Battle lines drawn in the Coalition over planned Budget cuts
Labour to fight for services, FG is seeking tax cuts
LABOUR is adamant that fewer spending cuts must be the number one priority in October's Budget – before easing the tax burden is even considered.
The package of spending cuts and taxation measures is expected to be close to half of the original €2bn target demanded by the International Monetary Fund (IMF).
But despite a higher tax take this year than anticipated, the coalition partners are already divided over the make-up of the Budget.
Labour is insisting that tax cuts will only be on the table if the Government can avoid significant service cutbacks.
Party sources are attributing their election meltdown to cuts in health, social protection and education and have vowed to bounce Fine Gael into ruling out any major reductions in spending.
The stance held by senior Labour figures will prove contentious with Fine Gael ministers who are adamant that tax cuts are "top of the priority list".
A senior Fine Gael source warned that the coalition is heading towards "unchartered waters" ahead of Budget 2014 given that the country has exited the bailout.
The party figure said Labour's stance on spending may scupper Fine Gael's plans to make tax cuts a strong feature of the next two budgets.
"Labour under Joan (Burton) are going to come into the budget all guns blazing.
"But at the end of the day, we have made no secret that we will put more money into people's pockets," said a source.
In her speech at the Labour Party hustings in Cork on Thursday, Ms Burton admitted that she is seen as being "difficult" due to her determination to protect the area of social protection. She became the first Labour figure to rule out any cuts in social protection and education last month.
It is a warning that must now be taken seriously given that she is favourite to become the next Tanaiste.
But top of the Fine Gael priority list is to target any tax cuts on removing middle income earners from the higher rate by widening the tax bands.
At the moment, anyone earning more than €32,800 hits the 52pc marginal rate of tax – one of the highest marginal tax rates in the OECD, well above the average of 36pc.
Fine Gael ministers have repeatedly said in recent weeks that this has to change, with some party figures in favour of increasing the band to at least €40,000.
Meanwhile, government sources last night predicted that the budget adjustment "will be closer to €1bn than €2bn", but warned that a lot depends on the next tranche of exchequer figures.
Speaking on RTE's 'The Week in Politics', European Affairs Minister Paschal Donohoe said a €1bn adjustment would "still involve so much difficulty for people".
He added: "We have to be responsible in relation to this. The reason why there is a commitment to deliver this 3pc (of GDP), is that the judgment is, if we deliver that figure, our interest payments on our national debt will go down, it will be easier for us to bridge the gap between spending and taxation.
"We will do what we need to do to deliver that figure and no more."
Separately, the government sources insisted that there is no concern about the prospect of the revenue from water charges being used towards fixing urgent problems with pipes.
Up to €500m from Irish Water is being used to reduce the overall adjustment as it allows Finance Michael Noonan to take the spend on water infrastructure "off the balance sheet".
This income will "neutralise" the spending on water infrastructure previously carried out by local authorities and free up some €500m which could be used for tax cuts or additional expenditure.