View from City Road: Changing mortgage tax relief has its pitfalls

There have now been two reports suggesting that the Government is considering a cut in mortgage tax relief. Our sister paper, the Independent on Sunday, wrote in August that Kenneth Clarke might reduce the pounds 30,000 limit on which tax relief on mortgage interest is available. Yesterday the Guardian reported that a slightly different way of cutting the relief is being considered: the Chancellor might abolish all tax relief for new home buyers from April 1995. Tax relief for existing home-owners would continue so long as they did not move house.

A cut - even an abolition - of tax relief makes a lot of sense while interest rates are low and still falling. But for all our sakes, let us hope that any change takes effect immediately. If the Chancellor were to set a phase-out date, he would be committing precisely the same mistake that Nigel Lawson made in his 1988 Budget when he said that he would abolish double mortgage tax relief from the following August.

The result was a Gadarene rush among young couples to buy starter homes before the deadline. There was a short-term boost to the housing market, followed by an awful collapse. Another collapse would probably not be as dire as it was after the summer of 1988, because the market is unlikely to be so oversold. But a phase-out date would certainly bring forward sales, and subsequently cause a lull.

This would in turn make it more difficult for chains to form in the rest of the market. If first- time buyers do not buy, then those attempting to move up the ladder cannot sell. As turnover shrinks, all those businesses that rely on house-movers - paints, furniture, white goods and so on - are hit.

Both proposals have the merit of being just about consistent with the Conservative Party's 1992 general election manifesto, which promised that mortgage tax relief would be maintained. But the economic - and political - effects are quite different. The depressive effects of a cut in relief after April 1995 would be occurring in the year before the most likely date for a general election. It does not seem a likely move for such a political Chancellor.