Five ways Rishi Sunak could save Britain from high tax hell

It seems extraordinary that just one year ago the Budget forecast inflation of 1.8pc for 2022. Fast forward to today, with Britain in the midst of a cost of living crisis, and the Bank of England is now predicting an 8pc rise in the cost of goods.

A large part of the increase is, of course, energy costs due to the disruption to gas and oil supplies, but some economists also point to policy decisions by the Bank itself.

When the Chancellor decided last year to suspend the pension triple lock, he pointed to wage distortions caused by the pandemic which would otherwise have provided an increase of 8pc to the state pension.

With the wonderful gift of hindsight that decision now seems poorly timed with the state pension due to go up by just 3.1pc, well below inflation, and likely to condemn many pensioners to financial stress. At the same time the economy has performed better than forecast, employment levels have recovered and government borrowing is about £13bn below target.

With the Spring Statement in mind the question is what scope the Chancellor now has to ease the burden on those most hard pressed by the cost of living crisis.

1) Save households from high energy bills

The obvious candidate is to remove the 5pc VAT charge on domestic heating fuels. There was no VAT on these fuels until April 1994 but once introduced EU law decreed that the rate could not fall below 5pc. Treasury tables say the reduced rate currently saves consumers £5.2bn so scrapping it would cost about £1.7bn. 

I accept that there may be better ways of helping lower income households through the benefits system. However, we will all remember our current Prime Minister declaring ahead of the EU referendum that scrapping VAT on domestic heating fuels would be one of the benefits of Brexit.

2) Help drivers beat rising petrol costs

Motorists are being hit hard by the sharp rise in the cost of petrol and diesel, brought on by a jump in the cost of crude oil. One by-product of this, however, is that the government is now collecting more VAT than expected. Fuel duty is applied 57.95p per litre on petrol or diesel. VAT is added at 20pc to make up the pump price, so we have a tax on tax. 

The RAC is currently quoting average prices at around £1.64 a litre for petrol and £1.74 for diesel. A year ago they were around £1.25 and £1.28 respectively. This means the Government is collecting extra VAT of around £2.5bn annually on the 38 billion litres sold, given it is 7p more per litre at the pump. Surely there is scope to cut the rate on fuel duty to lower the pump price accordingly and give motorists a break?

3) Delay the National Insurance rise

By the same token I recognise that the government needs to deal with the issues of NHS and social care funding. However, the hike in National Insurance contributions cannot be coming at a worse time.

These suggestions are not self-funding but the total cost is broadly within the £13bn margin available to the Chancellor. He won plaudits for his help in the pandemic and could do so again by adopting these measures.

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