Lib Dems propose higher-rate tax increase: Party drops demand for extra borrowing

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AN END to mortgage interest tax relief for new home owners from 1995 and a 3p-in-the-pound increase in the higher rate of income tax form the centre-piece of the Liberal Democrats' alternative budget, published yesterday.

In a pronounced switch of policy, the party has reversed its call for extra borrowing and instead called for an pounds 8.3bn increase in spending to be matched by an equivalent increase in taxation.

A programme of investment in transport, construction - including housing - schools and nurseries would be matched by the cutting of mortgage interest tax relief from 1995 and the income tax increases. The higher-rate increase would be offset by raising the threshold at which it is paid to pounds 25,200.

The party admitted, however, that it had made an error by not indicating that a further plan to allow councils to spend house sale receipts would count against the public sector borrowing requirement.

To the extent that the plan to 'ensure the immediate release of council house receipts for house building and housing renovation' is taken up, it will mean an addition to the borrowing total.

Overall, however, the new document reflects a shift of policy by the party's economic spokesman Alan Beith, who had previously indicated that an increase in borrowing would be necessary to ease the path out of recession. The document says that the UK has the 'least progressive tax regimes in the world'.

The mortgage tax plan would not affect existing buyers who would also be able to keep their entitlement when they moved house after the starting date of 1 January 1995.

The Liberal Democrats dismissed Labour's proposals for a pounds 10bn increase in revenue by closing tax loopholes - repeated by John Smith yesterday - as not 'remotely realistic'. They suggest that such schemes could save pounds 1.7bn next year and pounds 2bn the year after.

The Labour leader said Kenneth Clarke, the Chancellor, should not raise taxes in his Budget next Tuesday. 'You want to get people back to work. The important thing is to get the economy reviving again,' Mr Smith said on BBC Radio 2's Jimmy Young programme. He said that inflation was low because the economy was so sluggish that people were not going out to buy.

Mr Smith said closing tax loopholes was 'a much fairer way of raising revenue than putting up VAT and National Insurance, which is what the Prime Minister said they would not do. You cannot trust anything they say about tax any more.'

He believed that full employment was a possibility. 'We certainly ought to try,' he said.