By David Williams
4 January 2011
VAT has risen to 20% today, in a move defended by Chancellor George Osborne as the ‘least damaging’ tax increase for the UK economy.
It means that, for the first time, the VAT rate is now the same as the basic rate of income tax. The move, announced in the June Budget, is expected to raise £13bn.
Osborne told the BBC this morning that taxes would have to go up to cut the budget deficit. He said increasing VAT from its previous rate of 17.5% was the ‘least damaging’ option compared with increasing income tax or National Insurance.
He argued that raising taxes on earnings would make the British economy less competitive, and would have a bigger impact on those on the lowest incomes.
‘It is a tough but necessary step towards Britain’s economic recovery,’ Osborne said.
And, although he refused to rule out further changes to the tax system, the chancellor revealed that he considered the new 20% rate as a ‘permanent tax change’.
He told listeners: ‘It is a structural tax change to deal with a structural deficit.’
The move was condemned by shadow chancellor Alan Johnson as ‘the wrong tax at the wrong time’. Johnson warned it would ‘hit the poorest hardest’ and called for a rise in National Insurance instead.
Johnson argued that the coalition government was cutting the deficit too fast, but also claimed that Labour had wanted the structural deficit to be ‘eradicated’ by 2015/16 – just a year later than the government’s plans. Before last year’s general election, Labour had pledged to halve the deficit by the end of the current Parliament.
