Leading Article: What Labour didn't tell the middle classes

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The Independent Online
Putting up the cost of mortgages? That was not in Labour's manifesto. If Gordon Brown does the right thing, long advocated here and by most economic commentators, and cuts tax relief on mortgages in an early Budget on 10 June, many new Labour voters will be understandably upset. Thirty- one days into the new era and Labour would have broken its promise not to put up taxes.

During the election campaign, Labour's position was never quite watertight on the small print. Hard questions were always deflected with: "I'm not sitting here writing a Budget." But the headlines were clear. No increases in income tax rates, and no hidden spending plans that required tax increases. In theory, that means Mr Brown could put up taxes on other grounds, and two such have been advanced from most sectors of the punditry. One is as an alternative or supplement to higher interest rates, in order to restrain the consumer boom, and the other is to start to balance the Government's books at a faster rate. Both are sound reasons: consumer spending is rising too quickly and government borrowing is falling too slowly. But there was another part of the Labour mantra on taxes, which was "22 tax rises" - again and again Tony Blair told us that people on middle incomes had suffered enough. And, if there is one law of modern politics that Messrs Blair, Brown and Mandelson understand, it is that putting up taxes after promising not to is electoral death.

So, taxes ought to rise, but cannot. Mr Brown will not take back the pounds 2.5bn hand-out to the electorally volatile home-owning classes represented by mortgage tax relief. Not, that is, unless he gives it back to (most of) them in the form of tax cuts elsewhere.

Now this is where discussions on the the connecting corridor between Nos 10 and 11 Downing Street get interesting. As Mr Brown crosses over from his office to his living quarters, tripping over mountain bikes and footballs, and bumps into Mr Blair, furtively kicking the cat, the Chancellor is bound to be tempted by the idea of a Big Bang Budget. Why not try to rebalance the tax system, without significantly raising the tax burden, in one bold move, and do away with the need for a second Budget in November?

On the other hand, we know that this is one subject on which the two men disagreed before the election. Discussing how Mr Brown should answer the Tory charge that he would put up taxes in his early Budget, Mr Blair overruled him, according to Robert Harris's inside account of the campaign. "You should say that the only reason you're holding the Budget is to introduce welfare-to-work," he said. But different imperatives rule now. And in any case, the Budget will include, as well as the jobs programme funded by the windfall levy on privatised companies, a cut in VAT on domestic gas and electricity and the start of the phased release of council house receipts. So why not go further? An early Budget would be a wise way to capitalise on the goodwill which the new government has generated. Rather than being the bad news which brings the honeymoon to an end, a good early Budget could re-inforce the sense - already a "new dawnist" cliche - that Labour has "hit the ground sprinting".

Mr Brown has a clear idea of the kind of rebalancing the tax system needs. "Growth, employment, long-term investment and greater equality" are the principles which guide him, the Chancellor said yesterday. Apart from the fourth, these are not controversial, but more specific measures have been signalled. A shift in company and capital gains taxes in favour of long-term investment has long been expected. Faint hints have been dropped about the need to shift the tax burden from green activities to pollution and other threats to the environment. Another clear priority of the new government is to change the interaction between benefits and taxes to encourage work and discourage welfare dependency.

What has not been advertised in advance, however, is a raid on what has been called the middle-class welfare state, the "handout to home-owners". The case for it is overwhelming. Since the war, the use of their homes by the British as a store of wealth has been destabilising, magnifying consumer booms and busts and fuelling inflation. It has exaggerated and reinforced social division. Ending the tax subsidy of mortgages would therefore meet the Chancellor's objectives. Nor can Peter Lilley, likely to be the new shadow Chancellor, complain: the Conservatives cut the rate of relief to 15 per cent.

The pillage of middle-income perks would be politically survivable if it were carried out early and a new starting rate of income tax of 10p in the pound were brought in at the same time. That would tilt the pattern of winners and losers in favour of those on lower incomes, while improving incentives to take up low-paid work. The start of a house-price boom is the best time to act, because a rising market both eases the pain and needs to be dampened.

But, however much this newspaper would applaud the abolition of mortgage tax relief, it has to be said that the electorate should have been told in advance. Making the Bank of England independent was not in the manifesto either, although it was hinted at in some cloudy words about making the setting of interest rates more open, and last week's announcement was trailed some time ago as an "option" in speeches and policy documents. Again, it is a commendable move, but why not commend it to the voters first?

So long as things are going the Government's way, complaints will be muted. After all, since Labour won it has been very clearly saying what it means and meaning what it says. Pity that same could not be said for what went on before the election.