Chancellor George Osborne has insisted that the VAT rise from 17.5% to 20% is a “tough but necessary step” towards Britain’s economic recovery.
He confirmed he regarded the increase introduced at midnight as permanent, but said alternatives to tackle the deficit, such as rises in National Insurance or income tax, would hit poorer families harder.
The VAT hike, announced in last year’s Budget, is designed to raise £13 billion a year. Retailers have warned it could depress consumer spending in the high streets, while there are also fears it will fuel inflation and put upward pressure on pay settlements.
Shadow chancellor Alan Johnson accused the Government of breaking an election promise and said Labour favoured National Insurance rises rather than the VAT hike.
Mr Osborne told the BBC Radio 4 Today programme: “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. Income tax and National Insurance (increases) would have a more damaging impact on poorer people in our society.”
The rise is the second VAT increase in a year, after Labour chancellor Alistair Darling restored the 17.5% rate last January having temporarily reduced it to 15% for 13 months to stimulate the economy during the recession.
The change affects any VAT-registered business which sells or purchases goods or services that are subject to the standard rate. Most foodstuffs, children’s clothing and books remain zero-rated and reduced rates remain on items such as children’s car seats and supplies of domestic fuel and power.
Online shopping group Kelkoo said the change would increase the price of a litre of petrol from £1.19 to £1.22, a digital camera from £131 to £133.79 and a Ford Focus car from £15,195 to £15,518.
A report by the Centre for Retail Research suggested consumers will spend an average of £324 less in the remainder of this year as a result, cutting UK retail sales by as much as £2.2 billion in the first quarter of 2011 alone.