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Britain raises sale tax

Jan 05 2011 07:40

London - Britain's standard rate of sales tax, or VAT, increased to 20% on Tuesday 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% was a "reasonable" step towards economic recovery and would raise £13bn ($20.2bn) 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 told BBC radio: "I think it is a reasonable rate to set, given the very difficult situation we find ourselves in. The VAT rise is a tough but necessary step towards Britain's economic recovery.

"If you don't want to raise VAT, you have got to do something else."

He added: "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 £150bn 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 spokesperson 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 - this year has to be all about continuing the growth momentum. It hits the poorest hardest.

"For those three reasons this is the wrong tax at the wrong time."

The change affects any VAT-registered business which sells or purchases goods or services that are subject to the standard rate.

Among the items rising in price is a pint of beer, which will be pushed above three pounds for the first time in some regions, according to the British Beer and Pub Association.

Some shoppers beat the rise by snapping up big-ticket items such as televisions in the New Year sales before the new rate came into effect.

The majority of food, children's clothing and books remain free of VAT and items such as children's car seats, domestic fuel and power supplies for domestic use will continue to carry reduced rates.

A report by the Centre for Retail Research suggested consumers will spend an average of £324 pounds less in the remainder of this year as a result of the VAT rise, cutting British retail sales by as much as £2.2bn in the first quarter of 2011 alone.

Most economists surveyed by the Financial Times believe the government's attempts to reduce the deficit will stay on track this year because deep spending cuts and tax rises will not cut growth so much as to cause a double-dip recession.

Of 78 economists polled for Tuesday's paper, including 10 former members of the Bank of England's monetary policy committee, 43 thought the programme to tackle the deficit would be "on track" by the end of 2011.

britian  |  world economies  |  tax


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