David Prosser: An easy way to start on the deficit

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The Independent Online

Outlook Not long to go now. If the latest pronouncement from the National Institute of Economic and Social Research is to be believed – it reckons GDP growth was 0.2 per cent between June and August – the UK's recession ended in May. We won't know the NIESR is right for sure until towards the end of next month, when the Office for National Statistics publishes third-quarter growth figures, but after a period of such misery, that's not so long to wait.



Still, the Chancellor obviously isn't counting his chickens, insisting yesterday that it is too early to suspend the fiscal stimulus programme that he believes has been so vital in preventing full-blown depression. No matter that he has promised, in his own words, to "halve the deficit over four years once the recession is over", for now the spending must go on.

Indeed, there will be plenty of calls in the coming months for that spending to continue indefinitely. The retail sector, for example, has already begun lobbying for an extension of the VAT cut into 2010, while the car trade would like to see more money for scrappage.

If the US introduces the so-called "dollars for dishwashers" scheme, through which people get help with the cost of swapping domestic appliances for energy-efficient replacements, Mr Darling will come under pressure to follow suit with something similar.

Nor does the NIESR offer much hope to a Chancellor who needs to move away from fiscal stimulus towards spending cuts and tax rises as soon as possible. It warns that a technical end to recession is not the same thing as a return to normal economic conditions. In fact, there will be further months when output actually falls.

The need for further support for the economy will be pressing enough while doubts about the sustainability of the recovery persist. Should we enter the territory of the dreaded double-dip, the pressure becomes irresistible.

Mr Darling talked again yesterday of "tough choices" and "the biggest burden falling on those who can most afford it". The truth, however, is that politicians on either side of the divide have yet to even identify where those tough choices will be made.

All the more reason to make some easy hits. One suggestion made yesterday by an old – if somewhat disillusioned – friend of Labour is certainly worth some thought. The Trades Union Congress, increasingly nervous about the likelihood of an axe being taken to public sector pension benefits, published a decent analysis of the cost of tax relief on private pensions.

On the Government's own figures, tax relief on private pensions cost £37.6bn in the 2007-08 financial year, the most recent period for which data is available. The TUC reckons two-thirds of that money goes to higher-rate taxpayers, while £10bn of it ends up in the hands of the top 1 per cent of earners, those on more than £150,000 a year.

Mr Darling has already announced some marginal changes to pensions tax relief at the top end, but if he really wants to save money, this is a choice that might not be so tough. Reward those who make provision for the future by all means, but it cannot make any sense to spend so much money on tax breaks for pension savers who by any rational reckoning really cannot need the money.

The TUC's figures are a little misleading. The costs of pension tax breaks include reliefs for employers making contributions on behalf of staff, which would be very tough to dump, as well as lost National Insurance contributions on salary paid as pension contributions. Still, by limiting individual pensions tax relief to the lowest rate of income tax, it should be possible to save between £5bn and £10bn.

That's not to be sniffed at for a Chancellor desperate to raise cash. And a raid on pension tax breaks has something else going for it too. It's one of the few tax rises that doesn't have a knock-on effect on demand, since pension contributions are savings for the future rather than current spending.

Will the Chancellor – or for that matter, the Tories – heed the TUC's call, despite the undoubted political sensitivity of attacking pension tax breaks? That remains to be seen – but if Mr Darling can't make the easy choices, there's not much hope for those tough ones.

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