VAT rise will hurt growth, says the OBR

GEORGE Osborne’s decision to hike VAT will shave 0.3 per cent off GDP in 2011-12, the official independent forecaster said yesterday.

The chancellor will increase the sales tax from 17.5 per cent to 20 per cent in the New Year, as he seeks to pay down the largest deficit in Britain’s peacetime history.

Yesterday, the Office of Budget Responsibility (OBR) revealed the amount of damage it expected the tax hike to do to economic growth.

“The interim OBR’s June 2010 Budget forecast assumed that the increase in the standard rate of VAT from 17.5 per cent to 20 per cent would reduce the level of real GDP in 2011-12 by around 0.3 per cent,” it said in a statement.

Shadow chancellor Alan Johnson seized on the figures, claiming the hike would ultimately result in fewer jobs.

He said: “David Cameron promised he wouldn't raise VAT because it hits the poorest hardest. He broke that promise.

“Now the independent OBR has told us the impact of Cameron’s very own jobs tax – slower growth and fewer jobs.”

The OBR only publishes the assumptions behind its forecasts in response to a formal request. Yesterday, it refused to say who had asked for the information, although sources close to the Treasury insist it was the Labour party.

Meanwhile, economists at the Adam Smith Institute called on the government to consider more spending cuts instead of the VAT rise, which they said would do less damage to the economy.

“The coalition should urgently consider making further spending cuts instead of raising VAT, which is going to hit every household in the country,” said Tom Clougherty, executive director of the Adam Smith Institute.

The rise will come into force on 4 January 2011.