As VAT rises to 20%, chancellor rejects criticism that the tax is regressive, and claims rise is a 'tough but necessary step towards Britain's economic recovery'
George Osborne claimed today that increasing VAT was the "least damaging" way to tackle the national deficit in the face of criticism that the rise will squeeze families, hitting the poor the hardest.
Shoppers flooded high streets yesterday, snapping up items such as furniture, electrical goods and kitchens in an attempt to beat the VAT rise, from 17.5% to 20%, which took effect at midnight.
Although it is widely considered to be a regressive tax, one that takes a higher proportion of the income of people on lower incomes than those on higher incomes, the chancellor argued that increasing VAT was fairer than raising taxes taken directly from income, which he said would cost jobs and ultimately hit poorer people harder.
"Higher income tax or higher national insurance ... these two things I think would have a greater impact on work incentives, on competitiveness of the British economy. I think they would cost jobs," he told BBC Radio 4's Today programme. Asked if he was arguing that VAT was "more progressive", Osborne said "absolutely".
The shadow chancellor, Alan Johnson, told the Today programme earlier that putting VAT up was a "broken promise" and that Labour still favoured higher national insurance as an alternative to a 20% VAT rate.
"That was our argument at the general election and that's still our argument now," he said. "The Chartered Institute for Personnel and Development say the VAT increase is going to cost 250,000 jobs whereas the national insurance increase would cost 75,000 jobs. If national insurance was a tax on jobs, VAT is three times the tax on jobs."
The Labour leader, Ed Miliband, on the campaign trail in Oldham East and Saddleworth yesterday prior to next week's byelection, criticised the increase as the true start of the coalition's "squeeze" on families, while business leaders have warned of the potential damage to a fragile economy and charities have said it will hit the poorest disproportionately.
But Osborne said the evidence pointed to an increase in VAT as "the least damaging tax rise" and increasing income tax or national insurance "would have a more damaging impact on poorer people". He said the Institute for Fiscal Studies has said VAT is a progressive tax and described the increase as "a tough but necessary step towards Britain's economic recovery".
"Most economies and certainly the best international evidence ... is that countries with big deficits should increase their indirect taxes," he said. The chancellor said there was no plan to increase VAT further but refused to rule out further increases and said that today's rise was "permanent".
"It's a structural tax change to deal with a structural deficit and a structural increase in expenditure that happened," he said.
Under the new VAT rate petrol costs will hit a minimum of �1.20 a litre while the average cost of a pint of beer will puncture the �3 mark for the first time. There were reports last night of queues at some petrol stations as drivers attempted to beat the price rise.
The British Beer and Pub Association (BBPA) said the VAT rise would result in 8,800 industry job losses and even more pub closures as people opt to drink cheap supermarket alcohol instead of going to the pub.
The British Retail Consortium said that seasonal sales and promotions to absorb the extra VAT costs would mean that the worst of the increases would not be felt for some time ? but also admitted that some retailers had used the increase to boost sales in the short term by encouraging customers to buy early.
More than two-thirds of small firms are expecting the rise to damage their businesses, with more than half planning to pass the increase on to customers, according to a survey by the Federation of Small Businesses (FSB). It said that bigger firms will be better able to absorb the 20% VAT rate while smaller businesses may have to cut back on recruitment to cope.
The FSB called on the chancellor to review VAT when the deficit has been cut and return it to its usual level of 17.5% as soon as possible.
The Centre for Retail Research has said that UK retail sales would plummet by �2.2bn or 3.1% during the first three months of the year as a result of the rise.
Many retailers are expected to delay the new duty as they assess how rivals are setting their prices and old stock is sold off. A spokesman for the BRC said: "We're not expecting the prices of retail to shoot up overnight. For quite a period the effect of the VAT rise will be lost amid the discounts and sales.
"The VAT rise is certainly being used as part of the promotion activity that retailers are involved in. Some are saying they will bear the cost of the rise for people. They are effectively holding prices at the pre-VAT rise level as a promotion.
"Over the next few months there is no question it will put up prices and retailers have been pointing that out as part of their efforts to make people buy."
Analysis by Deloitte carried out for the Times showed that a family with a combined total income of �70,000 would have to pay an extra �10.80 per week in VAT, or about �561 for the year.
But a group of charities ? including Barnardo's, Save the Children and Oxfam, warned last night that the tax rise would hit the poorest disproportionately, with some families now having to pay more than �1,600 in VAT each year. It called on the government to spread the pain more fairly by also increasing its levy on banks, which are generally exempt from VAT.
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