LONDON – Britain’s standard rate of sales tax, or VAT, increased to 20 percent in one of several moves to slash a record public deficit, but the opposition said it would hit the poorest hardest.
Finance minister George Osborne insisted the rise from 17.5 percent was a “reasonable” step towards economic recovery and would raise £13 billion ($20.2 billion) a year.
Retailers have warned it could put the brakes on consumer spending at a time when Britain’s economic recovery remains fragile, while there are also fears the move could fuel inflation and put pressure on pay settlements.
It comes in a tough back-to-work week for British consumers after the Christmas and New Year festivities, with transport fares going up and fuel prices effectively rising twice.
The VAT rise also comes against a backdrop of deep cuts in public spending which are only just starting to take effect.
But Osborne claimed to listeners on BBC radio that he thought it was a reasonable rate to set, given the very difficult situation the UK is in. The VAT rise is a tough but necessary step towards Britain’s economic recovery, he claimed. “If you don’t want to raise VAT, you have got to do something else to meet the gaping deficit.”
He added that, “I said before Christmas that the VAT rate I regarded as permanent because it is a structural tax change.” Osborne, the Chancellor of the Exchequer, argued that an alternative policy of raising income tax and National Insurance payments “would have a more damaging impact on poorer people in our society.”
The VAT rise would actually boost job creation, he argued, because it would increase confidence that the government was tackling the country’s deficit.
Prime Minister David Cameron’s coalition government of his Conservative party and the Liberal Democrats has made a priority of cutting the £150 billion deficit it inherited from Labour after May’s election. Labour, now in opposition, said the government had broken an election promise by raising VAT.
Its finance spokesman Alan Johnson said, “this is a broken promise, this was the big issue of the general election campaign. It does nothing for jobs and growth
