George Osborne could raise VAT on items such as food, children's clothing, books, and energy bills to help cut taxes for businesses, the International Monetary Fund has suggested.
The IMF, the global financial watchdog, urged Britain's Chancellor to consider "broadening the VAT base" in order to pay for tax cuts for companies.
It did not name items that could see an increase in VAT. However, some of the biggest exemptions and reduced rates currently go to basic foodstuffs, the construction of new homes, children's clothes, energy, books and newspapers.
Reform, a think-tank, has previously suggested that raising VAT on food, the construction of new homes, children's clothes and electricity and gas would bring in around £15 billion.
Despite signs the economy is beginning to recover, the IMF warned Mr Osborne that his austerity programme is proving a "drag" on growth. It called for more immediate spending on infrastructure, such as roads, railways and energy projects.
The watchdog said the Treasury could also cut corporation tax rates and introduce more tax breaks for companies trying to raise capital for investment.
This could be paid for be higher VAT rates imposed on shoppers, it said.
It said: "To offset the budgetary impact of these measures over the medium term, the government could undertake a reform of property taxes and consider broadening the VAT base."
Mr Osborne drew criticism last year when he tried to raise the VAT rate on pasties, caravans, hairdressers' chairs and other unusual items.
Raising a substantial amount of money from extra VAT on essential items would likely to be even more politically controversial.
Treasury sources said there were "absolutely no plans" to follow the IMF's advice on "broadening the VAT base".
Mr Osborne said yesterday he had plenty of scope to boost the economy within the "credible fiscal plan" already set out.
"There are no easy answers to problems built up in the UK over many years," the Chancellor said. "It's a hard road to recovery, but we're making progress."
Currently, there is no VAT on children's clothing, basic foodstuffs, books and newspapers. People pay VAT at a reduced rate of five per cent on energy bills.
Dozens of other items and services carry exemptions or reduced rates for historical reasons, such as bingo, lottery tickets, postage stamps, cycle helmets, houseboat moorings, funerals, prescriptions and sporting activities.