Taxing times How Reeves could bring down inflation and give boost to households

After nearly four years of the cost of living crisis, Rachel Reeves is well aware of the harm inflation is inflicting on British households - and on Labour's share of the vote.

- Phillip Inman

While figures out last week suggested the annual rate of price increases may have peaked, the chancellor focused on its continuing human impact, saying: “For too long our economy has felt stuck, with people feeling like they are putting in more and getting less out. That needs to change.”

She has promised a range of policies in next month's budget to “bear down on” rising costs, which could go some way to counteracting negative headlines about an expected swathe of tax rises to close an anticipated £20bn to £30bn spending gap.

Reeves says the government must support the Bank of England in bringing down inflation and it is speculated that her target could be soaring “administered prices” such as utility bills and transport fares, which the Bank cited in August as a crucial driver of consumer costs.

So what are the chancellor's levers for mitigating a UK inflation rate that the International Monetary Fund has warned is on a path to be the highest in the G7 group of countries this year and next?

Cut VAT on energy

Millions of households are sustaining a huge financial hangover from soaring energy prices after Russia's 2022 invasion of Ukraine. Gas prices have fallen over the past 18 months but remain two-thirds higher than they were before 2020.

Ministers are concerned that lowand middle-income groups are heading into another hard winter made more difficult by hefty utility bill increases.

Higher water and council tax bills are already baked into the figures. Energy, on the other hand, could be reduced to save £83 a year on the average bill should Reeves reduce the 5% VAT charge on energy to zero. The energy secretary, Ed Miliband, has hinted that she will.

It is tempting because VAT is spelled out on utility bills and a cut would be immediately passed on, slicing about 0.2 percentage points from the consumer prices index (CPI), which last month stood at 3.8%.