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18 November 2010

Osborne must think again on VAT

OBR warns that next year's VAT rise will reduce growth by 0.3 per cent.

By George Eaton

There’s just seven weeks to go until the VAT rise kicks in, so it’s probably a bit late for George Osborne to change direction now. But the OBR’s announcement that raising the tax from 17.5 per cent to 20 per cent will reduce GDP by 0.3 per cent should give him pause for thought. As David Blanchflower notes in his column this week, the Nationwide Consumer Confidence Index fell again in October. The expectations index is at its lowest level for 18 months.

With consumer confidence in decline, there are few worse responses than raising VAT. A recent report for the Centre for Retail Research found that increasing the tax to 20 per cent will cost each household £425 a year on average. It added that the resultant drop in consumer spending could cost 47,000 jobs and lead to the closure of almost 10,000 shops.

Osborne would reply, as he usually does, that the country’s £149bn deficit means he has no choice but to raise VAT. Failure to take swift and decisive action would depress spending as consumers live in fear of future tax rises.

But a rise in this most regressive of taxes will not only reduce GDP, it will also add to inflationary pressures, making it far harder for the Bank of England to justify another much-needed round of quantitative easing. If Osborne is to avoid an anaemic recovery, or worse, a double-dip recession, he must think again on VAT.

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