The tax hike will cost families £400 a year and risk up to 250,000 jobs, Labour leader Ed Miliband claimed while on the by-election campaign trail in Oldham yesterday.
Osborne accused the Labour leader of “opportunism” and insisted the rise will save £13bn in government spending cuts.
“When Labour was in government they accepted this, which is why Alistair Darling says he wanted to put up VAT,” Osborne said.
Yet some Conservative backbenchers are unhappy that the government is raising taxes instead of imposing strong public spending cuts.
“As total public spending goes up, the heavy lift takes place through more tax revenue,” commented MP John Redwood on his blog. “That’s why 2011 starts with a hike in VAT and petrol duty, not with spending cuts.”
“It’s pretty appalling,” added Douglas Carswell, MP for Clacton. “Politicians tell us we can’t afford not to put up VAT, and that the cuts are frightfully deep – yet government borrowing in November was almost a third higher than last year.”
“VAT rises fall disproportionately on people on low incomes, the very opposite of the progressive impact that this coalition is supposed to be in favour of,” Carswell said.
Meanwhile, business groups are concerned about the effects on consumer spending. The tax rise could reduce retail sales by £2.2bn in the first quarter of the year according to a report by the Centre for Retail Research and Kelkoo.
Over the next decade British growth could be 1.5 per cent less as a result of the rise, said former City economist Professor David B Smith. According to economic forecasts, the tax could actually worsen the deficit in the long run, he said.
And there could be more misery for Londoners after the RMT’s Bob Crow said that the rise will “raise the bar” for the union’s wage demands.
“We have already rejected a pay offer on network rail operations and will be taking a tough negotiating stance in the year ahead,” said Crow.