Despite the tight spending estimates presented for next year, the Government will still need to raise additional finance on Budget day. Spending will rise further - as the Government accounts for a social inclusion package and the rising cost of public sector pay. Revenue will need to be raised to pay for this, if borrowing is not to surge.
The Government is certain to increase excise duties to raise some of the money. However it must be careful not to overdo this, for fear of fuelling inflation. So the Minister for Finance, Mr McCreevy, will also need to look elsewhere to raise revenue.
There is a strong case for filling at least some of the gap by cutting back on, or abolishing, a range of tax shelters, allowances and reliefs. Already there is speculation that the Minister may restrict the Special Savings Incentive Accounts (SSIAs); while not technically a tax-break, the cost is taken in the exchequer accounts against income tax. However if the SSIAs are to be restricted, the Minister should also tackle a range of tax shelters and loopholes, many of which benefit the better-off and have little benefit for the overall economy.
The SSIA scheme was initiated, in part at least, to persuade the European Commission in Brussels that the Government was doing something to cool what was then an overheating economy. Whatever its drawbacks, it does have a useful function, which is encouraging people to save. That said, the main goal of policy in this area should be encouraging people to save for their pensions, as opposed to merely putting money away for five years.
Abandoning the scheme would not be wise - and would probably not be legally possible. However, given the spiralling cost, there is a case for capping the amount which people can put into the scheme, while also easing the penalties for people wanting to take money out. Both these measures would guard the Exchequer from a further sharp rise in costs.
An immediate problem for Mr McCreevy is that because there is speculation of a capping of contributions, investors may move to increase their contributions before the Budget. If the Minister is going to announce some kind of cap, then perhaps there is a case for announcing it quickly, before Budget day. If he is not going to move, then equally he should clarify his intentions.
The SSIAs have been criticised as a transfer to the better-off. In some ways this is true, although many on modest incomes are using the scheme. However, many of the more mainstream tax breaks and allowances demonstrably favour the wealthy - or, in some cases, the corporate sector. If the SSIAs are to be restricted, then the Government should follow the advice of the National Economic and Social Council which, in an as yet unpublished report, have called for many allowances either to be made available at only the standard income tax rate or abolished altogether.