The Chancellor, George Osborne, defends the rise in VAT which came into effect today, saying that the government had no hidden plans to introduce further tax increases.
The Chancellor was responding to earlier criticism from the Labour Party which said that the tax increase – up 2.5 per cent overnight from 17.5 to 20 per cent – was “regressive” and would have a significant impact on jobs.
George Osborne defended the move, announced last summer, as a “tough but necessary” step for reducing the UK’s £149 billion deficit.
He said: “I think that a VAT increase is a tough but necessary step to dealing with Britain’s economic problems to dealing with the debts that everyone has.
“A tough but necessary step for dealing with Britain’s economic problems.” Chancellor George Osborne
“The alternatives are an income tax rise or a national insurance tax rise which is what the Labour Party is proposing today.
“I think that would damage working incentives for some low income earners in our country.
“We want to get people off welfare and into work. I think (the alternatives to a VAT rise) would increase unemployment and we do not want to see that.”
In an earlier interview, Mr Osborne said there is “not a tax hole” which will need to be filled by as-yet unannounced tax hikes.
“Our plans for the deficit reduction are set out now. They are over four years. All the components are in place…So we have set out the entire plan. There is not a missing component of it,” he said.
The Treasury hopes the VAT hike will bring in around £13bn over the next year.
FactCheck: Is a VAT hike better than a rise in NI or income tax?
Labour’s Shadow Chancellor, Alan Johnson, said that the VAT tax hike was regressive and “the wrong tax at the wrong time.”
He said: “Firstly, this is a broken promise: both the Conservatives and the Liberal Democrats said they wouldn’t increase (VAT) during the General Election campaign only seven months ago.
“This is a broken promise.” Shadow Chancellor Alan Johnson
“Secondly, it does nothing for jobs and growth, and that has to be the focus of our attentions this year.
“And thirdly, it’s regressive. It hits the poorest the hardest. For those three reasons, I believe this is a mistake.”
He added that the hike could lead to three times the job losses that would have happened under the previous Labour government’s decision to raise social security taxes paid by employees and employers.
Labour’s former Chancellor, Alistair Darling, told Channel 4 News that the Government was putting hundreds of thousands of jobs at risk by cutting public spending, while increasing taxes like VAT.
“That has gone up tpday and national insurance contributions for employees will go up in April, so people will get hit twice, when the Conservatives said during the election campaign that they would not do that,” he said.
Justine Greening, the Conservative Economic Secretary to the Treasury, told Channel 4 News that action had been necessary to tackle the deficit left behind by the Labour Government.
“We do want to make sure that we are able to lift people out of paying income tax on the very lowest wage, which is why we have raised personal allowances,” she added.
Tarlok Teji, retail expert and visiting fellow at Manchester Business School, predicted that the VAT hike would lead to inevitable job losses in the retail sector.
“We may get a second wave of shakeout in Q1, because Christmas wasn’t kind this year,” he told Channel 4 News.
“A number of retailers will go for cash calls to investors asking for more money, and if they don’t get it, stores will close down and staff will be let go: 2011 is going to be tough.”
Mr Teji predicted that there would be little growth, only a redistribution.
He said: “Online retail will continue to grow: it’s still on 10-15 percent of the market, so it’s still small, but I think that increasingly, more consumers will turn to online.
“I think that grocers will also be best at weathering the increase because they are the most responsive to consumers and have fantastic supply chains.
“But the decline of the housing market will inevitable have a knock-on efect on the DIY, department stores, and furnishing market.”
The British Beer and Pub Association (BBPA) predicted that up to 10,000 jobs could go in the brewing and pub sectors as VAT compounded a concurrent tax hike on beer.
With a ten pence tax increase on a pint in the past year, duty and VAT on a pub pint is now 77 per cent higher than in January 1997.
BBPA Chief Executive, Brigid Simmonds, said: “Today’s VAT rise is anther tax blow for the industry. The Treasury is piling tax on top of tax.
“The 26 per cent rise in beer duty in the past two years will now have an even higher VAT rate charged on top of it. The Treasury needs to think again when it comes to plans for further beer tax hikes in March.
“The Government has recognised that tax increases harm pubs, and wants policies that don’t damage the sector. Now is the time to translate this wish into action, with policies that keep pubs open, and create jobs and wealth in the UK economy.”