VAT will be raised to 20 per cent on January 4 next year, its highest ever rate.
The move, widely anticipated by retailers, will boost Treasury coffers by £13 billion each year, the Chancellor said. Supermarkets expressed relief that VAT was not extended to food and other zero-rated or exempt items.
Mr Osborne said the rise in VAT, which will boost Treasury coffers by £13 billion annually, was forced upon it by the previous Government’s reckless spending.
“The years of debt and spending make this unavoidable”, he said. “This extra single tax measure will, by the end of Parliament, generate over £13 billion a year of extra revenue. That’s £13 billion of revenue we don’t have to find in extra spnding cuts or income tax rises.”
The increase brings Britain into line with the European average. At 17.5 per cent, only Spain, Cyprus and Luxembourg had lower VAT.
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Retailers said the rise would put jobs at risk. Stephen Robertson, director general of the British Retail Consortium, said: “We didn’t want a VAT increase. It’ll hit jobs, consumer spending, the pace of recovery and add to inflation but we accept the Government has no easy options.
“It’s some consolation that the range of VAT-able products isn’t being extended.”
Mr Robertson said that the increase clashed with retailers’ busiest time of year as they geared up for the January sales, just as this January’s increase from 15 per cent to 17.5 per cent did.
Experts said the rise would would also mean that Britain had a higher sales tax than both France and Germany.
Gary Harley, head of indirect tax at KPMG, the accountancy, said: “Retailers will be relieved that the increase will not come in until 4th January next year, meaning that Christmas and New Year sales will be protected from it. But 2011 could be a hard year on the high street as prices go up to accommodate the new rate.
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“The UK’s tax competitiveness may have improved on the direct tax front as a result of the lowered corporate tax rate but on VAT we have dropped from the 3rd lowest rate in Europe to joint 12th highest with a rate above key European competitors: France, the Netherlands and Germany.”
Retailers had been divided over a rise in VAT. Tesco said recently that an increase would risk a “fragile” recovery, while Simon Wolfson, the chief executive of Next and an architect of the business backlash against Labour’s National Insurance rise, had said 20 per cent VAT would be “manageable”.
Mike O’Connor, chief executive of Consumer Focus, the state-funded watchdog, said: “The VAT rise will hit the poorest consumers hardest as people who earn least already spend proportionately more of their income on VAT and it will be even more important for consumers to shop around for the best bargains.”
The average price for a pint of beer or lager is expected to increase 10p a pint, up from £2.80 to £2.90 when the VAT hike to 20 per cent comes into force in the New Year.
Similarly a 19p rise on a pack of 20 cigarettes is anticipated.
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The Wine and Spirits Trade Association was also pleased by the freeze on alcohol duty especially as taxes had increased by 28 per cent on wine and 22 pr cent on spirits since 2008.
Jeremy Beadles, its chief executive, said: “Repeated tax hikes have produced less revenue for the Treasury and punished responsible drinkers, while failing to tackle the problem of binge-drinking.”