FINE Gael is threatening to press for a cut in the dole in next week's Budget, if Labour keeps pushing for tax increases on high earners.
Labour wants to increase the Universal Social Charge (USC) on those earning over €100,000 by 3pc, but this is regarded as a breach in the Programme for Government by Fine Gael.
The document agreed between the two parties commits the Coalition to no tax rises or cuts in basic welfare rates during the lifetime of the Government.
Fine Gael sources last night warned Labour that going after the USC would then bring a dole cut on the table.
Budget negotiations are entering a crucial week, with Finance Minister Michael Noonan and Public Expenditure Minister Brendan Howlin due to outline the €3.5bn package of cuts and taxes next week.
Mr Howlin is expected to bring a memo to a special Cabinet meeting this Wednesday outlining more than €2.1bn in spending cuts.
So far, budget decisions have been kept "drum tight" inside the Economic Management Council, which comprises Mr Noonan, Mr Howlin, Taoiseach Enda Kenny, Tanaiste Eamon Gilmore and a small number of advisers.
But Labour ministers are understood to be pushing the idea of an increase in the USC for anyone earning over €100,000 from 7pc to 10pc, which would yield €71m.
However, Fine Gael is reacting strongly against this, with one source telling the Irish Independent that increases in tax like the USC are as inconsistent with the Programme for Government as "cuts in primary welfare payments such as the jobseekers' allowance and other payments to working-age adults". It is likely to lead to tough negotiations ahead of Budget day on December 5, with the source adding "all is still to be decided this week".
Dublin Mid West TD Joanna Tuffy is one of those in favour of the USC move, saying "there is definitely something that needs to be done there".
It has also emerged that the property tax may be taken straight from social welfare payments. Mr Noonan has already said the tax may come straight from the pay packet of workers. However, discussions between the Department of Social Protection and the Revenue Commissioners raised the possibility of taking it from the dole and other benefits.
But minutes from a meeting released to RTE's 'The Week in Politics' programme point out there are "significant issues" in doing this.
"Delivery time is tight and resourcing requirements have been identified within the Department of Social Protection (DSP)," the minute from the September 27 meeting says.
"There are challenges to both Revenue and DSP to deliver this requirement." Other areas likely to be hit in the Budget are PRSI, excise duty and motor tax, as well as cuts to household packages to the elderly.