The imposition of VAT on newspapers would raise pounds 1.1bn for the Exchequer. The Treasury believes much of the impact on inflation of such a move - it is estimated it would add about 0.3 per cent to the retail price index if passed on in its entirety - would be cushioned by many newspapers absorbing the impact on their cover prices. The outbreak of a price war among the tabloids, started by the Sun's 5p cut to 20p last week, has already made the imposition of VAT easier.
On Friday, Mr Clarke said: 'I have always thought it anomalous to have such a narrow VAT base in this country and have frequently said so.'
Most newspaper executives are becoming resigned to the imposition of VAT and are working out how to deal with it. Publishing groups with strong links to the Conservative Party secretly admit that the attacks on John Major in the last year have weakened their bargaining power with the Government.
Publishing shares tumbled on the stock market last week after the stockbrokers Charterhouse Tilney put out a circular warning of the impact of VAT. It said the companies that would be hardest hit would be Emap, the newspaper and magazine group, and United Newspapers, which is in the middle of a pounds 190m rights issue.
Other firms that would suffer heavily from VAT being imposed include Mirror Group Newspapers, Pearson - which publishes the Financial Times - and the Anglo-Dutch publishing giant Reed Elsevier.
The damage would compound the publishing sector's problems with low advertising revenue and a fall-off in consumer spending because of the recession.
The tabloid newspaper market has been hit by the price cut launched by the Sun, which has gained the newspaper an extra 200,000 copies a day at a cost of about pounds 800,000 a week. The Sun is threatening to keep up the price cut for eight weeks, though indications are that the newspaper worst hit by the price war is its stablemate, Today.
MGN, which publishes the Sunday Mirror and the People, is bracing itself for a cut in the price of the News of the World today. News International has said it has no plans to cut the NoW cover price from its current 50p, although it could change its mind shortly before publication to steal a march on its rivals.
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