Truss weighs up cuts to income tax and VAT

Leadership frontrunner looks at raising personal allowance threshold as rival calls plan ‘regressive’

‘Cutting VAT will leave little to no benefit for low income households who will need the most help this winter’

‘A cut in VAT is not inflationary. It interacts well with monetary policy to keep interest rates under better control’

LIZ TRUSS is considering cutting income tax and VAT as her plans were labelled “regressive” by Rishi Sunak’s campaign.

The Foreign Secretary and favourite in the Tory leadership race is considering raising the personal allowance, the point at which people begin paying income tax, from its current £12,570 level up to four years ahead of schedule.

She is also eyeing a potential five per cent cut in VAT across the board as part of a suite of options to tackle the cost living crisis and offset rising energy bills.

A significant increase in Universal Credit from October is also being considered for the 8.5 million most vulnerable families as a way of targeting aid and avoiding blanket “handouts” to all households.

It is thought MPS in her camp favour cuts on VAT for goods but one senior supporter said: “It could easily be both.”

The energy regulator Ofgem warned the Government last week that it must act urgently to “match the scale of the crisis we have before us” as Britain faced the news that the average household’s yearly energy bill will jump from £1,971 to £3,549. The Treasury has been working up options but Ms Truss’s aides stressed yesterday no decisions had been made, apart from the public commitments to reverse the rise in National Insurance, cancel the planned Corporation Tax increases and impose a temporary moratorium on the green levy.

Mr Sunak’s team warned yesterday that cutting VAT from 20 per cent to 15 per cent would be “regressive” and cost tens of billions of pounds.

A campaign source for the former chancellor said it was flawed because VAT was not paid on basic items such as food therefore does nothing to help families pay their supermarket bills.

“It’s also regressive. Cutting VAT will benefit higher income households more, leaving little to no benefit for low income households who will need the most help this winter,” said the source.

They also warned the annual cost of £37billion for the five per cent VAT reduction would take the total for her tax-cutting plans to £100billion.

Ms Truss’s plans were, however, backed by the Thatcherite economist Patrick Minford, who said rising inflation was costing households around £50billion a year because they were being dragged into higher tax brackets that had not been index-linked.

“So what a cut in VAT or income tax would do is reverse that in this financial year. It makes no sense at this point to throw extra taxes on people when they’ve got these costs,” said the Cardiff Business School professor, 79, who advised Margaret Thatcher.

“It’s perfectly logical to offset that and reverse it and actually the quickest way to do that this year is through a cut in VAT which can be done immediately.

“This is not inflationary, it actually interacts well with monetary policy to keep interest rates under better control. It makes sense to cut VAT and income tax but you can cut VAT quicker, which is the right thing to do and it indexes this fiscal drag.”

Mr Truss, who has cited Prof Minford as an economist who backs her tax-cutting strategy, is also considering a temporary reduction in VAT rates on energy for businesses.

Steve Baker, who heads the relaunched Conservative Way Forward group, said: “The most regressive tax is VAT so cutting VAT has its attractions.”