Kate Andrews

    Is Rishi’s latest tax pledge a U-turn?

    Is Rishi's latest tax pledge a U-turn?
    Rishi Sunak (Credit: Getty images)
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    Is Rishi Sunak spooked? Today’s big tax announcement – his plan to temporarily slash VAT on energy bills this winter should he become Prime Minister, saving the average household £160 – is being viewed as a U-turn. This comes after the former chancellor used the first four leadership debates to double down on the importance of fiscal responsibility and not rushing tax cuts. With Sunak behind Liz Truss in the Tory membership polls by a ratio of roughly two-to-one, is this a desperate bid to improve his standing with grassroots voters? Or is something else going on?

    Whenever the cost-of-living crisis comes up, Sunak – on paper – has the upper hand. As chancellor, he was responsible for two major support packages this year, worth £9 billion and £15 billion respectively. The latter ensured the eight million most vulnerable households received £1,200 in subsidies, largely offsetting energy bill price hikes. It’s a sign of the times – and mindsets created around pandemic spending – that citing this support as evidence he will act if prices spike again has not convinced the membership he has a plan of action for winter. He has also struggled with his line on timings: that it’s better to see what happens to bills and then plan around it, than it is to preempt Ofgem’s energy price cap lift, expected to rise to around £3,240 in October. It’s a wholly sensible position, but doesn’t have the same ring to it as an immediate promise of tax cuts. Sunak has been finding it hard to compete.

    So is this an outright U-turn from Sunak? While as chancellor he ultimately rejected a VAT cut, he seriously considered it as a lever to pull in February when designing the first energy handout. He opted instead for a slightly more targeted measure to avoid being accused of giving the wealthy a hefty handout (as VAT is a tax on consumption, it follows that those with the biggest homes would also receive the biggest break). But the idea itself – especially the link to Brexit freedoms, which now allow for this VAT cut – has always appealed to Sunak. Furthermore, there is a credible line of reasoning which says a temporary tax cut is different to a permanent one: priorities can be rebalanced to make sure a temporary cut to VAT is costed for the next year.

    This takes quite a bit of explanation, however, and Sunak has no doubt opened himself up to criticism from Team Truss that he is pulling a U-turn. But where Sunak is most vulnerable is in his claim that tax cuts are inherently inflationary – an accusation he’s made of Truss’s economic agenda many times. He’s going to find himself getting into the weeds explaining why he thinks Truss’s tax cuts are inflationary while his are benign. And the most likely outcome will be voters thinking the claim was exaggerated – that while there may be major risks associated with unfunded tax cuts, an inflationary spike isn’t one of them.

    Written byKate Andrews

    Kate Andrews is economics editor of The Spectator

    Topics in this articleEconomy