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Speculation on VAT hike mounts

Speculation on VAT hike mounts

Category: Money

Updated: 14/05/2010
First Published: 14/05/2010

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.
Speculation that the newly formed coalition Government could be paving the way for an increase in VAT is mounting.

The new administration is likely to implement wide ranging cuts in the coming months as it works to reduce the significant budget deficit, thought to be around £163 billion.

Many new policies will be unveiled in the forthcoming emergency Budget that the Conservatives promised would be delivered within 50 days of the party being elected.

Cuts to parts of the public sector are inevitable, while restrictions will be made on certain benefits, such as child tax credits for richer families, and a scaling down of the reach of the Child Trust Fund.

More significant savings will need to be found however, and a rise in VAT to 20% could be worth as much as an additional £11.5 billion per year to the Treasury.

Any such decision may well be delayed until next year, as worries persist that a measure that stunts public spending could drag the UK into another recession.

It is hoped that a sizzling summer and the forthcoming World Cup will boost high street spending, giving the economy a much needed boost.

Last year, the Labour government cut VAT from 15% to 17.5% in a bid to encourage consumers to spend, although the measure has since reverted to its traditional level.

"Any increase to VAT will be an unpopular one for the simple reason that it directly affects every single individual in the country, irrespective of their income levels or economic wealth," said Darren Cook, spokesperson for Moneyfact.co.uk

"Unfortunately, it looks like an increase to VAT is one of only a of a few options that will help tackle our unprecedented deficit, with token changes to other tax structures making only a small dent.

"But if these changes are implemented too soon, this may have an adverse effect on our recovering economy and will play havoc with our escalating inflation figures. If inflation continues to climb and the pound remains under pressure, expectations of a bank base rate rise will mount."

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