The Government is planning a significant policy shift in October's Budget which will see Fine Gael move away from its promise of major tax cuts in favour of State-funded benefits for working families, the Sunday Independent can reveal.

The Government is expected to have billions of euros available to spend in the forthcoming Budget, but senior Fine Gael figures this weekend warned they do not expect substantial tax cuts in the Budget.

It is also understood the Government only plans to spend €1bn of its resources, over fears that a massive splurge on tax cuts and benefits will overheat the economy.

It is expected the USC will not be significantly reduced this year and instead taxation changes will focus on increasing the threshold for entering the higher tax rate. Fine Gael promised to abolish the USC and introduce US-style tax cuts before the last general election. However, the emphasis of the Budget will be on giving workers, especially the self-employed, access to a raft of new benefits aimed at reducing 'out-of-pocket expenses' for employees.

A senior Fine Gael figure said: "There is a growing realisation in Government that you can only do so much of that through tax cuts."

Another senior Government source said: "Taxation is not off the table but the thinking of the Taoiseach and other ministers is focusing on getting something back from the taxes you pay and PRSI is the perfect point for that because it really suffered through the recession."

A source close to the Taoiseach said the Budget would focus on "widening tax bands" and introducing new benefits for workers while also reducing the deficit and national debt.

Yesterday, Fianna Fail finance spokesman Michael McGrath insisted reducing the USC was a "key commitment" in the confidence and supply agreement which he expects Fine Gael to honour.

"On the personal taxation front they are all over the place. They started off promising the abolition of the USC, now they want to merge it with PRSI and now they might not be in favour of any tax cuts at all," he said.

However, the Government wants to maintain the current tax base and instead reward workers for their PRSI contributions.

This will see the introduction of more dental benefits, free eye tests, expanded free GP care scheme, reduced medical bills, increased childcare subsidiaries, parental leave and extra welfare entitlements for the self-employed.

There will be an estimated €3.2bn fiscal space in 2019, according to the last Summer Economic Statement.

However, sources said Minister for Finance Paschal Donohoe will have around €1bn to spend on tax cuts and spending measures. The additional funding will go towards servicing the national debt, increasing public sector pay and creating a rainy day fund.

The minister will also be under pressure to address demand from public sector unions who are looking for equal pay for new entrants.

However, the Government fears "repeating the mistakes of the past" and is concerned a major giveaway budget would overheat the economy.

"We are now closer to the next recession than the last recession," a minister said.

Another source said: "We will be prudent and let the others make all the promises."

Another central focus of the Budget will be setting out a pathway for merging USC and the PRSI, which Mr Varadkar committed to on taking office.

But this is a long-term project and the main taxation change will be increasing the entry point for the top rate of tax.

Any new tax cuts are expected to benefit single workers who currently pay 40pc tax on earnings over €34,550, and married people who pay the same rate on income over €43,550. The Government will move to increase the entry point for the top rate with the aim for reducing the marginal tax rate across the board.

The Government also believes increased benefits for workers can assist people who are outside the tax net.

"If you reduce tax it doesn't help them and then you come back to the assertion you're only helping the wealthy. You can't reach those people with tax cuts and reducing the tax base is not desirable because then it's a small base of people as it is," a source said.

Mr McGrath said Fine Gael was responsible for overseeing a "dramatic escalation in the costs that working families are facing".

He added: "The burden of personal tax has increased significantly over the course of the economic crisis but we believe people deserve to be rewarded and that means continued reductions in the USC. That is the key taxation commitment of the confidence and supply agreement and it must be honoured."

Sunday Independent