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."
what do you think?
This isn't a recession its a robbery! The theft of public money into private pockets.
I agree and it all started in 1997,by politicians who put party politics before common sense and the country,we need a new political system,one that's not run by the middle class professional politicians who dont even know what hardship is.
8 years left of austerity? We wont be free till the 2020's. . . Dont believe the politicians
No austerity for Gideon, Dave and their Eton chums, or the featherbedded gobsmiths in Parliament who are wrecking our country.
Boy this is depressing news today.mind you i suppose the weathers having an effect on me today.
This is just alarmist rubbish. One of the main reasons our economic outlook has deteriorated is BECAUSE of the increase in VAT to 20%. This one act caused a severe cut in demand and the consequent drop in sales - ask any retailer. Hence the drop in tax receipts that was big news last week. So to say that VAT will have to increase to 25% is sheer stupidity. It is far more likely that Osborne will have no option but to go for growth - and the only way to do that now is reduce taxes. Totally removing VAT from building materials, whether for new-build or renovation, would be an excellent start.
VAT can be reclaimed on new buildings, but not on renovations, which seems so unfair, so I agree, no VAT on building materials or plant hire.
In US they have come to realise that the key to economic recovery is cheap energy. Cheaper fuel reduces distribution costs. Lower heating bills puts more general spending power into the economy. However unless the immediate benefit is to be felt in Guandong, Americans have begun to realise they should direct their spending power on home produced goods.
They have the majority of people in the UK bent over a barrell and also know very little can be done about it !
Eight years ? we`ll be used to it by then.
The Bankers laughing all the way to the bank and we just sit hear and moan.
Is it possible we could see some figures please? For example, what was the national debt when the tories took over and what is it now? I would think that what with the billions borrowed each month, there has hardly been a dent made in the original debt. Truthful figures please, or is that too much to expect?
Good point Ray. Sadly, as I am a Tory, I have to say that the national debt has grown since the election. I realise that Labour turned a budget surplus into massive deficit, ut Osborne's policies are not helping.
Don't feel too bad, David. The Heir to Blair is not a Tory.
Seems I read the words of common sense. I fear we are on a path of diminishing returns administered by politicians who think in terms of increases rather than decreases and as we are going by the time the message gets home there will be such inflation as to undermine any policy.
Do this and you may as well shut up shop.
How depressing! A 25% VAT rate would kill growth completely and cause a massive fall in retail sales. Osborne should realise that you can slash government expenditure or you can raise taxes, but you can't do both without killing the economy. As far as VAT goes, he should learn that less tax often means more revenue. If VAT goes up, the black economy will boom, and you can be sure that those who evade VAT also evade income tax and national insurance as well. People will do their shopping across the Channel if they are close to a southern port - has he thought of that?
why not just stop paying the working man .tax tax tax ..make us all work ..take evrything of us give it to the scroungers and immagrants coming into this country..and when we retire just shot the f****ing lot of us and save more money.
This country is going to be to expensive to live there for there will be no point working it will turn 3rd world in the next 20years
Brian E Gorton
Look back oyer the years and find out who where the best boom and bust merchants.But dont blame the politicions with this one its the Bl---y bankers and multi - nationals!
Eight years time ? it will be 35% before then.
Maybe if our dear leaders realised that we no longer have an empire and spent the tax revenues on improving the lives of our nations citizens instead of blowing billions on nuclear weapons, aggressive wars against countries that never threatened us, Canute like schemes to control the world's climate etc, etc, etc.
How the rulers of the great British empire would turn in there grave at the joke our country is now