The governments cut in public spending coupled with a hike in VAT will play havoc with the retail trade this year, fear high street retailers.
According to a poll conducted by British Retail Consortium (BRC), 80 percent of retailers think that higher VAT will hamper sales while 67 percent are convinced that the year 2011 will be tougher than 2010.
Richard Dodd of BRC said: “The combination of the (VAT) rise, coupled with public sector cuts are leaving them gloomier than they were a year ago”.
The VAT hike from 17.5 percent to 20 percent from today will help the government mobilize an additional £13 billion in revenues. Unlike previous economy stimulating short term measures, the hike this time will be a permanent one.
Though the retailers are unlikely to hike prices immediately as part of January sales and other promotional campaigns, Mr. Dodd said that the effect will be visible in the coming months.
However, the Chancellor of the Exchequer – Mr. George Osborne defended the hike saying it’s a “tough but necessary step” to ensure the country’s economic recovery. Terming the VAT hike as the only feasible alternative, he said other measures like increasing National Insurance or Income Tax would have bigger effect on low income families.
“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 said in an interview to BBC radio.
The Shadow Chancellor Mr. Alan Johnson accused the government of breaking an electoral promise and said Labour would have preferred NI hike rather than VAT.
Kicking off the party’s Oldham by-election campaign, Labour leader Ed Miliband termed the hike as “wrong tax at the wrong time”. Arguing that it will hit consumers already struggling with higher fuel prices, Mr. Miliband said: “The VAT rise is the most visible example of what we mean when we say the government is going too far and too fast because it’s clear that it will slow growth and hit jobs. When family budgets are already squeezed now is not the time for a VAT rise to make it even harder to make ends meet”.
Reacting to Mr. Miliband’s charges, George Osborne said: “Labour left Britain with record debts that people know we have to deal with to avoid an economic crisis…VAT is a powerful weapon to tackle debt and if we don’t use it then the spending cuts would be over £13bn bigger”.
Stating that the government has struck the right balance, he asked “The question Ed Miliband faces is this: if you’re not raising VAT, where are the extra £13bn of spending cuts coming from? The NHS? Schools?”