Liz Truss faces backlash over ‘regressive’ plans to cut VAT

Liz Truss was facing a backlash on Monday for what critics called “regressive” proposals by her allies for a big cut in VAT intended to tackle inflation and ease the cost of living crisis.

The foreign secretary, who is the favourite to be the UK’s next prime minister, has insisted she is focused on cutting the tax burden instead of delivering “handouts” but has yet to set out detailed policies.

Proposals floated over the weekend for deep cuts in VAT were criticised by her opponents and some economists for not targeting support at the families that need it most, as well as for stoking inflation.

If Truss wins the Tory leadership contest, she is expected to deliver an “emergency Budget” before the end of September that will set out her plans to tackle soaring energy bills.

The Sun newspaper reported that Truss’s allies were urging her to halve the rate of VAT to 10 per cent at a cost of more than £60bn. Those advising her campaign claimed this would significantly reduce inflation for most purchases.

Patrick Minford, an economist supporting Truss’s leadership bid, told the newspaper it was “perfectly logical to offset” the cost of living crisis. But insiders on her rival Rishi Sunak’s leadership campaign described a big VAT cut as “regressive” and “flawed”.

One insider said Truss’s plans would “do nothing to help families pay their supermarket bills”.

In 2008, Gordon Brown’s government cut VAT by 2.5 percentage points to 15 per cent in an effort to lower prices temporarily and raise spending when demand and inflation were low.

Many economists say that this is not the time to repeat the move because help is needed for households most affected by high energy bills, rather than all households, and additional stimulus will force the Bank of England into more interest rate increases. The central bank is trying to cool spending levels to bring down inflationary pressure.

Other reports have suggested Truss was looking at cutting VAT by at least 5 percentage points, at a cost to the Treasury of about £38bn. That would save the average household £1,300 a year and reduce inflation by 2 percentage points if the temporary reduction were maintained for a year.

The effect on inflation would, however, be brief, while the additional spending from a temporary cut in VAT would increase underlying inflationary pressure, economists said.

Paul Johnson, director of the Institute for Fiscal Studies, said that cutting VAT would “benefit higher-income” households and would only lower inflation until the temporary measure was reversed, when the measure would “clearly increase [inflation]”.

One senior Truss supporter told the Financial Times she had also been briefed on proposals to increase universal credit benefits to help the poorest through the winter crisis. “Tax cuts won’t be enough: it’s almost inevitable she will have to do something on UC,” the MP said.

A Truss campaign insider said “neither are things Liz is committed to at this moment”, pointing to her campaign pledges to reverse April’s national insurance rise and halting next year’s corporation tax rise. But the official added: “She will evaluate other options if she becomes PM.”

The Johnson’s government inaction on the cost of living crisis was criticised on Sunday by Lord Alistair Darling, the former Labour chancellor, who called for an immediate intervention and warned that the economy risked tipping into recession.

“When you’ve got that on top of the fact you’ve got inflation already at very, very high levels we haven’t seen since the 1970s, this is a lethal cocktail, which is why it needs bold action taken by the government now, not fiddling around with small measures that frankly won’t make any difference at all,” he told the BBC.

Nadhim Zahawi, the chancellor, will visit New York and Washington this week to discuss “the global economic challenges” resulting from rising inflation and the Ukraine war.

Zahawi said: “These global pressures must be overcome through global efforts. I’m determined — here in the US — to work closely with my allies on the common challenges we face to create a fairer and more resilient economy at home and abroad.”

Victoria Prentis, a junior environment minister, said there were “many, many different plans” being worked on to tackle the cost of living crisis.

“Whoever comes in as the next Conservative leader and our next prime minister will have the background work ready and will be able to make those difficult choices very quickly and before it’s needed,” she said.

Meanwhile Truss pulled out of a sit-down interview with the BBC on Tuesday. The broadcaster said her campaign had informed them “she can no longer spare the time”.