Differences are already emerging between Labour and Fine Gael over how to reduce taxes if and when the Government has the room to do so.

The options include reducing the higher rate of tax; increasing the level at which people pay the higher rate; introducing a child tax credit; and creating a middle rate of tax.

Fine Gael would prefer a cut in the higher rate, while Labour is floating the idea of a child tax credit.

A Labour source said a number of choices were available, and claimed “there are no party- political differences yet”.

“These are all options that would be considered. You wouldn’t get down to taking positions on which ones until nearer the time, which is nine or 12 months away at the earliest,” the source said.

In contrast, a senior Fine Gael source said they had “never heard” of a child tax credit and maintained the existing rates of child benefit are enough to support children.

Tax bands
Both Minister for Finance Michael Noonan and Minister for Public Expenditure Brendan Howlin said they would like to adjust the tax bands to move people on average incomes out of the higher 42 per cent tax rate, which kicks in on earnings of more than €32,800. The rate rises to 52 per cent when the USC and PRSI are added in.

Adjusting the band is likely to be one of the first areas targeted, though Fine Gael wants a reduction in the rate itself.

“We support children through universal child benefit,” a senior party source.

“The problem is the 52 per cent rate for middle-income families. This damages incentives to work and invest.”

The child tax credit is one of a number of options being discussed in Labour circles, where the focus has been on how tax may be cut since Tánaiste Eamon Gilmore held out the possibilities of reductions at the party's recent conference.

“While they might want to cut the higher rate, there are other ways of relieving the tax burden. We’d like to see something that would have a direct effect on those who have been hit hardest,” a Labour source said.

“It could be worth a couple of hundred euro a year, more than the child benefit cut. A child tax credit is one of the options we would like to see examined if you’re talking about easing the tax burden.”

Politically, the introduction of a child tax credit before the next general election would help blunt the criticism of Labour for breaking its pledge not to cut child benefit. The cut, introduced in last year’s budget, caused controversy for the junior Coalition partner.

Third rate of income tax
Another option being considered is creating a third rate of income tax for middle-income earners. This would have a similar effect as adjusting the bands.

However, Minister for Transport Leo Varadkar yesterday warned a "giveaway budget" before the next general election could backfire because the electorate will be cynical of such promises.

Mr Varadkar said the Government would like to give something back after years of austerity but added the Coalition should be very cautious.

He also said a contingency plan for a collapse in the euro was in place but would not be needed.

“I would be very keen to give something back to Irish people,” the Minister said. “Irish people have endured huge sacrifices, have seen their standards of living go down and everyone in Government would like to give something back.

“I would be cautious about a giveaway budget before the election because people are rightly cynical about that kind of thing. I think it will backfire. I would be very cautious about that.”