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VAT rise may hit growth

Next year's increase in VAT may have an adverse affect on the recovery.

The warning has come from the Office for Budgetary Responsibility (OBR), the independent body set up by the government to oversee growth and spending forecasts.

The Chancellor, George Osborne announced in the June Budget that the standard rate of VAT will rise from 17.5 per cent to 20 per cent as from 4 January 2011.

As a result, the government is hoping to generate an additional £13 billion annually in revenue.

But the OBR's analysis of the VAT hike has suggested that it could shave as much as 0.3 per cent off GDP next year, the equivalent to £5 billion.

In response to a Parliamentary question, the OBR said: "The interim OBR's June 2010 Budget forecast assumed that the increase in the standard rate of VAT from 17.5 per cent to 20 per cent would reduce the level of real GDP in 2011/12 by around 0.3 per cent."

Were the dent in consumer confidence caused by the rise in prices actually to be that significant, it would endanger the OBR's prediction of 2.3 per cent growth in GDP next year.