Liz Truss is considering whether to reduce VAT by five percentage points across the board, which could save families £1,300 a year, it was reported.
The foreign secretary is understood to have discussed the move with her advisers but no final decisions will be taken until the Conservative leadership contest concludes on 5 September, according to the Sunday Telegraph.
The Treasury is expected to present the new prime minister with plans modelled on Gordon Brown’s response to the 2008 financial crisis, where VAT was reduced from 17.5% to 15% for a year, as part of a series of proposals amid soaring energy bills.
Energy bills for a typical household will rise to £3,549 a year on 1 October, when a new price cap is introduced, it was announced on Friday.
If the rate of VAT is cut by up to five percentage points from the current standard rate of 20%, it would be the largest ever reduction.
Truss’s campaign has begun drawing up plans for her “emergency budget” but a source told the Telegraph that it “would not be right for her to announce her plans before she has even been elected prime minister or seen all the facts”.
A cut of five percentage points would cost an estimated £3.2bn a month or £38bn to keep in place for one year, according to analysis by the Institute for Fiscal Studies research institute.
It would also reduce inflation temporarily by about 2%. Last month, Rishi Sunak announced plans to temporarily scrap VAT on household energy bills if elected prime minister.
A Treasury spokesperson said the government was making the “necessary preparations to ensure a new government has options to deliver additional support as quickly as possible”, adding: “No major fiscal decisions will be taken until the new prime minister is in post.”
• This article was amended on 28 August 2022. It is a cut in VAT of five percentage points that is being considered, not a 5% cut as the headline and text of an earlier version said. And VAT was reduced from 17.5% to 15% for a year in response to the 2008 financial crisis, not from 20% to 17.5%.
