Rishi Sunak is drawing up plans for deferred tax rises and cuts to public spending in his autumn Budget after he delivers a further fiscal stimulus for the UK economy in the weeks ahead.
The Treasury is first considering a temporary cut to value added tax and specific reductions in the rate for some sectors, according to those close to the chancellor, following significant pressure from industry and Tory MPs. A lower VAT rate for the tourism sector — including pubs, restaurants and hotels — is one option being discussed.
This could come as early as July as the government prepares to scrap the two-metre social-distancing rule and replace it with “one-metre plus” guidelines that are likely to include further use of masks and physical screens.
But any move to lower VAT — at considerable cost to the exchequer — would come with a sting in the tail, as Mr Sunak works up proposals for deferred tax rises and lower public spending as part of the autumn Budget.
Any action to lower VAT rates or other taxes would only come after the government loosens social-distancing rules. Prime Minister Boris Johnson will review the current two-metre rule today with input from the cabinet and the UK’s scientific and medical advisers.
Mr Johnson will announce tomorrow which sectors can resume trading on July 4, with detailed guidance provided to businesses that can reopen. The list is expected to include parts of the hospitality sector — such as pubs and restaurants.
But Downing Street warned that if the Covid-19 outbreak began to accelerate, the latest easing measures would be reversed. “We will not hesitate to put the handbrake on,” a spokesperson said.
The Treasury wants to closely monitor the level of spending to gauge whether members of the public needs a tax cut to encourage them to return to more normal economic life. There are also serious misgivings in the Treasury over the effectiveness of cutting VAT as a stimulus and officials say decisions on the move have not yet been taken.
But there has been more impetus to reduce VAT in recent days, with those close to the chancellor feeling that the benefits of a temporary reduction in the 20 per cent rate might outweigh the costs.
Pressure from business is also growing. In a letter to the chancellor seen by the FT, Helen Dickinson, chief executive of the British Retail Consortium, said that cutting VAT and income tax for low earners “would boost consumer demand and raise consumption”.
Kate Nicholls, head of UKHospitality, which represents the sector, called for a “big, bold intervention”.
While most Tory MPs expect a summer of stimulus, some advocated for the autumn Budget to include the deferred tax increases and spending cuts in order to stabilise public debt.
Neil O’Brien, MP for Harborough and a former Treasury adviser, said: “We simultaneously need a stimulus now to fight recession, but also need to roll the pitch so that we can deal with very high levels of debt.”
Another former Tory minister said the public finances were so stretched that a fiscal tightening would be necessary before long: “The public aren't going to like it but it feels like either spending cuts or tax rises are going to be necessary soon.”
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