Tax cut likely as Budget €5bn ahead

THE Government will have a war chest of almost €5 billion available for next Wednesday’s Budget, making a cut in the higher tax rate a strong possibility.

Cutting the top rate of 42% by one percentage point would cost the Exchequer just €228 million in a full year, according to estimates by the Revenue Commissioners.

Figures released by Finance Minister Brian Cowen’s department yesterday showed that is now well within his scope.

The White Paper for 2006, published by his department yesterday, showed the Exchequer is on track to record a surplus of €1.8bn by the end of December. This is an enormous €5bn ahead of the deficit of €2.9bn predicted for 2006 in last year’s Budget.

Taoiseach Bertie Ahern last night gave a hint of the Government’s thinking, five days ahead of the Budget.

He told the Cairde Fáil annual dinner in Dublin that the figures gave a “stronger than expected backdrop”.

The Budget would “reward work”, he said. That was taken as a reference to a possible cut in the top rate of tax.

The boon means Mr Cowen can keep to his stated objective of delivering a prudent spending plan and reducing debt, while still having sufficient room for some generous measures.

Speculation mounted last night that one of those measures would be to reduce the higher tax rate from 42% to 41% or even 40% — a move much sought after by Fianna Fáil’s coalition partners, the PDs.

Such a move would reduce the tax burden on high and middle-income earners, key demographics ahead of next summer’s election.

Spokespersons for Mr Cowen repeatedly stressed in recent weeks that he would focus on widening tax bands and increasing tax credits — with the aim of benefiting lower-paid workers — rather than cut the higher rate.

But it is now clear the minister is in a strong position to do both.

A spokesperson for the department acknowledged the “very strong revenues” last night, but in line with standard practice, would not comment on specific budgetary measures ahead of Wednesday’s announcement.

However, Labour last night warned that a cut in the higher rate of tax would principally benefit only “the well-off”.

Party finance spokesperson Joan Burton called on Mr Cowen to stick, instead, to his promise of widening tax bands and increasing credits for the lower paid.