The Times reported on Thursday that No 10’s chief of staff Steve Barclay had suggested the temporary reduction in the 20 per cent rate of tax in the hope of easing tax bills for millions and blunting the spiralling rate of inflation.
It comes after modelling from the Office for National Statistics (ONS) revealed that the rate of inflation in the UK, at 9.1 per cent, had reached its highest point since at least February 1982.
But the plans – which would see VAT cut to 17.5 per cent, costing the government £18 million – have reportedly stirred up controversy within the Treasury, due to fears it could overstimulate the economy and stoke the already raging rate of inflation.
The newspaper claims that Mr Barclay, the MP for North East Cambridgeshire, first raised the idea of VAT cuts in talks with the Treasury in the past two weeks, during which he referred to the move as “de-inflationary”.
A source familiar with the plans told The Times: “Steve’s been pushing it quite strongly but the Treasury is not buying it.”
A second source also claimed that Treasury officials had mooted the idea of potential VAT cuts last month. But, ultimately, the ideas were scrapped over worries it could lead to a short-lived fall in inflation followed by a more severe recession.
Paul Johnson, head of the Institute for Fiscal Studies, told The Times that cuts to VAT would be “economically inappropriate”.
He added: “It would reduce inflation in the short run because it would reduce prices relative to what they would have been. But it would increase inflation next year. It can’t help in the long run.
“And it could actually lead to higher inflation overall because you would be pumping extra money into an economy where demand is already outstripping supply. Stimulating demand at the moment would be economically inappropriate. On this one the Treasury is right.”
A source close to Mr Barclay said: “Steve has reinforced to ministerial colleagues that decisions on tax need to be taken by the prime minister and chancellor and that in exploring options, colleagues need to follow up on the commitments the prime minister made in his letter to MPs at the time of the leadership vote.”