Injury benefit and tax relief targeted: Nicholas Timmins examines some of the options for savings on social security being canvassed among Tory backbench MPs

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ENDING the state's role in industrial injuries benefit and in paying mortgage tax relief to those on income support yesterday emerged as two front-runners for the social security side of the Government's spending review.

Both are seen as possibilities by the free-market think tanks such as the Adam Smith Institute and the Institute of Economic Affairs and are already being canvassed by some Conservative backbenchers - along with encouraging people to opt out of the basic state pension, and possibly privatising some of unemployment benefit.

The IEA is also working on a paper proposing that the State Earnings-Related Pension Scheme (Serps) - which was sharply scaled down in Norman Fowler's 1985 social security review - should be phased out completely and replaced by private pensions, a course Sir Norman, now Conservative Party chairman, advocated in his 1991 memoir Ministers Decide.

The Adam Smith Institute will shortly propose that industrial injuries benefit - which costs about pounds 600m a year - and the remains of statutory sick pay should become the liability of employers, who would receive rebates on national insurance contributions. The institute will also propose a phased programme of offering people rebates to opt out of the state pension on condition they take a private pension.

Mortgage interest tax relief - which is now costing the Government pounds 1bn for unemployed people on income support - could also be phased out, some Tory MPs believe. Those taking out mortgages would have to insure against being unable to pay.

David Willetts, Conservative MP for Havant, a former member of the No 10 policy unit, said yesterday all were worth examining, with the winding down of industrial injuries benefit top of his personal list.

Requiring firms to insure to pay such benefits would not only over time get the state out of the field, he said, but 'send a strong signal', through higher premiums, for employers to improve safety for workers in more dangerous occupations.

Each scheme has technical difficulties, and has effects other than just cutting the Treasury's bill. For example, mortgages could become unaffordable for those at high risk of unemployment if state support were withdrawn, conflicting with the Conservative ideal of home ownership.

And while the ideas could cut state spending in the long term, several would cost the Government money in the short term. Existing commitments would have to be honoured as revenue was falling because of national insurance rebates and any incentives offered.

The long-term cost of Serps, for example, will have been sharply reduced by 4.9 million people leaving the scheme - provided they remain outside it. In the short term, however, the cost to the Treasury has been billions in rebates and incentives.