's plans to install a water meter in every house – a logistical nightmare. The Greens are keen to hold off water charges until meters are in place. And they are right. Water charges will only be palatable if they are done on conservation grounds – the Greens' idea is that every household gets a free quota of water and if that is used up, additional water is charged for. A flat-rate water charge could not be sold as a conservation measure.

But the harsh reality is that the government needs the money and cannot afford to wait for site valuations and water meters. For that reason, an interim property/domestic services charge – similar to the existing €200 levy on second homes – on every private home in the country looks a very realistic option.

Even with social welfare recipients being excluded from the levy, such a measure is likely to cause a political storm. But the reality is that the money has to come from somewhere. And compared to cutting the old-age pension, it would certainly represent the lesser of two evils. And when you have to find €3bn, settling on the lesser of evils is about as good as it gets for the government.

scoleman@tribune.ie