A rise in VAT to 20% would lead to 163,000 job losses and reduce consumer spending by £3.6bn, according to the British Retail Consortium (BRC).
The BRC has warned that an increase in VAT from its current 17.5% could lead to a lower demand for goods and services as prices increase which will result in lower margins for companies, leading to cutting costs and jobs.
The BRC said in its first year a VAT rise of 20% would reduce the deficit by £11.3bn but by the end of that first year there will be 30,000 fewer jobs in the UK, across all employment sectors and consumer spending would be £1.6bn less than it would have been.
They have estimated it would increase to 163,000 fewer jobs and a £3.6bn reduction in consumer spend after four years.
British Retail Consortium director general Stephen Robertson said: “For the first time we have clear, independent evidence showing VAT and NI increases will have a deep and long-lasting impact on jobs and growth.
“The budget deficit is serious. It has to be tackled but proposals must be judged against the implications for jobs and growth revealed by this new information,” he added.