Chancellor George Osborne insists today's VAT rise from 17.5% to 20% is a "tough but necessary step" towards Britain's economic recovery.

He regards the increase introduced from midnight as permanent, but said alternatives to tackle the deficit, such as rises in National Insurance or income tax, would hit poorer families harder (see the Cheap Online Shopping guide).

The VAT hike, announced in last year's Budget, is designed to raise £13 billion a year.

If retailers pass on the hike, the price of most goods will rise by 2.13%, meaning a £100 item will now cost £102.13.

Online shopping group Kelkoo says the change will 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.

The British Beer & Pub Association says it would add 6p to the cost of a pint of beer, pushing it through the £3 barrier for the first time.

'Spending to drop'

Businesses have warned the rise could depress consumer spending on the High Street, 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 says Labour favoured National Insurance rises rather than the VAT hike.

Osborne says: "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 adds: "I said before Christmas I regarded the VAT rate as permanent because it is a structural tax change.

"Income tax and National Insurance [increases] would have a more damaging impact on poorer people in our society."

Today's 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.

Most food items, children's clothing and books remain are exempt from VAT and reduced rates remain on items such as children's car seats and supplies of domestic fuel and power.

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.

'Broken promise'

Johnson says: "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.

"We need to get the deficit down, there's no argument about that."

Johnson says Labour had outlined £19 billion of tax rises in its last Budget, one element being NI increases.

Further reading/Key links

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