BRIAN LENIHAN will get middle-class workers to bail out the national exchequer in this week’s budget, imposing deep cuts in take-home pay and pension tax relief for higher earners and a €100m cut in child benefit.

The finance minister will raise almost €2 billion extra in taxes next year and cut spending by a further €1.5 billion on top of the €1 billion in 2009 spending cuts agreed in the summer. He will have to breach the EU’s stability and growth pact guidelines by borrowing almost €10 billion — roughly 5% of GDP — to fund day-to-day spending and capital expenditure on road, rail, schools, hospitals and broadband next year.

The latest figures suggest the government is planning to borrow €2 billion for current spending, something it wanted to avoid but which is being forced by an expected €6.5 billion collapse in tax revenues from the housing sector and a loss of consumer confidence.

Economists encouraged Lenihan yesterday to implement a tough budget but warned that too much pain for taxpayers could risk further depressing consumer confidence and compound his difficulties next year. Austin Hughes of IIB Bank advised the government not to correct the downturn in a single year but to plan for a gentler three-year correction, and borrow up to €10 billion.

As many as 25 government agencies — mostly in the health and education sectors — will be abolished or merged in order to save €70m-€100m. The annual child benefit package of €2.4 billion paid for 1.1m children will be pared back by €100m, most likely by cutting off payments once a child turns 16. Politically, this would be one of the more controversial moves in the budget and is likely to remain open until Tuesday’s 8am cabinet meeting.

Social welfare rates are likely just to track inflation next year with weekly increases in the region of €5 for pensioners and the unemployed at a total cost of about €320m. The old reliables — alcohol and cigarettes — are expected to get small,incremental increases so as not to fuel inflation. Cigarettes are expected to go up 30c for a packet of 20, bringing in €60m a year.

Lenihan is expected to increase the rate of betting tax, which has been cut to just 1% off-track and is zero at racecourses. There will be a double hit for higher earners, with a halving in the tax relief on pensions for those earning more than €35,000 a year, and by taking an extra 4% from those earning more than €50,000 by removing the PRSI ceiling. This would mean the PRSI bill for someone earning €70,000 a year rises from €2,000 to €2,800 a year.

College registration fees are expected to increase by 50% from €980 to €1,500.

However, education and social welfare — and the Health Service Executive — appear in line for significant increases in spending, according to estimates released this weekend by the finance department. All three are effectively demand-led increases to pay for extra teachers, larger numbers on the dole and increased healthcare costs.

The cuts in other areas will be deep and difficult to manage. In real terms the prison service budget will be cut by almost 8% (€20m), the Courts Service budget by over 17% (€9m) and Barry Andrews, the minister for children, will have to find savings of almost €64m. The finance department has marked itself down for an effective 10% cut and Revenue will be down 4% in real terms.

Lenihan will also outline the government’s priorities on large capital programmes. Metro North, the rail link from Dublin city centre to its airport, is not expected to be dropped. The €4 billion project is supposed to be delivered by 2013 but leaks had suggested it would be a casualty.

It is quite likely that Lenihan will postpone plans to build a new Abbey Theatre. A year ago, the government announced an international competition to design a new national theatre at George’s Dock on Dublin’s northside. The Office of Public Works has been drawing up competition rules, but a spokesman admitted yesterday: “In the current climate, we decided to hold off advertising the competition until Tuesday. There is money for it in the National Development Plan, but we are waiting for the budget.”

Last week Martin Cullen, the arts minister, appeared to prepare the way for a lengthy postponement when he told the Dail that the Abbey project is “complex” and there are a “myraid of technical, procedural and legal factors to address”.

He seemed more enthusiastic about rebuilding the National Concert Hall, which is more advanced and less likely to be delayed. An official notification of the tender for the concert hall work was published last May, and three shortlisted consortiums are in talks with the government.

Other projects that are likely to be postponed due to spending cuts are the Western Rail corridor north of Tuam, Co Galway, the Metro West rail line from Tallaght to Blanchardstown, and the Luas line planned from Lucan to Dublin city centre.

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