The Minister for Finance, Mr McCreevy, has no shortage of advice on what he should do in his upcoming Budget, nor any lack of cash. Department of Finance Estimates for the public finances next year, published this morning, show that before any Budgetary measures, the surplus of exchequer revenue over spending next year is expected to reach £3.5 billion.
Budgets are always something of a balancing act, but this year the Minister faces a particularly tricky task. The Government and the social partners appear to be making progress in seeking a formula to save the Programme for Prosperity and Fairness, but part of any solution would be significant tax reductions next Wednesday. However, Mr McCreevy will have to be careful not to boost inflation by adding too much cash to the economy.
Clearly, there will be significant tax reductions and these will be necessary to try to keep some lid on wage pressures. But the Minister must not go too far and the overall size of the package must be considerably less than last year. He should direct the bulk of the gains at the lower to middle income earners, rather than favouring the better off. Giving big gains to higher earners would risk putting further upward pressure on house prices - as was pointed out yesterday by the Economic and Social Research Institute.
This means the Government should leave the top income tax rate, now 44 per cent, unchanged. More encouragingly, there are indications that tax credits will be increased to take many people out of the tax net altogether. This measure benefits all taxpayers, but gives proportionately higher gains to lower earners. There are indications of new measures to encourage profit and gain sharing and these will require a generous response from employers. And if the Government can devise measures to encourage savings, linked to tax incentives, this would be welcome.
What of indirect tax reductions to reduce the rate of inflation? Such measures would only have a short-term impact. However given that a reduction in inflation might reduce wage pressures, some modest reductions can be expected.
Another central feature of the Budget is likely to be a significant increase in child benefit payments. This is the Government's answer to demands that it attacks child poverty and helps people with child care bills. Unfortunately, merely raising child benefit is a blunt instrument to address these problems and also directs cash to many better-off homes who have less need of it. However, given the fuss over tax individualisation last year, the Government looks likely to play it safe and pay out in child benefit, rather than adopting a more imaginative approach to the issues.
Also, the Budget package must not forget those on social welfare payments. They have seen their living standards eroded by higher inflation and deserve generous increases.
The Budget cannot solve all the economy's problems. Its performance next year will be heavily influenced by international trends, such as the value of the euro and the health of the US economy. However, Mr McCreevy will make an important policy statement next Wednesday; he must take a focused approach to addressing the needs of the economy, rather than going for a populist package which would only add further to inflationary pressures.