Lib Dems move to outflank Labour on taxes

PROPOSALS to phase out tax relief on mortgage interest but extend it for child care are being drawn up by the Liberal Democrats in an attempt to outflank Labour on tax and benefits.

A paper to be published next week will canvass a range of options which Liberal Democrat strategists hope will give them a distinctive edge over Labour as it rethinks policy in the wake of Tony Blair's election as leader.

Labour's policy on benefits is buried in its Commission on Social Justice which is not due to report until the autumn, while its tax policy is being reviewed by an economic commission.

Even when these produce findings, Mr Blair and other senior Labour figures, including Jack Straw and Margaret Beckett, have indicated that Labour may well seek to avoid specific pledges on tax and benefits ahead of a general election. Within Labour's ranks, the sense remains strong that the party damaged itself last time by early promises to raise pensions and child benefit which then in large measure dictated Labour's tax plans.

Instead, in Mr Straw's words, Labour is looking to provide 'not detailed policy, but a sense that we have thought through the hard choices . . . and that we know the kind of society and government we would offer'.

The Liberal Democrats' strategy is to go harder than that, differentiating the party from Labour by producing 'a menu with prices' in key policy areas, producing firm, costed policies on tax and benefits. It would then present itself as offering hard but realistic choices while attacking Labour for imprecision.

On child care, the party is expected to extend the exemption which ensures workplace nurseries are not taxed as a benefit in kind. The aim is to allow any child care paid for by employers to have the same status, providing it is provided through an approved nursery or registered childminder.

With the Government apparently in the process of ending mortgage interest tax relief by stealth - higher rate relief went in 1991, basic rate relief was cut from 25 to 20 per cent this year and next April it drops to 15 per cent - the Liberal Democrats propose to phase it out completely.

In its place, however, would come help with mortgages for the low paid through housing benefit which at present only assists those who rent. That idea has also been canvassed within Labour's Commission on Social Justice, but Labour, while supporting the idea in theory has fought shy of endorsing it in practice ever since Michael Meacher, when he was the party's social security spokesman, was savaged by the Conservatives for suggesting it.

The harder-edged approach from the Liberal Democrats follows the perceived success of their promise at the last election to put a penny on income tax, if necessary, to improve education.

The party is expected this week to take its ideas for such earmarked or hypothecated taxes a step further by canvassing the idea of spending the duty from alcohol and tobacco on specific health service projects.

Hypothecation of some part of income tax for the NHS is being examined by Labour, but the party remains a long way off firm proposals in that area.