The £11.4bn cost of any VAT increase

VAT in the UK is currently charged at 17.5 per cent, the fourth lowest rate in Europe and 2.5 percentage points less than the average rate of 20 per cent.

Price comparison website Kelkoo said increasing VAT to 20 per cent would raise an additional 11.4bn for the Treasury during the first 12 months, taking the total annual haul from the tax to around 91.29bn.

But it warned the move would cost each household an average of 425 and would reduce their spending power by 1.25 per cent a year.

The report, which was carried out by the Centre for Retail Research, said this could have a negative impact on retail sales, damage consumer confidence and ultimately reduce economic growth.

It said if consumers reduced and postponed spending following the rise, it could reduce GDP by around 0.5 per cent during the first 12 months, cutting economic growth for 2010 to 0.75 per cent.

The hike in prices would also lead to higher inflation, taking the Consumer Prices Index to around 3 per cent, compared with 2009's average rate of 2.1 per cent, it predicted. The move would also hit lower income groups the hardest, as they spend a higher proportion of their income on goods upon which VAT is charged.