Tomorrow’s budget will be the first of a series that will attempt to gradually increase living standards over a number of years, Taoiseach Leo Varadkar has said.

Mr Varadkar is seeking to cast Budget 2018 as the beginning of a period of continuous but affordable reductions in tax and increases in spending.

The Taoiseach told The Irish Times such an approach would lead to a “modest, sustainable increase in living standards every year” and a “new period of sustained progress”.

Negotiations will continue today between Minister for Finance Paschal Donohoe and Fianna Fáil, as well as with the Independent Alliance members of Government.

The main, outstanding difficulties with Fianna Fáil are on the spending side with discussions continuing in areas such as disabilities, mental health and the package of social welfare measures. It is acknowledged by Fianna Fáil and Fine Gael that there are insufficient resources to introduce wide ranging welfare increases from January. Fianna Fáil sources say they want an increase of €5 in almost all welfare payments, including unemployment benefit, from next March at the latest.

Senior Government sources also said budget day will not see an outline of tax and spending commitments for the next three years, as had been originally suggested by Mr Varadkar. Such a plan will instead be unveiled later this year.

It was claimed, however, that the Government’s future policy direction in areas such as income tax, deposit interest retention tax (Dirt), pensions and welfare, public sector pay and the minimum wage will be clear from the budget.

The exact composition of the income tax package has yet to be finalised, with last minute tweaking still being done. It is understood the threshold at which the higher rate of income tax kicks in will not be raised by as much as €1,000 for a single person but will increase by more than €1,000 for a couple.

At present, the higher, 40 per cent rate of tax applies on income above €33,800 and raising this threshold has been identified as a priority by Mr Varadkar.

Two methods of reducing the universal social charge – Fianna Fáil’s favoured tax cut – are being considered. One would see the 5 per cent rate, which applies on income between €18,800 and €70,000, drop by 0.5 per cent. The other would see the 5 per cent rate and the 2.5 per cent rate, which applies on income between €12,000 and €18,800, reduce by 0.25 per cent each.

Tax cuts, spending increases

Mr Donohoe is expected to meet the Independent Alliance today. Minister of State Finian McGrath has threatened to resign unless his budgetary demands are met. It is understood that his concerns centre on €3.4 million of funding to help give effect to Ireland’s ratification of the UN Convention on the Rights of Persons with Disabilities.