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VAT hike could 'harm' the economy

An increase in VAT to 20 per cent could lead to job losses and could have an adverse impact on the economy, a leading business group has claimed.

The British Retail Consortium (BRC) has published the findings of an independent analysis aimed at quantifying the effects that a rise in VAT would create.

The report suggested that a standard rate of VAT at 20 per cent would cost 163,000 jobs over four years and would dampen consumer spending by £3.6 billion during the same period.

The extra tax would lower high street demand, squeeze retailers' profits, push up prices and see jobs cut as businesses look to reduce costs.

The BRC said that there is no silver bullet that will allow the government to raise large amounts of revenue without having a substantial effect on the economy. Employment, consumption and GDP would all be hit significantly by tax rises.

The BRC wants the government to prioritise public spending cuts over tax increases as a way of tackling the deficit.

According to the report, in its first year, a VAT rate of 20 per cent would reduce the deficit by £11.3 billion, but by the end of that first year there would be 30,000 fewer jobs in the UK - across all employment sectors - than if there had been no increase. After four years that figure would be 163,000 fewer jobs.

A year on from raising VAT to 20 per cent, consumer spending would be £1.6 billion less than it would have been and after four years, £3.6 billion less.

The analysis, which was conducted for the BRC by the Centre for Economics and Business Research, also looked at the impact of a range of other possible VAT increases. A 19 per cent VAT rate would cost 99,000 jobs over four years while a 22.5 per cent rate would mean 317,000 fewer jobs over the same period.

Stephen Robertson, the BRC's director general, commented: "For the first time we have clear, independent evidence showing VAT and NI increases will have a deep and long-lasting impact on jobs and growth.

"The budget deficit is serious. It has to be tackled but proposals must be judged against the implications for jobs and growth revealed by this new information.

"Business growth will get the country out of the hole it's in. The government must now deliver a route to stability that supports companies and customers by avoiding damaging tax rises."

A government spokesman insisted that the government has no plans to raise the rate of VAT in the Budget.