Under-fire George Osborne defends 'necessary' VAT rise

Tuesday 04 January 2011 17:48

Chancellor George Osborne has been accused of treating people "like fools" by claiming today's VAT hike will hit the rich hardest.

Labour levelled the charge after Mr Osborne said the increase from 17.5% to 20% was "tough but necessary" and more progressive than alternatives.

He also signalled that there were no plans to reverse the rise - with income tax likely to be targeted for any possible reductions in future.

The VAT change, announced in last year's Budget, is designed to raise £13 billion a year to help tackle the deficit.

But there are also fears it will depress consumer spending as fuel and other costs rise, as well as driving up inflation further. Critics say the poor will suffer more because a larger proportion of their income goes on essentials.

Mr Osborne rejected the concerns, telling BBC Radio 4's Today programme: "I think it is a reasonable rate to set, given the very difficult situation we find ourselves in. The VAT rise is a tough but necessary step towards Britain's economic recovery.

"If you don't want to raise VAT, you have got to do something else."

He added: "I said before Christmas that the VAT rate I regarded as permanent, because it is a structural tax change."

The Chancellor added: "Income tax and National Insurance (increases) would have a more damaging impact on poorer people in our society."

But Labour leader Ed Miliband used a round of interviews to dismiss the coalition's argument, insisting Labour's plans for increases in national insurance contributions were fairer.

"George Osborne should stop treating the British people like fools," he said.

"He claimed that this VAT rise was fair - but David Cameron admitted before the election that VAT rises were unfair.

"Everybody knows it's poor and middle-income families that will be hit hardest."

Mr Miliband said Mr Osborne should apologise for "misleading Britain".

"The truth about this VAT rise is it's the wrong tax at the wrong time," he added.

Today's rise is the second for VAT in a year. Labour chancellor Alistair Darling restored the 17.5% rate last January, having temporarily reduced it to 15% for 13 months to stimulate the economy during the recession.

TUC general secretary Brendan Barber said ordinary people were paying the price for the mistakes of banks, who would not be hit by the levy.

"VAT bears down on those who did least to cause the crash, while the Chancellor is asking for little more than a token contribution from the banks," he added.

And Bob Crow, general secretary of the RMT transport union, said higher VAT would "raise the bar in pay negotiations this year as we fight to defend our members' standards of living".

Federation of Small Businesses chairman John Walker called for moves to protect small business against the effects.

"If the Government truly believes that the private sector is going to strengthen the recovery, we need to see action," he said.

"Increasing the threshold at which companies have to register for VAT will put almost £900 million back in the pockets of small businesses. Without this, small firms will struggle to bounce back as the spending cuts start to bite."

However, Mr Osborne insisted the coalition would not back down in the face of protests. Pressed on whether he would commit to lowering VAT before income tax, the chancellor said he considered the VAT level permanent - a label he has not attached to the 50p rate for top earners.

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