The Government is pinning its re-election hopes on a 'big bang' 2pc Budget cut to the unpopular Universal Social Charge (USC) for lower and middle-income earners.

The Sunday Independent can reveal that the Finance Minister Michael Noonan now looks set to go further than the maximum 1.5pc cut already signalled.

Should he do so, people earning €70,000 would see their take-home pay increase by more than €1,000 per year, while those earning €35,000 would be €350 better off.

And in a clear sign that the general election campaign is under way, Labour leader Joan Burton will tomorrow say she believes the "potential" now exists to "phase out" the USC entirely for those on low and middle-income levels.

The Government believes a 2pc USC cut would shore up support for the Coalition ahead of the election, which is now expected to take place next year.

Both parties are keen to sell a message of prudent management of the economy, but believe a USC cut for lower and middle-income earners is the best way to restore voters' incomes.

The Government estimates that a 2pc cut will cost around the €540m level, which would mean that two-thirds of Mr Noonan's €750m additional spending allocation would be used to reduce the USC burden.

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But there is growing support for a "big bang" approach, given that it will be the last budget before the election.

The Government would leave itself open to accusations of undermining the tax base should it proceed with a 2pc cut.

In the past, the Department of Finance has said that the main reasons for introducing the USC were to broaden the tax base, simplify the taxation structure, remove poverty traps, create a "sustainable and efficient" charge and increase the tax yield.

Parents also look set to benefit from increased childcare supports, with consideration being given to a second free year of childcare and after-school supports, senior sources said last night.

Tanaiste Joan Burton is to tell her parliamentary party think-in tomorrow of the "potential" to "phase out" the USC for low and middle-income workers.

"The potential to phase out USC for low and middle-income workers as part of a structured plan over a series of budgets, and the room to invest more heavily in essential public services, will drive a social, cultural and community renewal.

"But potential has to be realised. And that's why the election will be so crucial. We can choose the policies which have brought the country back from the brink or we can put everything we have achieved together at risk," she will say.

The news comes as the coalition parties have received a five-point bounce in the latest Red C opinion poll, with Fine Gael (28pc) up three points and Labour (10pc) up two. Fianna Fail (18pc) is unchanged, but Sinn Fein (16pc) is down two and Independents/Others (28pc) are down three.

Senior Government sources have told the Sunday Independent that the desire to cut the USC by 2pc is considerable as it would deliver a massive boost to the so-called 'coping classes' in 'Middle Ireland' ahead of the election.

"The USC brings in a lot of money the way it is structured, so any cut to it costs a lot of money. But there is considerable support for cutting by 2pc, as it would be a massive boost for those who have suffered a lot of pain," a senior figure said.

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This weekend, Mr Noonan insisted that the Government would avoid increasing taxes on workers but could use tax increases on tobacco in order to allow him achieve that goal.

Mr Noonan is planning to introduce major housing and childcare programmes, as well as measures aimed at making it easier to women to re-enter the workforce.

There will also be a heavy emphasis in the Budget on cutting taxes for the self-employed, Mr Noonan has said.

As part of that, Mr Noonan appears to be ready to reduce the gap between the USC paid by entrepreneurs and PAYE workers.

Under the current regime, self-employed people pay 3pc more in USC on earnings over €100,000 than PAYE employees earning the same money.

With Budget negotiations now under way but still not finalised, it is understood that the USC cut will apply to the 7pc rate currently levied on incomes between €17,577 and €70,044.

A 2pc cut would see those on incomes of €70,000 better off to the tune of €1,050, while those on €50,000 would pay €650 less each year and those earning €35,000 would have €350 more in their pockets.

It is also understood that the higher USC rates of 8pc and 11pc on incomes above €70,000 and €100,000 respectively will remain unchanged.

Mr Noonan has also signalled his intention to increase the entry point at which people begin paying USC to remove 500,000 people from its reach.

Introduced in 2011 as an emergency measure, the USC at its height brought in more than €4bn a year to the Exchequer.

A bringing-together of a number of levies, the USC is one of the most painful legacies of the crash and both Fine Gael and Labour are keen to reduce it. The USC immediately became hated by the public, who experienced a drop in net income in Budget 2011.

Many people thought the USC was the reason for the reduction in their net income but the Department of Finance said this was not the case for many taxpayers.

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The department claimed the reason many income earners saw reductions in their net income was due to the reduction in income tax credits and bands that also occurred in Budget 2011.

Ms Burton's comments to her party are significant as it places the Government parties on an election footing.

In her address to Labour TDs and Senators, Ms Burton will outline how the party must sell the virtue of its achievements in Government.

"The picture is now very clear, the choice is very clear: between a Government driving recovery and renewal, or the risk of an incoherent opposition returning us to ruin," she will say.

The Sunday Independent has also learned that Health Minister Leo Varadkar may have to make do with as little as €200m extra for current spending in Health next year.

The HSE had sought around €1.9bn, but that figure has been dismissed as "off the wall and ludicrous" by Government figures.

Public Expenditure Minister Brendan Howlin is unable to meet the demands of Mr Varadkar on the current side but it is understood that the Budget will include provision to further widen the intake of nurses into hospitals across the country next year.

It is also believed that Health will be a major beneficiary in the Government's pending capital spending plan, which could help ease the funding crisis.

A spokesman for Mr Varadkar said: "Discussions are under way between the Department of Health, the HSE and the Department of Public Expenditure and Reform on this year's allocation.

At this stage the HSE has submitted its estimate but no definite figures are available as these are subject to current discussions."

Sunday Independent