George Osborne is right to end tax perk for the wealthy – but his other priorities make our economy unbalanced

Running out of options, the Chancellor may feel impelled to hit what Margaret Thatcher would have called 'our people'

(Getty)

Like a fiscal living fossil, the survival of higher‑rate tax relief on contributions to personal pensions has been a surprising phenomenon. We may be sure that every year the Treasury has presented a succession of hard-pressed chancellors with the option of cutting it back. It is, indeed, one of the very last tax perks available to the middle classes, who once luxuriated in being able to claim tax rebates on the interest on their mortgages, a lost world to today’s first‑time buyers.

That tax relief on pension contributions has weathered the age of austerity is still more remarkable. For the very wealthy there have been progressively more sensible (ie lower) limits on the total size of their multimillion‑pound pots, but this has not affected the bulk of middle-class savers.

Now, however, the stories have been planted, the idea floated and the reactions tested; the Chancellor is readying himself for reform. It is still early in the parliament, and he must hope that the political damage will be repaired by the time of the next general election. The public finances, too, are nowhere near as healthy as the Chancellor had planned and his options are running out. He may well feel impelled to hit what Margaret Thatcher would have called “our people”.

If the opposition parties merely want to make mischief for the Government they will line up with the inevitable bunch of Tory rebels to thwart the Chancellor’s scheme. If they want to play grown-up politics, they will suggest some other very necessary changes to go alongside the Chancellor’s putative plan. For while the Chancellor is right not to protect another of the many financial perks enjoyed by the relatively wealthy, many of whom have already lived through and profited from times of unanticipated asset growth and who have far more than the value of their pension savings to rely upon in their dotage, Mr Osborne should be wary of the law of unintended consequences.

For where will all this money go, if the incentive to boost pensions is withdrawn? Residential property is a fair bet, already in bubble conditions across the South. With the new rules on withdrawing substantial funds from personal pensions pots, people are already using their freedoms to invest in buy-to-let. The last thing the housing market now needs is another wave of cash diverted from people’s monthly contributions to their retirement.

The irony is that the buy-to-let boom has been fuelled by the sort of tax breaks that are increasingly unnecessary in stimulating a housing recovery. But it would not be the first time that an apparently harmless fiscal adjustment had spelled doom for the housing market, as Nigel Lawson found when he adjusted mortgage tax relief rules in 1988. That pushed house prices still higher and made the subsequent crash even more violent than it need have been.

Lord Lawson was the last Chancellor to talk about “fiscal neutrality”, taking well-meaning but sometimes disastrous tax breaks out of people’s personal financial decisions. By tipping the balance away from equity and financial investment and towards real estate, today’s Chancellor risks making our unbalanced economy even less stable and reliant on house prices for its vigour. It may well end in tears.