Jeremy Hunt is said to be looking at cutting national insurance and introducing a vape tax as part of his upcoming March Budget.
The chancellor is reportedly considering a 1 per cent NI reduction which will cost about £4.5 billion a year, in a bid to satiate calls within his party for tax cuts.
But Mr Hunt has considerably less headroom than previously thought after official forecasts downgraded the amount of money available to the government.
The chancellor is considering introducing a levy on vapes
But the chancellor is still keen to push forward with some tax cuts, and is said to be looking at alternative sources of income to fund it
It is thought he may introduce a “vaping products levy” to be paid on imports and by manufacturers to try to make the habit unaffordable for children, The Times reports.
The Institute for Fiscal Studies (IFS) has pushed back against the chancellor’s plans to introduce tax cuts, warning it would be “very challenging” to achieve considering Britain’s ageing population and mounting debt pile.
It further cautioned the transition to net zero and protecting the UK’s public services like hospitals and schools would need higher spending in the medium term than current government plans.
The chancellor has already scaled back his plans after he was said to be considering a 2p cut in national insurance tax, but the £13.7 billion a year cost made it unaffordable with current figures.
Mr Hunt is also said to be considering only increasing public spending by 0.75 per cent rather than 1 per cent, a move that could save about £5 billion a year.
But economists have warned this would lead to considerable spending cuts for unprotected departments. The IFS said this could worsen already struggling public services, such as courts and prisons, higher education and the Home Office.
Rishi Sunak announced he would phase out the sale of cigarettes
The IFS said during the Autumn statement the chancellor “ignored the impacts of higher inflation on public service budgets and instead used additional tax revenues to fund eye-catching tax cuts.”
It warned against doing the same this time, stating that “until the Government is willing to provide more detail on its spending plans in a spending review, it should refrain from providing detail on tax cuts.”
The plans to introduce a vaping duty are expected to raise more than £500 million a year by 2028 and 2029, and will be accompanied by a one-off increase in tobacco duty to ensure that vaping remains a cheaper alternative.
The scheme forms part of Rishi Sunak’s push to stop children taking up vaping while creating a “smoke-free generation”. The prime minister announced he would phase out the sale of cigarettes in his Autumn conference speech, in what he dubbed the “biggest public health intervention in a generation”.
The proposed vape tax is modelled on 15 similar schemes across Europe and will align the UK with the EU’s plans to introduce a bloc-wide vaping levy.
Last week the Office for Budget Responsibility (OBR) informed the government that it would have about £13 billion of fiscal headroom, of which Hunt will leave about £6 billion in reserve.
Typically, chancellors leave themselves £25 billion of headroom to cope with changes in interest rates and inflation without needing to change tax and spending policies, but Mr Hunt’s room for manoeuvre has been heavily impacted by inflation falling faster than expected, resulting in lower tax revenues, and increased borrowing costs.
The final forecasts before the budget are expected on Friday.
