RELIEF FOR INTEREST

HC Deb 12 July 1983 vol 45 cc817-26

Question proposed, That the clause stand part of the Bill.

7.30 pm

Mr. Straw

Clause 3 proposes an increase in mortgage tax relief from £25,000 to £30,000. It gives the committee a chance to discuss, in perhaps a rather less frenetic atmosphere than just before the election, the general question of how best to encourage owner-occupation through the tax system. All hon. Members are in favour of the extension of owner-occupation and all Governments since the war have tried to encourage it.

In many ways Labour Governments have made more successful efforts to encourage home ownership than other Governments, through the introduction of the option mortgage scheme, and the grant and loan schemes of my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore). However, the fact that we are all in favour of encouraging owner-occupation and subsidising it, does not mean that it automatically follows that we are in favour of each and every proposal for improving or extending tax relief.

It is interesting to note that tax relief on mortgages was not part of some explicit policy developed by Government and then approved by the House. It is a hangover from a quite separate tax regime—that of schedule A. The idea was that all income arising from capital, even imputed income, should be subject to a charge to tax and that correspondingly, any capital expenditure—pre-eminently interest payments, regardless of what the capital was borrowed for—should be the subject of tax relief. There was a symmetry about schedule A, even though we all remember that it was an unpopular tax. Indeed, it was one of the measures that, I think, the late Sir Gerald Nabarro took up with great gusto, and finally had abolished. One part of schedule A was abolished, but the other part was not. That is why we are left with a subsidy that has an anomalous root.

As recent Treasury figures show, the subsidy has grown greatly. Even before the increase in the mortgage tax rate, I believe that it was running at about £2,150 million per year.

The second point that the Committee should examine very coolly is whether the subsidy has worked in the way that those who want it greatly extended believe that it has, or whether it has worked differently. The subsidy should improve the opportunities available to people to purchase houses. That is the idea of a housing subsidy. It should also improve the total demand for housing and so encourage the housebuilding industry. I readily acknowledge that the evidence is not complete, but there is a good deal of evidence to suggest that such subsidies have principally affected not the quantity of housing, but its price. In other words, the subsidy has, on the whole, changed not what people can buy, but the price that they will have to pay for it.

Therefore, there is something paradoxical about the subsidy. Of course it has been of obvious benefit to individuals. Many hon. Members, including me, benefit from it. However, it is questionable whether it has generally benefited house owners and buyers. I say that because it appears that a large part of the subsidy has become capitalised into house prices. Had the subsidy not existed, house prices might have been that much lower.

That characteristic of the subsidy has been well recognised by Treasury officials and Ministers. However, I exclude the Economic Secretary from that, because he has only just moved to that great Department. The record shows that in the Finance Bills for 1979, 1980, 1981 and 1982 the Government were not indexing things. In 1981 they had to apologise profusely for their lack of indexation. They stoutly resisted proposals not only to index the £25,000 limit that was set in 1974, but also to increase it by £1,000 or £2,000. In the debates in 1980, 1981 and 1982, Treasury Ministers came under pressure from their Back Benchers to increase the subsidy, and they had to perform a difficult balancing act. Nevertheless they stuck pretty stoutly and resolutely to the line. Although they did not advance their reasoning in public, we know that the reasons that had led them to that decision and to the arguments that they put forward inside the Government were similar to those that we are putting forward this afternoon. Those arguments cast a very sceptical eye over the value of spending additional resources by way of increasing the limit, instead of using the same resources in other areas of housing.

I hope that the Economic Secretary will admit to that scepticism, as I know from private conversations that it is felt throughout the House. It is also reflected in some of the comments made in the report of the Treasury and Civil Service Committee on "The Structure of Personal Income Taxation and Income Support." I acknowledge that the paragraph that I am about to quote was, according to the minutes, disagreed to by the Committee as a whole. Nevertheless, I am assured by the Chairman of the Sub-Committee, my hon. Friend the Member for Oldham, West (Mr. Meacher), that the Sub-Committee agreed to the passage that I am about to quote. Therefore, it reflects the view of only some — and not a majority — of Conservative Members, as well as those of Opposition Members. In paragraph 10.17 it said: Our conclusion is that the reliefs on mortgage interest and pensions contributions should be restricted to the standard rate of tax and that the cost of the reliefs should be counted as and subject to the normal controls over public expenditure. We do not go so far as to recommend the abolition of the reliefs in whole or in part"— Neither do we— However, the rationale for them is by no means entirely clear and they introduce an undesirable regressive element into the tax system. We think the Government should put in hand a detailed examination of the justification for the reliefs and of the effects of phasing them out and, in due course, publish a White Paper. Meanwhile, we have included in our consideration of the options for change … the possibility of reducing mortgage interest relief by a half and spending the money saved in other ways. Although the report's birth was a little difficult because of the intervening election, I hope that the Government will consider that recommendation and put in hand that serious examination. Now is the time to do it, just after an election when there is less need than formerly to conduct the argument simply at the level of rhetoric.

We had reservations about the proposal to increase the limit from £25,000 to £30,000 because we thought that if there was £60 million to spend—the cost of the proposal — it could be spent on housing in better ways. One possible paradox resulting from increasing the relief in this way is that if the subsidy has, as many of us think, helped to push up house prices, it may well have undermined the opportunities available for those whom it is principally designed to help. I refer to the first-time house buyer. In the past year he has seen an increase in house prices of 11 per cent.

We also felt that there was not sufficient justification for the increase, for the reasons that the former Chief Secretary echoed in a speech that he made on 29 April 1982. He said: The average advance to first-time buyers is now £14,500 and to other borrowers about £15,500, so the limit of £25,000 on the size of loan qualifying for relief is still high enough not to affect the vast majority of home-buyers. It is true that that was said in 1982. The figures that the then Chief Secretary quoted have advanced a bit. The average mortgage for the first-time buyer is now just over £16,000 and the figure for other borrowers is just over £19,000. Nevertheless, his point remains valid. The limit of £25,000 was sufficient to encompass the great majority of buyers, particularly those in the market for the first time.

When my right hon. Friend the Member for Bethnal Green and Stepney was Secretary of State for the Environment, he introduced a grant and loan scheme that provided a cash bonus of up to £110 for first-time buyers and a loan of £600 if they bought a house within certain limits. The present Government were committed to improving that scheme according to their 1979 manifesto. From what she said at Question Time today, the Prime Minister apparently still regards that manifesto as a hallowed and revered document, so I assume that the commitment stands. It remains to be implemented.

In January 1980 the hon. Member for Brentwood and Ongar (Mr. McCrindle) asked the then Secretary of State for the Environment when he proposed to improve the scheme. He was told that the commitment was contained in the manifesto but that the Government had made it absolutely clear that it had to follow improvements in the overall economic climate.

We believe that part of the £60 million could be better spent on encouraging more first-time buyers if it were used for a grant and loan scheme rather than a mortgage subsidy. I shall be interested to hear whether that is possible.

The Labour party is strongly committed to encouraging owner-occupation. We are committed to encouraging that partly through the tax system, but that does not prevent a serious discussion across the Chamber about the best way of achieving a common end.

Mr. John Cartwright (Woolwich)

I agree with much of the analysis by the hon. Member for Blackburn (Mr. Straw) of the origins of mortgage tax relief. If one tried to devise a system for giving help to those who need it when buying their homes, one would not come up with the existing system of mortgage tax relief. It is a historical accident and the inequities are clear. The system is geared to giving the most help to people with the largest mortgages who need help the least.

The system certainly helped to push up house prices. Far from assisting first-time buyers, there is evidence that the existing mortgage tax relief arrangements do most to help people who are trading up, buying second and third houses and moving to more and more expensive houses. That is not the aim of those who want to use mortgage assistance to bring owner-occupation within the grasp of more people.

The need for reform is clear. We should aim to concentrate most of the help on those who need it most —those at the bottom of the income scale. That is why during the election campaign the alliance argued the case for an income-related mortgage assistance scheme. Such a scheme would be based not upon the size of the mortgage, but upon the size of a person's income. The system would involve standard rate of relief for a large band of taxpayers with average or lower than average incomes, and lower rates of relief for those on higher incomes and a less strong case for public support when buying their houses.

The difficulty about such an approach is that it involves individual tax assessment. Such a scheme would be impracticable unless and until PAYE is computerised.

7.45 pm

Mr. Campbell-Savours

Why is it that during the election campaign we heard reports from up and down the land of Liberal and SDP candidates supporting the raising of the threshold to £30,000 when the hon. Member and his hon. Friends have been in the Lobby against that proposal in the last 14 days?

Mr. Cartwright

I cannot speak for every Liberal and SDP candidate throughout the land. I can speak only for myself. I shall explain my view about the £30,000 and I shall also explain the party view. There may not be a unified alliance view. Different views are not unhealthy or unreasonable.

Mr. Campbell-Savours

Can the hon. Gentleman explain why last night alliance Members voted three ways—some voted in favour of the International Monetary Arrangements Bill, some against it and some abstained. Is that a consistent political position?

Mr. Cartwright

We are not discussing the International Monetary Arrangements Bill today and if I did I should be ruled out of order. It is not unusual for Members of the Labour party to split at least three ways on an issue. I have 30 years' experience of the Labour party and I can think of a number of occasions when deep divisions caused the Labour party to go in different directions. If the alliance does that occasionally, it is not unusual.

The alliance is in favour of gearing mortgage tax relief to incomes, but that may not be possible under existing tax arrangements or until PAYE is computerised. The problem is what to do about existing practice. I recognise the hon. Member for Blackburn's case against a blanket increase from £25,000 to £30,000. However, the £25,000 figure was fixed a long time ago and house prices have risen dramatically. In some parts of the country £25,000 is reasonable and buys a substantial residence, but that is not so in all parts of the country.

If one tried to buy a two-up, two-down house in beautiful down-town Plumstead — not the most fashionable part of London—one would have to struggle hard to find anything under £25,000. For a normal house one would pay a great deal more than that. I am sure that the hon. Member for Blackburn wants to help people at the bottom of the income scale, but they are penalised by the £25,000 limit.

One of the solutions is to explore the possibilities of a regional approach to the mortgage tax ceiling. The house purchase assistance scheme provides a precedent. The Government use the scheme to provide cash help for those who have saved towards their deposit. The scheme is little used and costs only £1 million of taxpayers' money. The scheme could be improved and extended to encourage people to buy their own homes.

One of the features of the house purchase assistance scheme is that the ceiling on house prices is assessed regionally. The limits are based on a Department of the Environment formula and are geared to house prices in 11 regions. Different parts of the country have different limits.

The highest qualification figure is in greater London where the limit, magically, is £30,000. In the south-east the limit is £27,000 and in the west Midlands it is £20,500. In the northern region it is £18,500 and in Yorkshire and Humberside one qualifies only if one is buying a house up to the value of £18,000. There is a precedent for a regional approach to the problem. While we retain the existing system—and I want it changed as quickly as possible to a fairer system— a regional approach to house prices would iron out at least some of the inequities.

Mr. David Penhaligon (Truro)

The debate provides an opportunity to discuss the problems faced by those wishing to buy a home. We all tend to judge what is a reasonable price for a house by our local experience. My judgment is a reflection of the area that I represent, where I was born and brought up. I view the Government's proposal on the basis of whether is will help my constituents, especially those in real difficulties.

My part of the world is slightly different from the remainder of Britain because the percentage of council houses in my county is less than 15 per cent. of total properties. There are 100 families living in temporary accommodation as homeless families, hoping that one of the 15 per cent. of properties will become vacant so that they can make what most of us would call a normal home. Those 100 families are living in caravans or rooms in large converted properties while waiting for council homes. The simple reality is that if a young couple marry and wish to live in their own property, they have no choice but somehow to buy a property. It is hopeless to wait for a council home and there are few properties to let because an alternative use for let properties is favoured by landlords. There is enormous pressure on couples in my area to buy a property and take on a mortgage. I have told many young couples who come to my surgeries that the only alternative is to become pregnant and hope to be rehoused under the homeless persons legislation.

I judge the clause on whether it will help couples in my area — people on low incomes who have recently married and are looking for their first home. I am talking about those earning between £5,000 and £8,000 a year, hoping to borrow two and a half times their income, probably between £12,500 and £20,000. Those who can borrow £20,000 are fortunate. The people with problems are not those worried about paying the interest on a £30,000 mortgage, but those wondering how they can meet the repayments on a £12,500 or £15,000 mortgage. The properties that they can buy are usually fairly inadequate and in need of repair.

The sad conclusion is that such people will not receive any help from the clause. It will not ease their position by one farthing a year, let alone by any useful sum. The money provided by the clause could be used to help those facing real problems.

The most unjustifiable aspect of mortgage tax relief is the way it provides greater help as incomes increase. If someone takes on a mortgage and then doubles his income, clearly the original repayment will be no great problem yet he will find that the amount of relief increases. I calculate that someone in the highest tax band—with a taxable income of £36,000 a year, which means that he must be earning considerably more than that—with a £30,000 mortgage will receive tax relief from the Government of £2,000 a year. Yet a struggling young couple with a £15,000 mortgage, paying the standard rate of tax on a taxable income of £6,000 or less, receive only £500 a year in tax relief. That cannot be a sensible way to use the large sums of money that we rightly give towards encouraging owner-occupation. The money should be spent to encourage first-time buyers.

My experience as a Member of Parliament of individuals having difficulty with their first house purchase is that they are not those who, on the whole, pay tax at 60 per cent. and have £30,000 mortgages; they are people on low incomes who, because of the pressure of local circumstances, are forced to take on financial responsibility at which many of us would pale—but the alternative is no home at all.

Have the Government seriously considered the possibility of limiting tax relief to the standard rate and then increasing the size of the mortgage relief to £35,000? They could then use some of the money that would undoubtedly be saved to increase help for young couples buying their first home. I cannot emphasise too strongly that we should be directing the money at first-time buyers. If there is a certain problem in the inner metropolitan area of London, we must face that, but the additional money being made available will not help those who most deserve help. That cannot be a sensible use of Government money.

Mr. Ridley

I apologise to the hon. Member for Blackburn (Mr. Straw) for being absent from the Chamber for a few minutes. However, I have been given a full report of what he said and will deal with his points in my speech.

There is a simple technicality that should be considered. If the Opposition vote against the clause and, by some miracle, defeat it, that would restrict relief to £25,000 for the whole of the financial year 1983–84. As the relief has been included in the tax codings of those with mortgages between £25,000 and £30,000, a clawback would be necessary for the part of the year that has already passed. That could probably not be done until next year's codings, although it might be possible in some cases where assessments are made. It is unlikely that it would be easy to reverse the decision taken by the Chancellor in the Budget without considerable difficulty, delay and distress for those affected, and we shall not do it. It would be a breach of the pledge that we gave before the election that we would reintroduce the £30,000 limit if we were returned. I am sure that the Committee will agree that it would be wrong for us to go back on our pledges, even though hon. Members may not have welcomed the pledge that we originally gave. Furthermore, that would be pandering to at least one of the prejudices of the Opposition.

8 pm

The case has been made throughout the debates on the mortgage interest relief limit that an increase to £30,000 helps only some parts of the country, particularly the south-east and London — although the Committee will remember my hon. Friend the Member for Strathkelvin and Bearsden (Mr. Hirst) telling us on Second Reading that in his constituency just north of Glasgow the average price of houses is about £27,000. That shows that the incidence of houses costing more than £25,000 is more widespread than just around London. Even if it is the case that houses cost more only in the London area, why discriminate against that area? Why make it impossible by not adjusting tax relief accordingly for people living in that area to buy their houses, just because house prices are more than £25,000?

I think that the hon. Member for Woolwich (Mr. Cartwright) found himself in a dilemma in this respect. Although he was, in theory, against increasing mortgage interest relief—that was what his head told him—his heart and that part of his spirit that helped him while knocking on doors to obtain precious votes told him that he had better go along with political reality and that it was necessary to increase the limit to £30,000 on this occasion.

Mr. Cartwright

In London.

Mr. Ridley

The hon. Gentleman says, "in London", but he would be an unwelcome guest in my constituency if he said, "Yes, I am in favour of increasing the limit to £30,000 in my constituency but not in Gloucestershire. The people of Gloucestershire can go and jump in the River Severn." If we were to have much higher limits in the south-east and in the hon. Gentleman's constituency, where house prices are depressed, we would reach the sad state of what I might call counter-regional policy. We might then have a reduced limit. Perhaps £25,000 is too much for Workington. Would the hon. Gentleman want that reduced to £15,000?

Mr. Cartwright

If the Minister is saying that there is no case for regional variation in mortgage tax relief, why do not the Government apply that idea in the house purchase assistance scheme, where regional variations and ceilings, with the highest in Greater London and the lowest in Humberside and Yorkshire?

Mr. Ridley

We do not want to introduce more discriminations and distortions into the system. Whatever we do in other areas, we would not wish to introduce regional distortions into the tax system. If those distortions are such as to give greater advantage to the more prosperous parts of the country, they would be bitterly resented, and rightly so, in many parts of the Committee. We are right to stick to a national limit. The only question remaining is what that national limit should be.

The hon. Member for Blackburn said that the cost of mortgage relief was £2.3 billion. The truth is that in the current financial year it is likely to be £2.7 billion of which clause 3 accounts for £50 million—I am accused of trivialising everything but that is a small proportion of £2.7 billion—rising to £75 million and to £100 million next year, 1984–85.

I wish to consider the limit as it affects the change in house prices nationally and the assistance given to housing in the private and public sectors. The house price limit of £25,000 was introduced in 1974. If that figure were increased in line with the retail price index, it would now be about £80,000. If it were increased in line with the change in the house prices index, it would be about £60,000. We propose to go not to half the RPI increase but to half the house prices increase. Either the Labour Government greatly overdid the limit in 1974 or we have been a little slow and hesitant to increase it by this small amount in the Budget. Whatever view one takes, it must be right to go to at least half the increase of house prices.

Those figures provide strong evidence against what was said by the hon. Members for Blackburn and for Woolwich, that the existence of mortgage interest relief pushes up house prices and that the more the Government give the more house prices are pushed up. In the past nine years house prices have not increased by anything like as much as the retail price index, despite the fact that there has been generous mortgage interest relief which extends not only to the basic rate but to the higher rates of tax.

Mortgage interest relief this year is expected to cost £2.7 billion. Subsidies to council houses are expected to cost £0.85 billion. Housing benefits to council tenants are £1.90 billion and rent allowances to tenants of private rented property are £0.35 billion. Those last three figures total £3.10 billion. Although the figure for mortgage interest relief and the figures that I subsequently gave are not directly comparable, the fact is that we are spending roughly the same sums of money on those who rent or rely on council houses as on those who are building or buying their own houses. That is a measure of some equality and a reasonable position.

The hon. Member for Blackburn referred to the Treasury and Civil Service Committee report. I can be as critical as I like of that report because it did not appear in the name of any right hon. or hon. Gentleman—it was published but not endorsed by the Sub-Committee. The report suggested that the cost of mortgage interest relief should be counted as and subject to normal controls over public expenditure. It is not public expenditure in many senses because it is not demand determined. As council house subsidies, housing benefits and rent allowances are demand determined, I do not believe that cash limits would be a suitable way of dealing with this matter. It is for Parliament to decide on a level of relief and on a limit to the amount of relief and then to accept the consequences in terms of expenditure, just like any cemand-determined expenditure.

The issue boils down to whether this is the right limit. I believe that we are not far away from the right limit. The hon. Member for Truro (Mr. Penhaligon) asked whether it is right to extend the relief to higher rates of tax. He mentioned one of the great truths of taxation, which is that the higher one's income the more tax one pays and the more benefits one receives from tax relief.

This is the counterpart of the rich paying the greatest through tax. Any tax relief is bound to benefit the higher more than the lower income people. It must be so. We are talking here only about tax relief; it is only by a mixture of grants and tax relief that one can achieve a different objective. Just as a different objective was achieved in relation to children by abolishing tax allowances and going to child benefit, so it would take a move of that sort to change that basic fact.

The Government believe that it is right that we should make mortgage interest deductible at the higher rates as well as at the basic rate, and I thought that the hon. Member for Truro ended with a revealing remark when he said that, even from the point of view of his constituents, it would be a better deal to limit it to the standard rate and increase the limit to £35,000, in a way betraying the fact that he is quite happy to see the limit go up. Indeed, as I listened to his speech, I thought that his criticism of the £30,000 limit lacked that conviction which it is the hallmark of a good Liberal to show.

Mr. Penhaligon

Be it in my constituency, in Gloucester, London or elsewhere, if somebody takes on a property—that is, a mortgage corrmitment— which one assumes he could handle the day on which he took it on, and if while in possession of that property his income goes up from, say £10,000 to £40,000 a year, the amount of money which the Government give him to help him to purchase that property doubles during that period. If the Minister is saying that that is an accident of tax and that the Government are maintaining it because it is difficult to know what else to do, that is one thing. But I fear that the Minister is saying that he believes it to be a justifiable use of the £2.7 billion to which he referred earlier. If he were to say the latter, I might fundamentally disagree with him.

Mr. Ridley

It applies to any tax relief. It applies also to life insurance premium relief. If one suddenly finds that one's income has doubled, one can double one's life insurance and get twice as much, or even more, tax relief for that purpose. It applies, for example, to superannuation and retirement annuity relief. It used to apply to other reliefs until the Government phased them out. It is a fact of life that with a tax relief the benefit will inevitably be the greater for the people who pay more tax at all stages.

Mr. Robin Cook

I must press the Financial Secretary further on this point. Is it inevitable that it will benefit most those who pay the highest rates of tax? The question raised by the hon. Member for Truro (Mr. Penhaligon)—the question was raised also in the Treasury Select Committee — is whether it is possible to limit that relief to the standard rate and, if that is possible, is it not desirable to do it?

Whatever doubts there may have been in the past as to whether that was possible, with the advent of MIRAS it is now clearly possible. Indeed, the difficulty after MIRAS arises not in relation to who is getting the higher rate of tax band relief, but to the fact that relief at the standard rate goes to everybody. The problem is to retain staff at the Inland Revenue to work out who should be entitled to additional benefit over and above the standard rate.Surely, therefore,it would be not desirable but possible to limit the relief to the standard rate.

Mr. Ridley

I would not deny that it would be possible. Nobody has argued that it would be impossible or immensely expensive or complicated. It is something that MIRAS is coping with and I will only correct the hon. Gentleman in pointing out that the other problem with MIRAS has been with mortgages of more than £25,000, and to a large extent that problem is met by increasing the limit to £30,000, though if mortgages tend to creep up over £30,000 again that problem will arise because part of the mortgage does not attract tax relief. That is another argument in favour of the clause.

I would not deny that it would be possible to remove mortgage interest relief at the higher rates of tax. I am simply saying that it would not be desirable so to do. The Government wish to maintain the present situation and I believe that it has been partly responsible for the very large increase in home ownership. The fact that 80 per cent. of people now aspire to own their homes shows what an immensely successful policy this has been. As people go up the ladder, they can change from a smaller to a bigger and better house. The Government welcome that, and if the clause makes a small contribution to increasing that the Committee will want to support it.

Question put and agreed to.

Clause 3 ordered to stand part of the Bill.