Leading Article: Freeze the VAT, not pensioners

KENNETH CLARKE's first Budget must be bold. The Chancellor should freeze VAT on domestic fuel at the 8 per cent rate being introduced from April. Plans to increase it to 17.5 per cent in 1995 should be scrapped. Fairness and sound political judgement militate against following Norman Lamont's intention to extend the tax. Changes to income-tax relief offer simpler and less socially divisive ways of cutting the Budget deficit.

When VAT was introduced two decades ago by Anthony Barber, a Conservative chancellor, its supporters stressed that it would not be regressive. Our European partners may have broadened the imposition of the tax to include food and even water, but in Britain necessities have been zero-rated. Introducing VAT on domestic fuel breaks that tradition and will hit the poor disproportionately hard.

Compensation packages have been proposed by ministers to alleviate the impact. But the result is likely to be second best: a complicated structure that is politically difficult to legislate and fails to relieve the costs incurred by all the needy.

Yesterday's pensioners' rally at Westminster was a predictable outcome. Elderly people are understandably angry. Many are model citizens that Tory politicians praise: self-sufficient people who have scrimped and saved to minimise their demands on the state. VAT on fuel will deplete their reserves. Extra help for those on income support will fail to reach many of them, either because they are too proud to claim it or because they do not qualify. The alternative - raising state pensions to reflect increased fuel costs - would be too expensive.

Given a free hand, the Chancellor would be wise to drop all Mr Lamont's plans for VAT on domestic fuel. Mr Clarke could raise the required tax yield by cutting mortgage tax relief further than is already planned. Additionally, he could restrict the value of personal income allowances. These combined policies would make the VAT measure unnecessary.

However, political and economic realities probably mean that Britain is now stuck with the 8 per cent hike. A generous Christmas bonus to pensioners, along with the planned help for people on income support, might be sufficient to forestall mass protest. But VAT on fuel should not be allowed to rise further. Income-tax relief changes are the logical, smooth, trouble-free and fair means to make up lost revenues. That way, elderly people will be warmer in their homes, and Tory MPs, worried for their electoral prospects, may sleep a little easier in their beds.