Fear over VAT rise fuelled

Chancellor George Osborne is to increase the sales tax from 17.5 per cent to 20 per cent on January 4 in a move he expects to generate an additional 13 billion a year.

But fears that the move would damage the economic recovery were fuelled yesterday when the independent Office for Budget Responsibility (OBR) released its view of the rise.

The watchdog said its analysis of the overall impact of the June Budget – in which the VAT hike was announced – had assumed a 0.3 per cent fall in GDP as a result of the higher sales tax.

"The interim OBR's June 2010 Budget forecast assumed that the increase in the standard rate of VAT from 17.5 per cent to 20 per cent would reduce the level of real GDP in 2011/12 by around 0.3 per cent," it said in response to a parliamentary question.

The disclosure led to renewed demands for Mr Osborne to re-think the VAT rise. Tom Clougherty, executive director of the right-leaning Adam Smith Institute, said: "There's no doubt that raising VAT will hit consumer confidence and damage the economy."