Sunak has room to slash taxes by £30bn to ease cost of living crisis

RISHI SUNAK has room for up to £30bn of tax cuts in the autumn to alleviate the cost of living crisis, economists said, as the Chancellor comes under pressure from his own party to prove he can do more than just ramp up spending.

Demands are growing for cuts to income tax or VAT to help lift living standards by either leaving more money in workers’ pockets or reducing the tax levied on family spending.

Martin Beck, chief economic adviser to the EY Item Club, said that last month’s decision to cut £400 from household bills this winter is a one-off giveaway, so does not affect the Chancellor’s headroom against borrowing targets set for the middle of this decade.

“Headroom will still be plentiful,” he said, anticipating the Chancellor will have around £30bn of leeway if he still wants to hit his goal of funding dayto-day spending out of tax revenues without borrowing in 2024-25.

“Even if inflation is higher than expected, that is not necessarily bad for the public finances. He has already reaped some of the benefits from it in stronger tax receipts, and the freeze in income tax allowances could be particularly fruitful if inflation is higher, so he could have more [headroom].”

Benjamin Nabarro, economist at Citi, predicts a move on VAT, which could ease the cost of living crisis. He said: “Having reaffirmed a precedent for state support, we expect fiscal policy will likely do more in the face of a large and persistent squeeze. However, widespread stimulus is only likely once the risk of more persistent inflation has abated. We therefore expect further support to come via a sweeping VAT cut from the fourth quarter.”

HMRC figures indicate such a cut could bring the rate of VAT down from 20pc to in the region of 17.5pc. It would emulate the move by Alistair Darling, chancellor during the financial crisis, who cut the rate from 17.5pc to 15pc.

Tom Clougherty, of the Centre for Policy Studies, said he anticipates more calls from Conservative MPS for action into the autumn as the cost of living crisis intensifies. The Bank of England expects inflation to rise from 9pc in April to a peak of 10pc or more in October when energy prices rise again.

Mr Clougherty said there is “a lot of enthusiasm” on the Tory benches for “taking VAT off domestic fuel. That can be seen as a Brexit win”.

The headline rate of VAT could also be on the table. He said: “It is very much the Treasury mindset – there is a recession, why don’t we cut VAT for a while to encourage people to spend?

“It would make sense from that point of view, and it would also make sense as if you reduce a sales tax as customers experience it, things might get a little bit cheaper if the savings are passed on.”

Bringing forward the 1p cut to the basic rate of income tax currently pencilled in for 2024 could also be an option.