While books, newspapers and other zero-rated goods escaped the widening of the VAT net, electricity, gas, coal and heating oil are to be taxed at 8 per cent from April 1994 and 17.5 per cent a year later.
David Blunkett, Labour's health spokesman, said: 'I am sure this change will mean an increase in hypothermia as many elderly people will go without heating because of the threat of increased bills. It is a disaster for all low-income families, but particularly for the frail and elderly.'
Mr Lamont, portraying the tax as a green measure, said it would encourage more efficient use of fuel and so reduce environmentally damaging carbon dioxide emissions. 'For the first time the rate of VAT on domestic fuel and power will be the same as that charged on goods like loft insulation material, which improve energy efficiency.' Britain was unique in the EC in not taxing domestic fuel.
He said social security benefits would rise automatically to reflect higher prices. The increases would also be taken into account when income-related social security benefits were up-rated next year. 'I recognise that this will cause particular problems for those on low incomes.'
The VAT change is overwhelmingly the biggest revenue earner in his Budget. The Treasury expects the measure to raise pounds 950m in 1994-95, pounds 2.3bn in 1995-96 and pounds 2.85bn in the following year.
Help the Aged was alarmed about the impact on millions of pensioners, many of whom spend a high proportion of small incomes on keeping warm. It demanded a promise from the Peter Lilley, Secretary of State for Social Security, to increase pensions as well as income-support to compensate for the new tax.
The Child Poverty Action Group pointed out that the lowest-earning fifth of households spent more than twice the proportion of their income on fuel compared with the average household and many lived in hard-to-heat, energy-inefficient housing. Fran Bennett, the director, said the Chancellor's assurances about compensation for the low-paid through increased social security benefits were 'vague and worthless to the low-paid and those who don't take up their benefits'.
The two-step VAT introduction will raise the annual gas bill of a typical three-bedroom semi-detached house in the south of England from the current average of pounds 430 to pounds 464 next year and pounds 505 in 1995. British Gas said bills in the colder north would be even higher.
Gas prices were reduced by 5 per cent in real terms last year, it said. Even after the imposition of VAT, they would still be lower in real terms than when British Gas was privatised in 1986 and would be the cheapest in Europe.
Ian Powe, director of the Gas Consumers' Council, said the increase would cost the average gas user pounds 1 a week: 'This is a punitive tax on the warmth and comfort of low income families, which must to some extent be returned through subsidised energy efficiency improvements to their houses.' He conceded that most other European countries already taxed domestic heat and power, but many had a low rate of about 5 per cent. 'We did expect this, but not so quickly and not so much.'
Precise electricity charges depend on the region. In London, assuming no changes in the pre- VAT price, the average household's annual power bill would rise from pounds 289 to pounds 312 next year and pounds 340 in 1995.
London Electricity said: 'The decision comes at a time when we had hoped to reduce prices. It's an additional burden on our customers at a time when many are already suffering hardship due to the recession. We are hoping that our energy prices from 1 April will go some way to offset the Chancellor's decision.'
While gas and electricity customers expressed disappointment, producers of other zero-rated goods and services such as food, newspapers, books and children's clothing were relieved that VAT had not been extended to them.