Miliband accuses Osborne of deceit on VAT

The Labour leader stepped up his attack by accusing Mr Osborne of "deceit" after the Chancellor insisted the increase was a "tough but necessary step" for the economy and said alternatives would hit poorer families harder.

Mr Osborne played down hopes the rate could be lowered once the economy is in better shape by describing the increase to 20 per cent as "permanent", hinting he would rather cut income tax or National Insurance.

The coalition argues the 2.5 per cent tax rise is essential in order to cut the budget deficit, but unions and Labour claim it will hit the poorest harder.

Retailers warn it could depress consumer spending in the high street and the Federation of Small Businesses has urged the Government to increase the threshold above which firms have to register for VAT.

Mr Osborne said: "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."

He added: "Income tax and National Insurance (increases) would have a more damaging impact on poorer people in our society."

With the issue giving Mr Miliband's party leadership fresh momentum, the MP for Doncaster North went on the offensive and Labour produced quotes from David Cameron before the election in which he said raising VAT was "very regressive".

"George Osborne should stop treating the British people like fools," said Mr Miliband. "He claimed that this VAT rise was fair but David Cameron admitted before the election that VAT rises were unfair.

Everybody knows it's poor and middle-income families that will be hit hardest."

The rise is the second VAT increase in a year, after Labour restored the 17.5 per cent rate last January following a temporary cut to 15 per cent.

Former chancellor Alistair Darling rejected claims by Mr Osborne that he would have raised VAT if Labour had won the General Election, but the Tories attacked Shadow Chancellor Alan Johnson after he said an increase in National Insurance was better than the VAT rise.