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Increasing VAT could ‘hit’ the recovery

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Pushing up the rate of VAT in order to tackle the budget deficit could have a detrimental impact on the economic recovery, a new study has claimed.

Alistair Darling has already ruled out a possible increase in VAT for the forthcoming Budget.

But speculation has persisted that future Budgets may see a hike in VAT from the current 17.5 per cent to bring it in line with the EU average of 20 per cent.

At the moment, UK VAT is the fourth lowest in Europe.

However, a study carried out by the Centre for Retail Research on behalf of Kelkoo, the price comparison website, argued that an increase would run the risk of dampening economic growth.

A rise to 20 per cent in VAT would generate an extra £11.4 billion annually for the Treasury. But it would also mean, the report claimed, an additional £425 a year in costs for the average household.

The knock-on effect would be to reduce consumer spending power by 1.25 per cent.

Were consumers to rein in spending after a VAT rise, it could shave as much as 0.5 per cent off GDP in a year.

Another adverse effect, the report continued, would be to fuel inflation by as much as 0.9 per cent.

Bruce Fair, managing director of Kelkoo UK, said: “While it is widely recognised that urgent action is required to plug the hole in the UK’s finances, it is imperative to avoid a sharp drop in consumer spending, as it could derail the country’s fragile recovery from the recession.

“An increase in VAT would increase government revenues significantly, but it could also have serious repercussions for consumers, retailers and the economy.”