FINANCE Minister Brian Lenihan last night gave his strongest hint yet that he plans to bring lower-paid workers into the tax net.

Speaking during a special four-hour debate on next month's Budget, Mr Lenihan said that having half of all income earners in the State paying no tax -- as is currently the case -- was "not viable".

His cabinet colleague and Green Party leader John Gormley claimed he favoured cutting public service pay over cutting essential services when faced with a choice between the two.

The Government had hoped the debate would "flush out" the Opposition's alternative plans to obtaining €4bn in cutbacks. But Fine Gael, which believes child benefit should not be reduced, and the Labour Party, which has called for the Christmas bonus to be reinstated, failed to disclose their plans.

Instead, they will unveil them closer to the December 9 Budget. Fine Gael's finance spokesman Richard Bruton did unveil plans to reduce the upper rate of employer's PRSI by 20pc and the lower rate by 50pc as part of a €900m pro-jobs tax cut.

However, Mr Gormley said he had expected to see the "colour of the Opposition's money" but had been left "deeply underwhelmed" by Fine Gael and Labour.

The "harsh reality" is that €1.3bn of the required €4bn must be shaved off the public sector pay bill, he said.

"There are efficiencies to be found, but insofar as we face a choice between cutting essential services and cutting pay, I favour cutting pay. Most public servants whom I know agree," Mr Gormley said.

Kicking off last night's debate, Mr Lenihan said around half of income earners would pay no income tax next year.

"While they may have some exposure to the Income Levy, having 50pc out of the tax net is not viable if we want to fund the range of services we expect government to provide," he told the Dail.

His comments signalled the prospect of tax brackets being widened to bring lower income earners into the tax base. Under the current system, anyone earning €18,300 a year has enough personal tax credits to avoid paying any tax.

Only two weeks ago, a major OECD report recommended bringing more people into the tax net as it said tax revenues and government spending no longer matched.

The proposal to cut personal tax credits, which currently stand at €3,660, comes after statements from Mr Lenihan in recent weeks about how few people are paying income tax.

Two out of five workers paid no income tax last year, and half of all tax came from the one-in-30 workers who earn more than €100,000.

Taking account of the increases that have been made to personal taxation, the marginal tax rate is now at 52pc cent for PAYE earners and higher for the self-employed.

"We know from our experience in the 1980s that we cannot tax our way out of a recession," Mr Lenihan said.

"However, who funds the income tax yield tells its own story. In overall terms 4pc of income earners contribute almost half of the income tax yield."

Productivity

In recent years, the country's labour costs have moved out of line with productivity developments, the minister said.

Therefore, reducing labour costs -- through a combination of "nominal" pay reductions and enhanced productivity -- must form part of the strategy to improve competitiveness.

The public sector had already made an important contribution but "more is required".

Taoiseach Brian Cowen told opposition parties that if the Government took firm action now, the country would witness growth in the second half of 2010. But cutting €4bn marks only the start of addressing the country's problems, he said.

Under Fine Gael's plans, changes to the PRSI rates would benefit 175,000 employers and their 1.7 million employees.

The tax cuts would be financed by a carbon tax, which would take in €480m and a windfall levy on power generators, which would provide €200m. The abolition of the PRSI allowance and the ceiling on employees' PRSI would cost €470m while contributing €250m to deficit reduction.

Labour's Joan Burton said she accepted the need for a deficit reduction target of €4bn as long as the measures did not cause further contraction.

She said the issue of tax exiles must be addressed. "If you live here, do business here, then you pay your share, no ifs, no buts, no special pleas."

- Aine Kerr Political Correspondent

Irish Independent