SWEEPING changes in the way the country's finances are run, including the abolition of PRSI and the reduction of income tax rates to 40 and 20 per cent, are contained in a proposal unveiled by the Progressive Democrats yesterday.

Under the five-year plan, the party claims that if public spending was pegged at current levels, allowing for inflation, it would still be possible to have a current Budget surplus of £750 million in five years.

PD spokesman on finance, Mr Michael McDowell, said employers PRSI could be reduced to 7.5 per cent (the standard rate is currently 12.2 per cent) and Corporation tax could be cut from 38 per cent to 25 per cent.

Mr McDowell said the party's economic proposals entailed capping public spending rather than increasing it or cutting it back. The proposals were vital if Ireland was to compete vigorously when EU funds began to drop off.

The plan argues that the proposed tax and PRSI changes would have a dramatic effect on Ireland's economy by boosting taxpayers' wages at all levels and providing better incentives to enterprise. Ireland would become a much more attractive location for labour intensive industries and the numbers in work would be boosted substantially, it claims.

Former Progressive Democrats leader, Mr Des O'Malley, warned yesterday that issues such as employers' and employees' PRSI would have to be tackled urgently. He said the Republic was in danger of losing domestic and foreign employers to Northern Ireland, due to the ceasefires.

The plan calls for capital gains, tax to be reduced from 40 per cent to 25 per cent and for the abolition of residential property tax. Mr McDowell said yesterday the high rate of capital gains tax encouraged tax avoidance and acted as a dampener on economic activity. It only brought in £30 million per annum, he said.

The plan calls for a unified approach to the Budget, under which tax targets would be viewed to be as important as expenditure targets.

Mr McDowell said every year 14 Ministers went into battle against the Finance Minister and success seemed to be judged by "being able to get an increase in your Departmental Budget, to do basically the same things as you did last year".

Instead, he said, there should be a unified budgetary process in which tax and spending decisions were considered by the whole Government acting together to meet specific targets for reform and expenditure.

To complement this policy, State Departments and agencies would be given autonomy within pre-set limits. They would be managed with a value-for-money approach in which decision makers would be given incentives to reduce rather than increase spending.

The plan also proposes a major privatisation programme to "improve the competitiveness and efficiencies of the Irish economy and to deliver a better service to private and industrial consumers.

Major state assets which could be disposed of include ACC, ICC and TSB as well as Aer Lingus and Telecom Eireann, the PDs say. Mr McDowell says commercial enterprises such as the ports and the airports could also be privatised.

He said privatisation was not a matter of ideology, rather of pragmatism. He said that when the State was involved in such ventures the need for capitalisation was always there.

Such a programme could generate more than £2 billion for the Exchequer, if privatisation was done on a case-by-case basis over five years, he said.

The PDs' plan drew an angry reaction from Labour. Deputy Pat Upton said the plan was a recipe for economic madness and dismissed it as a "simplistic and populist attempt at playing to the gallery".

He added that the plan was "narrow in focus and if implemented, will lead to the creation of an exclusive rather than inclusive society".

Earlier, Progressive Democrats leader, Ms Mary Harney, ruled out a coalition with Labour after the next election.