UK VAT Hike Still Squeezing The Pocket

by Robert Lee, Tax-News.com, London

04 January 2012

The UK's value added tax rise (VAT) added 1% to the level of prices in 2011, the accountancy firm PwC has calculated.

The hike, which took VAT from 17.5% to 20% on January 1, 2011, compounded the tough squeeze on consumers from rising energy and food prices, PwC's chief economist John Hawksworth has said.

However, Hawksworth added that the impact is merely temporary, and should not adversely impact growth or inflation in 2012 or beyond, assuming no further rise. He explained that there will also have been positive economic effects from the VAT rise. These include a smaller budget deficit and a consequent reduction in long-term interest rates, although Hawksworth admitted that these are harder to quantify.

Turning to the wider European context, PwC partner Stephen Coleclough noted: "It's interesting to note that other EU countries are now hiking up their VAT rate - it's increased in Italy and France, and in Hungary it's now up to 27%. These moves are inflationary and aimed at increasing revenues; they must also balance with the growth needs of the country." Ireland also recently introduced a 2% hike in its standard rate of VAT, taking the tax to 23%, as part of its bailout commitments.

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