Chancellor George Osborne claimed that the government’s increasing of VAT 17.5 to 20% is the “least damaging” taxation rise in their attempt to address the deficit. According to Osborne, the government found it fairer than an increase to income related taxes such as national insurance and income tax.
VAT is widely thought of as a regressive tax because of its untargeted nature – it disproportionally hits everyone, with the poorest left worse off. However, the Chancellor denied that VAT is going to hit the poor hardest and that it is a regressive tax. “Absolutely!” was his answer to the question of whether he thinks the VAT tax is more progressive.
Notably, in their pre-election campaign the Conservatives had been quick to deny any intentions to raise VAT. Whilst in their own pre-election campaign, the Liberal Democrats pledged not to increase VAT and where vehement in their criticism of any plans to do so. Nevertheless, VAT increase has been approved in the Coalition’s first budget and has been implemented two days ago.
Alan Johnson, the shadow chancellor, criticised the decision, labelling it a “broken election promise”. He also reiterated the findings of The Chartered Institute for Personnel and Development.
The institute estimated 250,000 job losses as a result of the VAT increase as opposed to 75,000 Job losses had the increase been in national insurance. “If national insurance were a tax on jobs, then VAT is 3 times as much so,” argued Johnson.
The minimum petrol cost will increase to become £1.2/Liter, and for the first time, the average price of a pint of beer will hit £3.
Almost 9, 000 jobs will be lost in the beer and pub industry, according to the British Beer and Pub Association.
Consumers will feel the worst of the increases after the seasonal sales and promotions come to an end, according to the British Retail Consortium.
Small businesses are expected to suffer the most from the VAT increase. 70% of small businesses expects the VAT increase to have a damaging effect on their businesses. 50% are planning to pass the increase on to customers, According to the Federation of Small Businesses.