The Chancellor has been meeting Treasury ministers, senior officials and advisers at his country residence of Dorneywood to plan Budget strategy. But few decisions on specific tax measures will yet have been taken, with the Budget still four months away.
However, the Government's political difficulties make it sensible for the Treasury to impose any tax increases in a fashion that makes them as incomprehensible as possible to the average voter.
The Conservatives' drubbing in the Christchurch by-election - blamed largely on the planned extension of VAT to domestic fuel - makes the task of making further inroads into the Government's pounds 50bn borrowing requirement more sensitive. But the Chancellor's recent decision not to lower public spending ceilings in the next two years means that taxes will have to bear the brunt of any additional cuts in borrowing.
In a reply to the House of Commons Treasury Select Committee last week, the Treasury echoed the Conservative election manifesto when it pledged: 'Some 10 million borrowers continue to benefit from mortgage interest relief, the largest number ever. The government intends to maintain mortgage tax relief.'
But the Treasury believes this commits it only to retaining the principle of mortgage interest tax relief, not its present level. This leaves open the possibility of cutting the amount on which tax relief can be claimed from the present pounds 30,000 ceiling. Less likely is a cut in the rate. Norman Lamont, in the March Budget, announced that this would fall to 20 per cent from April nexst year.
Mortgage interest tax relief will cost some pounds 4.3bn in 1993-4 and is worth up to about pounds 40 a month to the average mortgage- holder. Most economists regard it as an inefficient distortion of the market. It raises the price of owner-occupied housing and, by contributing to swings in house prices, reduces workers' mobility.
The Building Societies Association argues that although the effect on householders of scaling down tax relief would be relatively small, it would deal a blow to confidence in the housing market and house prices. But economists at the City firm UBS has predicted that house prices could rise 7 per cent next year.
The London Research Centre argues that abolishing mortgage interest tax relief altogether would increase the average share of London homeowners' income spent on mortgage repayments from 25 to 28 per cent.
Another possibility would be to restrict the allowance on personal tax to the 20 per cent lower income tax rate. The allowance now means that in 1994-5 individuals will not pay tax on their first pounds 3,515 of income. This is worth pounds 1,406 a year to upper-rate taxpayers, pounds 879 to basic rate tax-payers and pounds 703 to those on the lower rate. By restricting the allowance, all taxpayers would receive a tax credit of pounds 703 a year.
This would have a similar impact to an rise in income tax or National Insurance rates, but would be far harder to understand. In contrast, extending VAT would be much more obvious and probably much more unpopular.
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