Minister brings in `mother' of all budgets

Most Budgets have something which grabs the public attention and leads to great heat in the following days.

A few years ago it was the indication - subsequently withdrawn - that child benefit would be taxed. Another year saw a big fuss over property tax. This year, once everyone realises the implications, the big row will be over what the Department of Finance calls the "individualisation of the standard rate band".

It does not sound very exciting, but set out in an annex to the Budget documents is a plan to move to a system in three years time where a married couple with two spouses working would have twice the tax allowance of a couple with one spouse working. For the next tax year, the two spouse working couple will move into the higher income tax rate at earnings of £34,000 (€43,171) compared to £28,000 for the one earning couple.

So this year the couple with two earners on an income of £30,000 gains over £1,100 from the Budget, while the gain for the one income couple is around £600.

However the goal in three years time, as set down in the examples in the Budgetary documents, is that the allowance - or credit - for a married couple with two earners will be twice that for a single earning couple. Taking this year's bands for illustration, the single earning couple moves on to the higher income tax rate at £28,000, while the two income couple can earn £56,000 before being hit by the higher rate.

The goal of this is to get more married women to return to the workforce. And there is an argument that the single income couple can afford more tax because they do not incur childcare costs.

However the scheme - as outlined over three years - will be hugely to the disadvantage of those with one spouse remaining at home. It is an effort to attack one of the problems facing the economy - labour shortage - but it does so by introducing an entire new and controversial element into the tax system. It is, surely, unfair to those with one spouse remaining at home - of which there are currently around 100,000.

What else does Budget 2000 bring? It is a package hugely to the benefit of the better off, mainly due to the reduction in the top 46 per cent rate of tax. It has been said before, but is worth repeating. The big problem with the tax system is not the rate at which tax is levied, but the fact that tax kicks in at relatively low income levels and that people move on to the higher income tax rate at relatively low incomes.

The best part of the tax package is that, by increasing the single person's standard rate tax band from £14,000 to £17,000, it means that the single earner can earn a good deal more before becoming liable at the higher 44 per cent rate. The top tax rate will thus not kick in until around the average industrial wage. Married couples with both spouses working will also gain, as their band rises from £28,000 to £34,000.

Apart from this band increase, the income tax measures are disappointing. Having introduced a welcome and substantial rise in tax allowances in last year's budget - and thus aimed the benefits at the lower income earners - this year Mr McCreevy returns to the tried and tested formula of cutting income tax rates. The cut in the top rate, in particular, aims benefits at the higher earners.

There may be an argument to cut income tax rates in the years ahead, but surely the bigger problem in the short term is the relatively low level of income at which people enter the tax net in the first place.

This year's Budget did little to address this issue, with a rise of just £500 in the main personal tax credit and no increase in the PAYE credit. Resources would have been better spent increasing allowances than cutting income tax rates.

In particular, an increase in the PAYE allowance would have been another route to make it more attractive for married women to return to the workforce. He could have afforded to double - or even treble - this allowance and thus married women an incentive to return to work, without being so discriminating against those remaining at home.

Analysis by the Economic and Social Research Institute, completed exclusively for The Irish Times, and carried on page 6 of this supplement, confirms that it is the better off in the population who gain most from the Budget. Again, the gains to most welfare recipients are less than the benefits to many taxpayers. Better-off double-income married couples, in particular, will dine out for some time on this Budget. Mr McCreevy insists that it must be seen in the context of a longer-term strategy. However we are still not told what precisely the strategy is. His first budget cut two percentage points off the two tax rates, thus giving the main benefit to the better off. Last year's package introduced major increases in allowances and also took the welcome and reforming step of introducing tax credits.

Credits were heralded as a way of being able to target tax reform at particular groups - but this year the main income tax credits were not the major focus of the tax package. Instead we were back to the old route of cutting income tax rates. However the move to complete the change to credits this year was welcome, while mortgage interest relief has also been simplified.

The Minister will have plenty of money to spend over the next couple of budgets, according to his economic forecasts. These are based on the reasonable expectation that growth will remain strong. He can thus afford to set out a significant reform programme as part of the talks of a new national agreement.

It remains to be seen whether there will be a big enough fuss about the allowances plan outlined for married people to lead to a reverse in direction. But there is no reason why a new national agreement should not set out clear goals for a tax reform programme over the next few years which would clearly address the remaining issues in the tax system.