Chancellor Rishi Sunak plans to cut 5% value added tax rate on household energy bills, which would allow Boris Johnson to pay so-called ‘Brexit dividend’ and help families get through a difficult winter.
Some Tory MPs have called on Sunak to cut the VAT rate in his Oct. 27 budget to show the government is responding to a looming cost-of-living crisis.
But the Chancellor generally resists pressure to loosen the purse strings in a very tight budget and is wary of the political risks of a reduction in VAT on national energy bills, as well as an annual cost of around $ 1. £ 5 billion.
During the Brexit referendum campaign in 2016, one of Vote Leave’s promises was that “fuel bills will be lower for everyone”. EU rules stipulated that member states could not reduce VAT on home energy and gas below its current rate of 5%.
“When we vote for the holiday, we can remove this unfair and damaging tax,” Johnson and other Brexiters said in a joint statement. “It is not fair that unelected bureaucrats in Brussels tax the poorest and that elected politicians cannot do anything.”
Government officials briefed on budget preparations said Sunak, who backs Brexit, has considered cutting VAT by 5%, but no decision has been made. The Treasury declined to comment.
“It would tick two boxes – it reminds people of the benefits of Brexit and shows you are listening to people,” said a Treasury official who had been involved in many budget deliberations.
But his colleagues say Sunak is worried about the “big enough precedent” that would be set if he started cutting VAT – a vital source of revenue for the Treasury. The Chancellor is trying to re-impose fiscal discipline in his budget after huge public spending during the coronavirus crisis.
The reduction of VAT on energy ahead of the UN climate summit COP26 in Glasgow could also be controversial.
Paul Johnson, director of the Institute for Fiscal Studies, a think tank, said the move “would increase the effective subsidy we provide for gas combustion.”
“It would also cost over £ 1.5bn per year, with most of the benefits going to high-income households,” he added.
But Robert Halfon, Conservative chairman of the House of Commons education committee, said the VAT cut “would show we’re doing something to help consumers” and honor a referendum pledge on Brexit.
He added that he would be happy if the VAT cut was targeted at the poorest households, saying it would be wrong to try to achieve environmental goals “on the backs of the workers”. Sir Christopher Chope, a great curator, also supports the movement.
Jonny Marshall, an economist at the Resolution Foundation, another think tank, said a VAT cut “would not be targeted and would be quite costly,” adding that Sunak could use other mechanisms to help families in need. poor during the winter.
Last month the government launched a £ 500million counseling fund to help the less well off during the cold season. It also helps vulnerable consumers through programs such as the warm house rebate and winter fuel payments.