Budget: VAT increases will hit middle incomes

Budget at a glance

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Increasing the rate of VAT from 17.5 per cent to 20 per cent in January will bring in more than 12bn a year for the Treasury, but will cost middle earners more than 400 a year.

Labour branded the move "deeply unfair" because it hits those on the lowest incomes hardest proportionally, and it is also embarrassing for the coalition Government after both parties rejected the idea of a VAT increase if they won power.

During the election campaign Liberal Democrat leader Nick Clegg launched campaign posters claiming families would be hard hit by a Tory VAT "bombshell", prompting then-Shadow Chancellor George Osborne to tell the Yorkshire Post: "Complete nonsense, we have made it clear our plans do not involve changing VAT."

Labour leadership contender Ed Balls, MP for Morley and Outwood, said: "Increasing VAT to 20 per cent is deeply unfair – it hits the poorest families the hardest including pensioners and the unemployed who don't pay income tax or national insurance."

The Government did, however, pledge to keep "everyday essentials" such as food and children's clothes free from VAT until the end of the current parliament at least.

The indirect tax partner at Deloitte in Leeds, Simon Prinn, said yesterday that retailers faced a "difficult period", especially as consumer spending was already fragile.

But he added: "This announcement has been widely expected and many retailers will feel that the Government has been helpful in delaying the implementation of the increase until January."