VAT rose today by 2.5 per cent to 20 per cent, a rate that Chancellor George Osborne has signalled will be permanent, calling it “a structural change to the tax system to deal with a structural deficit”.
The 20 per cent rate is predicted to raise an extra £13 billion for the Treasury, a welcome boost for the coalition government as it works to balance the national books.
Mr Osborne calls the VAT hike “tough but necessary”. Labour leader Ed Miliband says the move is “the wrong tax at the wrong time” and that it will cost the average family an extra £7.50 a week, or £390 a year.
Mr Osborne says the increase in VAT will help to boost employment by increasing confidence that the government is tackling the budget deficit. A report by the Centre for Retail Research and Kelkoo, Europe's largest e-commerce website, says the bottom one-fifth of earners will be hit hard, as VAT payments represent 12.1 per cent of their disposable income compared to 7.4 per cent in the average household.
Mr Osborne says raising VAT is the least harmful tax option to help tackle the nation’s debts, compared with a rise in income tax or national insurance, which he describes as “far more economically damaging”.
The British Retail Consortium says the rise will push inflation up and contribute to reduced sales as the year continues – although it accepts that the increase, coupled with public spending cuts, is necessary as part of the government's package to tackle the deficit.
No doubt we will listen to the arguments, pay our money and take our choice as to who is right and who is wrong on the VAT front. One thing is certain: when it comes to 20 per cent VAT, we don’t have much choice other than paying up – or keeping our money in our pockets.
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