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VAT increase may be on the agenda

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The plans laid out by the new coalition government could mean a rise in taxes, with VAT a favourite target, experts have warned.

According to Credit Suisse, the coalition deal could well add a further £10 billion to spending levels, which means that significant tax rises may become a necessity in the forthcoming emergency Budget.

Some estimates put the additional level of taxation required to tackle the budget deficit at £50 billion.

A possible favoured option would be a graduated hike in VAT to 20 per cent.

On its side, a rise in VAT has immediacy in producing a regular revenue. The downside for the government is that any increase could dampen consumer spending or fuel inflation.

Leading think-tank, the Institute for Fiscal Studies (IFS) has already suggested that VAT may the most viable choice of tax increase.

A rise in VAT to 20 per cent would generate an extra £11.5 billion of government income but would add an average of £425 to each household bill, a new report by Kelkoo, the shopping comparison website, has calculated.

In real terms the hike would push up the price of everyday goods by 2.1 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.”