Penny Mordaunt under fire for claiming fuel tax cut is ‘self-funding’ because revenues are going up

Sunak-backer Dominic Raab rubbishes argument – amid criticism of campaign for undermining UK’s ‘net zero’ commitment

Penny Mordaunt has sparked a row over her plan to slash fuel tax by denying it would blow a multi-billion pound black hole in the Treasury’s finances – because revenues are rising.

The claim that the cut would be “self-funding” was rubbished by a key supporter of Rishi Sunak, who has accused his rivals of “fairytale” economics in the Tory leadership race.

Dominic Raab, the deputy prime minister and a Sunak backer, urged Ms Mordaunt to produce a “serious analysis of self-funding tax cuts” to back up her argument.

He said the claim was not “particularly credible”, adding: “And, of course, the big question is, what impact would it have on inflation?”

The row over a policy based on making it cheaper to drive comes amid criticism of the campaign for undermining the UK’s legal commitment to reach net zero carbon emissions by 2050.

Ms Mordaunt, the race favourite among Tory party members who will pick the winner, has pledged “immediate, targeted support to help with the cost of living” by halving VAT on fuel.

The levy will bring in around £15.4bn in taxes for the Treasury this year, which means the cut would potentially cost £7.7bn – although it is understood it could last for only around six months, costing £4.5bn.

Ms Mordaunt described the impact as “neutral”, telling the BBC that was “because you’re getting additional revenues into the Exchequer on fuel”.

Her aide later clarified that she did not mean it was neutral because motorists would buy more fuel and drive more, but that the Treasury was enjoying a “windfall gain” from rising fuel prices, which would be removed.

The issue of tax has dominated the leadership contest, although the clash is a narrow one between reductions immediately – or in the near future, under Mr Sunak, the former chancellor.

Ms Mordaunt has also pledged to raise income tax thresholds at an immediate cost of around £3bn and has not ruled out reversing the planned hike in corporation tax at an annual cost of £17bn.

Liz Truss, the foreign secretary, has gone even further, with a £30bn uncosted promise to halt the corporation tax rise, suspend green energy levies and reverse the rise in National Insurance to fund the NHS.

Mr Raab told Sky News’s Sophy Ridge On Sunday programme: “You can’t borrow your way out of an inflation crisis.

“If people are suggesting we should make cuts to the NHS, at a time not just of Covid, but all the other non-Covid NHS challenges, they have got to spell out where they are coming from.

“We want to all leave people with more money in their pocket. But if you cut taxes and inflation robs people of that money because it is worthless or sees interest rates go up so their mortgage is more expensive, then frankly it is a false economy.”