Rishi Sunak’s team has warned cutting VAT by 5% across the board would be “regressive” and cost tens of billions of pounds amid reports Liz Truss is considering the move as a “nuclear” option.
It is one of a series of possible strategies to ease the cost-of-living crisis being drawn up by the Treasury for the new prime minister to look at when they take office, according to The Sunday Telegraph.
The newspaper said the 20% headline rate of VAT could be cut by up to 5%, saving the average household more than £1,300 per year. But a source from Rishi Sunak’s campaign said this would be “incredibly regressive” and cost north of £30 billion.
The Sunday Times also reported that Ms Truss is considering slashing VAT as part of an emergency package to help households cope with rising prices. A Treasury spokesperson said the department is making the “necessary preparations” to ensure the next government has options to deliver extra help “as quickly as possible”.
It comes after Boris Johnson said whoever succeeds him in No 10 would announce “another huge package of financial support” as Britain faces sky-high costs this winter. The outgoing PM hinted at the scale of the options to ease the burden being teed up for either Ms Truss or Mr Sunak to consider, as he insisted “we must and we will help people through the crisis”.
According to The Sunday Telegraph, a source close to the discussions about the next steps said cutting VAT was “the nuclear option”. Cabinet minister George Eustice has said it is “right” that the next leader waits until they take office to weigh up all the potential moves to combat the cost-of-living crunch.
In an article for Mail+, Mr Johnson acknowledged the next few months will be difficult – “perhaps very tough” – as “eye-watering” energy bills take their toll, but he forecast the UK will emerge “stronger and more prosperous (on) the other side”. He said “colossal sums of taxpayers’ money” had already been committed to assisting people with their bills.
But he added: “Next month – whoever takes over from me – the Government will announce another huge package of financial support.” Mr Eustice said both leadership candidates had already set out “some specific things” they would do to ease the strain, but argued it was right that whoever secures the keys to No 10 would “want to look at all of the options properly costed” once they started in the role.
Chancellor Nadhim Zahawi has suggested people earning around £45,000 per year could be among those struggling to cope with soaring living costs as the energy price cap is hiked again. Regulator Ofgem warned the Government on Friday it must act urgently to “match the scale of the crisis we have before us” as Britain faced the news the average household’s yearly bill will rise from £1,971 to £3,549.
Mr Sunak has already said he will provide additional support targeted at the most vulnerable. He reiterated this in an article for The Times on Saturday, arguing efforts should be focused on low-income households and pensioners, with help delivered through the welfare system, winter fuel and cold weather payments.
He said it is “right to caution against providing definitive answers before getting into Downing Street”, as it is “responsible” to first have “full command of the fiscal situation”. However, the former chancellor acknowledged that providing “meaningful support” would be a “multibillion-pound undertaking”.
Ms Truss has promised “decisive action” to deliver “immediate support” if she wins the contest. But she has so far been vague about what form this assistance might take besides slashing green levies on energy bills and reversing the controversial national insurance hike.
She has argued it is not “right” to announce her full plan before the contest is over or she has seen all the analysis being prepared in Whitehall. Senior Tory MP Robert Halfon, who is backing Mr Sunak, said on Saturday that whoever takes the reins in No 10 needs to perform a “huge-scale” intervention.
In an interview with GB News, Mr Halfon called for a new “social tariff” for vulnerable families and those who are “just about managing”. Mr Zahawi has declared he is working “flat out” to draw up options for a plan of action for the next prime minister so they can “hit the ground running” when they take office in September.
In an interview with The Daily Telegraph, he said he was exploring ways to ensure “we help those who really need the help”.
“My concern is there are those who aren’t on benefits,” he said.
“If you are a senior nurse or a senior teacher on £45,000 a year, you’re having your energy bills go up by 80% and will probably rise even higher in the new year – it’s really hard.
“If you’re a pensioner, it’s really hard. So Universal Credit is a really effective way of targeting, but I’m looking at what else we can do to make sure we help those who really need the help. We’re looking at all the options.”
The Treasury spokesperson said: “We know people are concerned about rising prices, and that’s why we’ve introduced £37 billion help for households, targeted at the most in need.
“We are also making the necessary preparations to ensure a new government has options to deliver additional support as quickly as possible, as the Chancellor has made clear.
“And as the Prime Minister has made clear, no major fiscal decisions will be taken until the new prime minister is in post.”
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