Brown refuses to rule out VAT on house purchases

The chancellor Gordon Brown today refused to rule out placing VAT on house purchases in a bid to rein in the booming property market and raise funds for his spending plans.

Mr Brown was forced to defend his hold on the public finances after announcing in last month's pre-Budget report that he would have to borrow an extra ?20bn over the next two years - much higher than he had forecast in the 2002 Budget.

MPs on the Commons Treasury select committee said his reputation as the "iron chancellor" was in danger of turning into one of "rusty Brown" because his forecast for public sector net borrowing was "dud".

They challenged Mr Brown to explain how he would offset the cost of further borrowing if future forecasts were also off the mark.

In last April's budget, Mr Brown forecast that borrowing would be ?11bn for 2002-03 and ?13bn for 2003-04. But in last month's pre-Budget report, the chancellor was forced to increase the forecast to ?20bn, and ?24bn for next year.

Conservative MP David Ruffley said his original forecast had been a "whacking error" on the chancellor's part, and that taxes would have to go up if the borrowing continued to increase.

"It seems to me if you want us to keep the sobriquet iron chancellor and you don't want to become 'rusty Brown', you will tell us what you will do if borrowing becomes higher."

Mr Brown said: "Our duty is to meet our fiscal rules and we will meet our fiscal rules.

"We made our tax promises at the general election to the British public. I made the change in national insurance as was proposed in the House of Commons and accepted in the finance bill, and that tax rise will go ahead."

Later, Mr Brown insisted he was not complacent about the booming property market, because interest rates remained low and therefore the proportion of income spent on mortgages was lower than it had been before the 1990s recession.

Asked whether it was a possibility that the government could place VAT on house purchasing to dampen the property market, the chancellor replied: "I don't get into speculation."

But pressed on whether he was refusing to rule out the measure, Mr Brown said: "We will keep all of our election commitments, all the commitments we have made on taxation."

In its 2001 general election manifesto, the Labour party pledged not to extend VAT to food, children's clothes, books, newspapers and public transport fares, but made no mention of excluding house purchases.

Soaring house prices were blamed for pushing inflation through the Bank of England's 2.5% target today to its highest level since June 1998.

The headline inflation rate, a figure which includes mortgage interest payments, also rose 0.5% to 2.6% - its highest since February 2001.

One mortgage bank, Halifax, today predicted that house price inflation is set to slow dramatically next year.
It estimated that the annual rate of house price inflation will increase by just 9% in 2003, compared to highs of more than 30% reached in October this year.

At the Treasury committee, Liberal Democrat MP David Laws asked the chancellor whether he believed the market was going through a "boom". Mr Brown appeared reluctant to use the word, saying only that "there has been a very fast rise in house prices".

Mr Brown added: "I look at what is happening to housing as part of what is happening to consumer spending as a whole.

"What we are suggesting in our forecasts for next year is that consumer spending growth will moderate and as part of that the housing market will moderate as well."

Concerns about the booming housing market had to be balanced by a combination of low inflation and the low cost of mortgages because of low interest rates, Mr Brown said.

Mr Laws said there appeared to be a "substantial difference in tone" between the chancellor and the Bank of England, which has warned about the housing market becoming overheated.

The chancellor replied: "We expect and look forward to seeing house price growth moderate over the next period.

"I hope that both the Bank of England and I would balance the picture, which has been very high growth in house prices, particularly in London and the south east ... I would balance that picture by looking at what is the burden of consumers."

Asked whether this meant he was relaxed about the situation, Mr Brown said: "I am never complacent and we will always be vigilant about these matters.

"When you have got fast-growing house prices, it is one issue that the Bank of England and the Treasury are right to take very seriously indeed."