Labour has fallen into a trap by calling for VAT to be lifted on energy bills in the Budget

Rachel Reeves, the shadow chancellor, has committed her party to a policy that would benefit the better off and be bad for the environment, writes John Rentoul

Rachel Reeves, the shadow chancellor, on the Andrew Marr Show on Sunday (BBC News)

Politics is almost always chaos and confusion, and almost never conspiracy. But it is tempting to think that Rishi Sunak planted a seed on purpose, to lure Labour into a trap that he can exploit in his Budget speech.

It was reported about a week ago that the chancellor was considering a cut in VAT on energy bills to help relieve the burden of rising prices on people on low incomes. At the weekend, the idea was taken up by Rachel Reeves, the shadow chancellor, who advocated abolishing VAT on energy bills for six months.

It sounded like a good and prudent way to alleviate hardship. She told Andrew Marr: “VAT receipts have come in more than £2bn above forecast. Let’s use that money to ease that pressure on people who are worried about the winter months, about putting food on the table and heating their homes.”

In fact, it is a bad way of protecting people on low incomes because most of the benefit of a cut would go to the rich, who tend to live in bigger houses and use more energy. The idea is superficially attractive to Labour because they want to be seen on the side of the hard-pressed bill-payer; and it is superficially attractive to Tories for the additional reason that a VAT cut could be presented as a Brexit dividend.

Under EU rules designed to harmonise VAT, the tax cannot be reduced below 5 per cent once it has been imposed on anything. So there was an obvious attraction for a Brexit government of using the freedom of having left the EU to cut VAT on energy to zero – as was done when the “tampon tax” was abolished the moment it was possible in January.

But the Treasury is now briefing journalists that cutting VAT on energy isn’t going to be in the Budget after all, leaving Reeves out on a limb, advocating a bad policy and giving Sunak an easy win in his speech tomorrow.

I can draft that part of his speech now: “Mr Speaker, I have received representations that VAT should be cut on energy bills. I do not think that would be fair, as the benefit of that measure would mostly go to better-off households. Nor would it be in accordance with our objective to achieve net-zero carbon because it would encourage people to use more energy, including energy from fossil fuels. So I have decided to reject those representations and instead, I will deliver targeted help to people on lower incomes, and measures to encourage people to switch to green energy.”

Labour has fallen into this kind of trap before. In the 1992 Budget, just before the general election of that year, Norman Lamont outflanked Labour’s plans for higher taxes on the better off by bringing in a lower income tax rate that benefited those on low incomes.

Now Sunak can pull the same trick, not just by posing as a chancellor who is more concerned about the poor than his shadow, but by presenting himself as greener than Labour too.

I don’t know what the last few measures in his Budget will be – the mere handful that haven’t been trailed in the longest pre-Budget media exercise ever – but I suspect that he will propose more generous rules for universal credit, which will draw some of the sting from the Tory rebellion over the ending of the £20 a week uplift that is still rumbling on.

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That will be awkward for Labour because although it opposed the cut to universal credit, it does not want to commit to promising to restore it now that the cut has happened. Even more awkward, on the eve of the UN climate change summit in Glasgow, will be Labour advocating lower taxes on fossil fuels.

The sensible approach for a green party worried about high energy bills for people on low incomes would be to keep the universal credit uplift (and to extend it to other state benefits); unfortunately for Labour, the Tories now have a better claim to be that party.

As tradition dictates, it will be Keir Starmer who responds to the Budget statement tomorrow. He may find that the VAT cut policy that he agreed with Reeves is going to make it harder for him to attack Sunak, and easier for the chancellor to present himself as both green and pro-poor.