Leading Article: Real problem, wrong answer

AT FIRST glance, there is an elegant and audacious simplicity about the proposal that the Abbey National has sent to Norman Lamont, the Chancellor of the Exchequer. The aim is to revive the stalled housing market and so stimulate the economy. Sir Christopher Tugendhat, the bank's chairman, suggested what he called a tax credit scheme to encourage existing owner-occupiers to move.

In fact, the plan is more radical that this phrase might imply. The Abbey National wants the Government to compensate house owners completely for any loss they might make if they sell their principal home. As potential losses are, for many people, larger than their annual income tax liability, they could expect a cheque from the Revenue to cover the difference. The main stipulation is that the beneficiaries should purchase another property for their own occupation. The scheme would run until the market turned around. Once housing prices started rising, values would gradually become equal to, or greater than, original purchase prices. The scheme would, therefore, be self-liquidating.

There can be no doubt that there is a grave crisis in the housing market, and that its resolution would stimulate the economy and lift a burden of fear from the shoulders of millions of people. House prices continue to fall and, according to some estimates, 1.5 million homes are now mortgaged for more than their current market value. In such circumstances, people are unwilling to sell. Property transactions are running at about 25 per cent lower than last year. Repossessions are unacceptably high, and about 300,000 people are more than six months in arrears on their repayments.

However, elegant though Sir Christopher's proposals initially appear, they should not commend themselves to the Government. The scheme would be a bureaucratic nightmare to police, and open to widespread fiddling if not adequately supervised. Moreover, no government should consider bailing out those who have lost money as a result of investments that they hoped would yield a capital gain. The Chancellor told the Commons in May 1991: 'Rising unemployment and the recession have been the price we have had to pay to get inflation down. That price is well worth paying.' His comment may have lacked charity, but it accurately summed up the position adopted by ministers.

In any case, it is obnoxious to suggest that one particular group should be compensated by the state for hardship inflicted in the course of a national battle against inflation. There is no reason to single out mortgage holders for special assistance. They are no more virtuous than other victims of the recession. Not even the most vociferous campaigners for the unemployed have suggested that those who have been made redundant should be compensated in full for their lost earnings and damaged prospects. And nobody expects the state to recompense those who have suffered as a result of the decline in the value of shares.

It would be far more sensible for the Government to stimulate demand by giving limited tax incentives. The Chancellor should consider whether all borrowing on new mortgages over the next three years ought to qualify for complete tax relief on the interest. This would be a fairer and more effective way of achieving Sir Christopher's worthy objective.