The cabinet will today prepare for a review of the Programme for Government, to take place in September in parallel with negotiations between the Coalition partners on a substantial tax-cutting package in next December's budget.
The Tanaiste, Ms Harney, yesterday called for substantial cuts in the upper and lower tax rates, as promised in the 1997 Programme for Government, saying that an indication by the Minister for Finance, Mr McCreevy, to last week's Cabinet meeting that £350 million would be available for a tax-cutting package was "not sufficient".
She predicted yesterday that a "radical tax package" would be agreed by the Cabinet in the autumn, cutting the two tax rates and removing thousands of low-paid workers from the tax net.
Sources in both Government parties said yesterday that the initial suggestion by the Minister for Finance that December's tax-cutting package would be limited to some £350 million was a traditionally cautious opening position. Mr McCreevy is understood to have mentioned the £350 million figure at last week's daylong meeting of the Cabinet, which discussed economic projections.
A source close to Fianna Fail said that there was no dispute between the Government parties over the necessity for tax cuts and reform. "We have a jointly-agreed Programme for Government with very definite commitments", he said. What remained to be negotiated was the form tax cuts and reform should take.
Today's Cabinet meeting - in the newly-purchased Farmleigh House, adjoining Dublin's Phoenix Park, bought by the Government recently for £23 million - will consider preparations for the review of the Programme for Government. Ministers will consider a document analysing progress on the 257 commitments contained in the programme. The Taoiseach and the Tanaiste will give an assessment to today's meeting of the Government's progress and what its future strategy should be.
The review in September will coincide with the climax of negotiations on the £38 billion National Development Plan and the preparations for the renegotiation of Partnership 2000 with the social partners. The final shape of December's tax-cutting package will only emerge when these three processes are completed.
The review of the Government programme is expected to be negotiated by Fianna Fail Ministers Mr Noel Dempsey and Mr Dermot Ahern and PD Ministers of State Mr Bobby Molloy and Ms Liz O'Donnell.
The Coalition's Tax Strategy Group will meet weekly throughout September and October to examine the options for tax changes. The group includes senior officials from the Department of Finance as well as officials from Fianna Fail (the Taoiseach's programme manager, Mr Gerry Hickey, and adviser, Dr Martin Mansergh) and the Progressive Democrats (the Tanaiste's programme manager, Ms Katharine Bulbulia, and adviser, Mr Maurice Roche).
This group will examine various proposals for tax cuts put forward by the Coalition partners and will then report to the Taoiseach, Tanaiste and Minister for Finance on the options.
Although a £1.7 billion Government surplus is expected for 1999, the amount available for tax cuts will be reduced by the Government decision, announced last Friday, to set aside one per cent of Gross National Product (GNP) annually to offset the State's future public service and State pensions liability. This will amount to some £520 million this year.
The Programme for Government promised to reduce the basic rate of income tax to 20 per cent and the higher rate to at most 42 per cent and possibly 40 per cent over five years. The programme also promised that the standard rate of tax would be broadened over five years "to ensure that 80 per cent of taxpayers do not pay tax at the higher rate on any part of their income".
In this Government's first Budget in 1997, the top tax rate was reduced from 48 to 46 per cent and the lower rate from 26 to 24 per cent. In last year's Budget, however, the rates were unchanged, as the Government opted to introduce a system of tax credits as a means of reducing the personal tax burden.
Ms Harney said that the expected £1.7 billion Government surplus meant "we are either spending too little, or taxing too much". She added: "I take the view we are certainly taxing too much, and £350 million would not be a sufficient tax break. Last year, it was £581 million, and it was over £500 million in our first year in government. The Progressive Democrats are a tax-cutting party. It is one of our central platforms."
Meanwhile, the business and employers' organisation, IBEC, has warned against rising wage costs, saying that this could lead to the undoing of much of the economic progress of recent years.
Tax cut not enough, says Harney: page 7