The word is that it’s not just raising VAT to 20% that is being considered, but even the introduction of a 5% rate on food that is currently VAT exempt.
While its timing is going to be nightmarish for retailers, everyone in the sector accepts that VAT is going back up to 17.5% on January 1. What’s really worrying retailers is what happens afterwards.
Whoever wins next year’s general election will inherit a poisoned chalice. The public finances are in disarray and the first act of any new government will have to be to find the money to put things right.
There is a growing fear that VAT will be one of the mechanisms used to balance the books. And the word is that it’s not just raising VAT to 20% that is being considered, but even the introduction of a 5% rate on food that is currently VAT exempt.
If you were David Cameron, you could see the attraction. VAT is less politically sensitive than income tax and, by doing it straight away, it’s Gordon Brown - and even retailers - who get the blame. He should think twice, though: if the Tories want to stop the economic recovery in its tracks, putting up VAT is the surest way to do it.
It’s not just that retail is the engine room of the UK economy, and that the current recovery in the sector is fragile. It’s also that how much people spend on their weekly groceries has a real impact on how they feel about their prosperity. If their food bill goes up 5%, that’s billions of pounds going from consumers’ pockets to the Treasury that would otherwise have gone into the real economy. VAT on food would also hit the poor disproportionately - no one has to buy a new handbag, but everyone has to eat.
Tough decisions lie ahead of the new government. But VAT on food, combined with an increase on non-food, would deliver a hammer blow to the retail sector, economic recovery and the poorest in society. If he wins Cameron should look elsewhere for the money he needs.
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