VAT May Have To Rise To 25%, Warns IFS

Chancellor George Osborne may have to hike VAT to 25% as he continues his battle to restore Britain's economic health, analysts have suggested.

The Institute for Fiscal Studies (IFS) warned struggling Britons could face yet more spending cuts and tax rises because of weaker economic growth and lower tax revenues.

If these problems are permanent, the Chancellor will need to plug a £23bn black hole if he is to meet his financial targets by 2018, according to the respected think tank.

Achieving this from tax hikes alone would be "roughly equivalent to increasing the main rate of VAT from 20% to 25%", the IFS said.

Mr Osborne is due to reveal his latest economic plans next week when he unveils his Autumn Statement on December 5.

But the lack of scope for tax increases has been laid bare by a new spending power report by Lloyds TSB.

Its research found the squeeze on family budgets - as a result of stubborn inflation and weak wage growth - was just as strong in October as it was a year earlier.

It warned that rising energy bills this winter would only exacerbate the situation.

The IFS suggested Mr Osborne may also have to tear up one of his key austerity goals because Government borrowing is likely to rise this year.

The Chancellor has been battling to keep his financial targets on track as the economy continues to stay in the doldrums.

He has already extended the planned period of spending cuts by two years, well beyond the next election in 2015, and warned of further welfare cuts.

But poor growth since his Budget in March means more bad news is expected next week, including the embarrassment of higher borrowing this year than last.

"Since the budget, the outlook for the UK economy has deteriorated and Government receipts have disappointed by even more than this year's weak growth would normally suggest," said IFS Deputy Director Carl Emmerson.          

"The planned era of austerity could run for eight years - from 2010-11 to 2017-18."

The think-tank estimates Mr Osborne may need to find another £11bn in tax rises or welfare cuts for the post-election period.

This is on top of extending the same squeeze on public spending already planned and the extra welfare cuts that have already been discussed.

It predicted that borrowing would reach £133bn for the year ending March 2013 if current trends continue, £13bn above the Office for Budget Responsibility's spring forecast.

"This would mean that underlying borrowing rose between 2011-12 and 2012-13 rather than fell as the Chancellor George Osborne had intended," the IFS said.

Rising borrowing would be a major blow to the Tories, who promised to all-but eliminate a record budget deficit by the time of the 2015 election and to get Britain's public sector net debt falling as a percentage of national output by 2015/16.

The IFS said Mr Osborne might have to scrap the latter target.       

"The Chancellor would likely be best advised to abandon the rule and consult on replacing it with something that better ensures long-run sustainability rather than engage in significant further fiscal tightening in order to remain on course to comply with this target," it said.

The report came as the "quad" of Mr Osborne, David Cameron, Deputy Prime Minister Nick Clegg and Chief Secretary to the Treasury Danny Alexander were gathering in Downing Street to finalise next week's statement.

There are hopes the Chancellor will cancel the planned 3p hike in fuel duty due in January. Fresh taxes aimed at the wealthy are also expected.

A Treasury spokesman said: "Action taken by the Government has cut the deficit by a quarter, whilst over a million new jobs have been created in the private sector, inflation is down and the economy is healing.

"Britain still faces economic challenges at home and abroad but the Government is taking the tough decisions needed to deal with our debts and equip our economy for the global race."

But TUC General Secretary Brendan Barber insisted the IFS report was further proof that the coalition's strategy is "failing on all counts".

"The UK should be on the road to recovery by now. Instead we could be set for a prolonged period of debilitating austerity well beyond the next election," he said.

"The Chancellor should use his Autumn Statement next week to change course. Sadly he looks set to drive the economy even faster in the wrong direction."