What's in Lenihan's budget briefcase?

Some options available to Brian Lenihan to try to plug the budget deficit.

HOW BAD is it going to be? That is the question on most people's minds in the run-up to Budget 2009. The "what's-in-it-for-me?" feeling of boom-time budgets has been replaced by widespread fear and nervousness that Brian Lenihan's first budget will mark the beginning of a 1980s revival: all high taxes and spending cuts.

In order to stop the Government's deficit from falling into an even bigger black hole (that would eventually have to be paid for by taxpayers anyway), households across the State may be looking at a hefty hit to their incomes during 2009.

The Minister for Finance will reveal all next Tuesday, when he presents the Dáil with his strategy for halting the economic tailspin. As ever, the contents of the budget briefcase will affect the income, spending power and life choices of almost everyone in the State. What are the trigger words that people should keep their ears pricked for?

The way in which tax turns workers' gross salaries into more modest net ones, as well as the current rates of payment for common social welfare payments, is explained in the panel below. The case studies on this page, which have been posed for by models, have been compiled for The Irish Timesby PricewaterhouseCoopers (PwC). They outline how the Government's readjustment of social welfare benefits and the tax system could either dent or boost individual families' finances. They will be updated to reflect the budget day changes in The Irish Times's Budget 2009 special supplement next Wednesday.

So what are Mr Lenihan's options?

INCREASE THE TOP RATE OF TAX TO 42 PER CENT OR HIGHER

Two years ago, in Budget 2007, Brian Cowen cut the top rate of tax from 42 per cent to 41 per cent, promising to cut it again in last year's Budget to 40 per cent. When the economy faltered, that did not happen, and now there is a realistic risk that the top rate may revert to 42 per cent again.

Such a tax increase would have the advantage of not directly hurting lower-income taxpayers, but you would not have to be a high roller to be affected. As things stand, a single person who earns more than the standard rate cut-off point of €35,400 pays at least some tax at the higher rate.

Younger members of the workforce may not remember that before 2001 tax rates were even more heartbreaking: the higher rate of tax was 44 per cent and the standard rate of tax was 22 per cent. Since Budget 2001 the standard rate has remained at 20 per cent. Any increases here would hurt lower-income workers who are already struggling with rising food and fuel bills. Unless they could be compensated for this through other credits and reliefs, such a move seems unlikely.

MAKE LITTLE OR NO CHANGES TO TAX BANDS AND PERSONAL TAX CREDITS

The budget often includes increases to the standard rate tax band and personal tax credits. These increases ensure that the proportion of workers in the tax net and the higher-rate tax bracket does not creep up purely as a result of wage inflation.

If the standard rate tax band is not increased at the same rate as average pay increases it amounts to a kind of stealth tax on workers, who must somehow find modest pay rises sufficient to cope with rather less modest rises in the cost of living.

Increasing the personal tax credit and the PAYE tax credit also helps to reduce workers' annual tax burden. Tax credits are simple. A €120 increase in a tax credit equals €120 into the hands of the taxpayer spread over the course of the year - in other words, the person's tax burden is reduced by €10 each month. These tax credits could, in theory, be cut. Certainly, increases in credits seem set to be small or non-existent this year. If there are any, they will be token gestures that are wiped away by inflation or used as a way to offset the income-slashing impact of a hike in the top rate of tax or a failure to widen the standard rate tax band.

ABOLISH THE PRSI CEILING

One Budget 2009 rumour is that Mr Lenihan will abolish the ceiling on the income that is subject to pay-related social insurance (PRSI) contributions.

PRSI, which is currently charged at a rate of 4 per cent to employees and 3 per cent to self-employed people, is only charged on earnings below €50,700, so abolishing this ceiling would hurt middle and higher-income workers who earn more than this amount.

Cutting the rates at which PRSI is charged could, at the same time, help to ease the higher cost of living for lower-income workers and mitigate the effect of the ceiling's abolition on middle-income earners. In other words, removing the ceiling and cutting the PRSI rates could be an effective way to tax the rich.

INCREASE JOB-SEEKERS' BENEFITS, STATE PENSION RATES AND CHILD BENEFIT PAYMENTS BY LESS THAN THE RATE OF INFLATION

With unemployment forecast to climb to a rate of 8 per cent next year, it is expected that the Government will have to make an effort to increase job-seekers' payment rates at least in line with inflation.

It will not be politically pleasant for the Government if it reduces the already limited purchasing power of this group, given that the rise in redundancies is at least partly the result of its handling of the economy.

Pensioners are another vulnerable group because their income tends to be fixed, while a greater proportion of their money is spent on essentials it is difficult to cut back on. They cannot scrap around for overtime work to cope with the cost of spiking winter fuel costs.

Failing to keep child benefit payments in line with inflation would also seem to be stingy, regardless of how dire the economic crisis is. Child benefit is currently a non-taxable payment that is paid to all families. This prompts regular calls for it to be taxed or means-tested. However, either measure would represent a dramatic change in Government policy on supporting families: with the economy fast settling into a recession, generating headlines by tinkering with the rules on child benefit seems extremely unlikely.

MAKE LARGE HIKES TO INDIRECT TAXES

If in doubt, let smokers and drinkers take a hit. Given that vast swathes of the population fall into at least one of these categories, it is clear that 2009 is going to be grim for most.