(Bloomberg) -- Chancellor of the Exchequer Jeremy Hunt may announce a new UK tax on vapes as part of his budget next week, a person familiar with the plans said.

The potential move on March 6 would come as part of a wider package that aims to reduce overall taxation, with Hunt still debating whether the headline announcement will be to lower income tax or to cut national insurance, a payroll tax. The chancellor told fellow Conservative Members of Parliament late on Monday that next week’s announcement will see him pursue “smart tax cuts” that drive growth and reward work.

The levy on vapes — which could raise £500 million ($630 million) for the public purse by 2028-29 — would apply to both manufacturers and importers and is being considered as part of Prime Minister Rishi Sunak’s efforts to crack down on vaping and smoking to protect children’s health, according to the person, who spoke on condition of anonymity because the plans aren’t finalized.

Sunak made a ban on smoking for future generations one of the flagship policy announcements of his premiership. In January, the prime minister also said he would ban disposable vapes in order to protect children. If the new tax on vapes is confirmed, tobacco duty would then be raised to ensure vaping is still cheaper than smoking, the person said. The Times first reported the story on Tuesday morning.

With a general election expected later this year, Hunt is under growing pressure from Tory lawmakers to announce voter-pleasing tax cuts, and he and Sunak have strongly hinted they intend to do so, in a continuation of the giveaway in November’s Autumn Statement. Then, the chancellor announced an eye-catching two percentage-point reduction to the headline rate of national insurance, and made permanent a tax break for corporate investment known as “full expensing,” calling it the largest business tax cut in modern British history.

Addressing a group known as the One Nation Conservatives at a private meeting Monday night, Hunt said that while the fiscal giveaways wouldn’t be on the same scale as in the Autumn Statement, they would nevertheless be a continuation of the theme, according to the person. 

Despite the cuts in November, the overall tax burden on ordinary Britons has been rising. That’s because the thresholds at which different tax bands start have been frozen until 2027-28, pulling more taxpayers into higher bands in a process known as fiscal drag. That’s left real household disposable incomes on track to shrink over this parliament by 3.5% — the steepest fall in living standards since the 1950s, increasing pressure on Hunt to unveil more tax cuts. 

The decision on whether to reduce income tax or national insurance next week, and whether they could be cut by either one percentage point or two, will be made when the chancellor receives the final fiscal forecasts from the Office for Budget Responsibility showing him how much room he has to maneuver, according to the person.

As things stand, Hunt has very limited headroom on his fiscal targets, thought to be around £13 billion, although some economists estimate it could be larger. That’s left Hunt considering a renewed squeeze on public spending to free up extra cash for tax cuts, a suggestion that’s drawn criticism from some economists including the International Monetary Fund.

Cuts to public spending would squeeze departmental budgets, potentially increasing public disquiet at the state of public services including local government, further education, courts and prisons — areas that bore the brunt of austerity following the 2008-09 global financial crisis. 

The Institute for Fiscal Studies warned on Tuesday that Britain’s fast-growing population is ramping up pressure on Hunt’s spending plans, requiring a £25 billion ($31.7 billion) top-up to stop fresh cuts to some public services. The IFS said that higher-than-expected migration will further reduce the generosity of departmental budgets in the coming years, and urged Hunt not to press ahead with tax cuts next week. 

“New long-term population projections driven mostly by higher expected net migration help increase the size of the economy but will make existing spending plans even more challenging in per-capita terms,” the IFS report said. 

--With assistance from Tom Rees.

(Updates with further details of Hunt’s plans starting in second paragraph.)

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