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Sunday 16 December 2018

Dan White: Don't say you weren't warned: Where Lenihan will slash €3BN

cuts: Finance Dept will go after soft targets in a very painful Budget

1 Cut capital spending by even more than planned in 2011. The government already plans to cut capital spending, new roads, hospitals, schools etc, by €1bn to €5.5bn next year. However, you can't just turn a switch to start new projects. Between the time a new project is agreed and the first shovel hits the ground takes at least three years.

With all of the major road projects finishing this year and no visible "pipeline" of new projects, expect the actual figure to be much lower than €5.5bn.

2 Introduce water charges. With a property tax off the agenda until after the next general election the government badly needs to introduce at least one major revenue-raising measure on December 7. Water charges look like the most likely suspect.

Even a €200 flat-rate charge on every household in the country would raise €300m. Even better from Fianna Fail's point of view, a water charge could be dressed up as an environmental measure and blamed on the Greens.

3 Increase carbon taxes. In last December's budget Brian Lenihan introduced carbon taxes, which pushed up the cost of motor fuel, heating oil, ESB and natural gas, and solid fuel. This we were told, would help us save the planet. For a cash-strapped government it also had the added benefit of raising a handy €330m of revenue in a full year.

With the carbon tax mechanism now in place, an increase could be quickly implemented. A doubling in the carbon tax to €15 per tonne would raise another €330m. This, too, could be blamed on those political gluttons for punishment, the Greens.

4 Raise DIRT. This government has already increased the deposit interest retention tax savers pay on their interest from 20pc to between 23pc and 26pc. It's going to go up again on December 7, probably to 30pc. DIRT is a tax the Department of Finance loves as it is collected at source by the banks, who hand it over to the exchequer in large regular lumps. An increase in the DIRT rate to 30pc across the board would raise about an extra €175m. With the exchequer desperate for every cent that isn't nailed down, an increase in the DIRT rate is an absolute no-brainer.

5 With tax revenues stuck at €31bn, no matter how much he raises taxes by, Brian Lenihan's ability to push up income taxes, excise duties and VAT is extremely limited. However, he has to find a way of increasing at least some of these taxes if he is to meet his targets. Even if he introduces all of the measures outlined above, Lenihan will still be at least €1bn short of his €3bn target.

So how does he bridge the gap?

With the tax hikes of the past three budgets having drastically reduced his ability to squeeze high earners, expect him to extend income tax, possibly at a low 10pc rate, to the near 50pc of those in work who currently pay no income tax. In addition, Brian Lenihan announced plans in last December's budget to replace the existing PRSI system with a new social protection charge.

The word on the street is that this new charge will apply not just to wages and other forms of other "earned" income but also to "unearned" income such interest, dividends and capital gains. While we will have to wait until December 7 to see the full details, expect an extension of PAYE to the lower-paid and the new, extended social protection charge to raise most of the extra €1bn-plus that Lenihan needs to balance his books and keep the bond markets, if not the rest of us, happy.

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