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Budget: VAT to rise to 20 per cent

By Channel 4 News

Updated on 22 June 2010

Despite pre-election pledges not to put up VAT, the Chancellor George Osborne is accused of hitting the poorest hardest with a VAT rise, but Business secretary Vince Cable tells Channel 4 News that the worst-off have been safeguarded.

Pounds (Getty)

In January next year the VAT sales tax will rise from 17.5 per cent to 20 per cent - despite Conservative claims before the general election that they had no plans to raise it.

Coalition partners, the Liberal Democrats actively campaigned against changing the rate by launching a poster campaign dubbed the "Tory tax bombshell" (pictured below).

Vince Cable told Channel 4 News: "Following that advertisement, and it may not have been the best designed advertisement campaign that's ever been considered, I was repeatedly asked...what our views were on VAT and I said many times that this is not something that can be ruled out - no sensible person would rule it out, given the seriousness of the financial situation."

But today flanked on the government benches by his Lib Dem partners Tory Chancellor George Osborne said the tax hike, which is expected to generate £13bn in extra revenue by 2015, was inescapable.

"On 4th January next year, the main rate of VAT will rise from 17.5 to 20 per cent," Mr Osborne told the Commons. "The years of debt and spending make this unavoidable."

The chancellor went on to say that essential items, such as food and children's clothing, as well as other zero-rated items like newspapers and printed books will be exempt from VAT.

A Liberal Democrat election poster warns of hidden Tory tax hikes.

The reduced VAT rate of 5 per cent, for items including domestic fuel and power, will stay the same this year.

The 17.5 per cent rate of VAT has been in place since 1991, except for the temporary reduction to 15 per cent introduced by Alistair Darling as the last Labour government sought to tackle the recession.

Mr Cable told Channel 4 News: "Things have changed in the last few weeks. The international situation has deteriorated very badly indeed - that's why we had to move very quickly on it."

Labour leadership contender Ed Balls said the VAT increase was "deeply unfair" while critics hit back at the government's plans saying that the "poorest people would be hit the hardest". 

Meanwhile Liam Byrne, shadow chief secretary to the Treasury, told Channel 4 News that the Labour party would not have needed to bring in a VAT rise.

He said: "We had a plan to bring in £19bn of tax in through increasing National Insurance, and so we didn't have a need to introduce VAT.

"But this tax is now going to be paid by everybody in the country, including pensioners who of course don't benefit from the increase in the income tax threshold."

Mr Cable insisted that the two poorest social groups - pensioners and children - had "been safeguarded". He said pensioners are being protected "in a way they never have been before", with the restoration of the link between pensions and earnings.

Liberal Democrats under VAT fire
In an article for Channel 4 News UNISON general secretary, Dave Prentis, said the VAT rise, along with the changes in the public sector would mean a "cut in living standards for millions of ordinary workers and their families."

Despite the temporary decrease VAT during the last Labour government the sales tax has slowly risen over the last two decades. In the early 1980s the Tories put up VAT from 8 per cent to 15 per cent and it rose again to 17.5 per cent in the 1990s. 

A Liberal Democrat MP today threatened to vote against the budget in protest of the VAT rise.

In a stark warning of potentially damaging splits in the Tory/Lib Dem coalition, Bob Russell said: "I can't see myself at the moment voting for the budget."

The Lib Dems warned during the general election campaign that the Conservatives planned a VAT "bombshell" that would hit the poorest hardest.

More from Channel 4 News
Gary Gibbon: June budget - now we know how bad the pain ahead will be
- Emergency budget 2010: public sector pay freeze
- Emergency budget 2010: Osborne's 'tough but fair' budget
- Emergency budget 2010: the challenge for George Osborne
- Emergency budget 2010: welfare benefits cut

But Mr Cable told Channel 4 News: "A year ago the reform pamphlet warned of a budget that was very similar to what we had today, Nick Clegg made similar announcements about cuts. We, before anybody, identified the scale of the cuts and the specifics of things that had to be done - on tax credits for example."

Lib Dem deputy leader Simon Hughes hit back at the criticism towards the change in policy in the party saying: "I say to our colleagues around the country, to our supporters and to our members: of course we can't get everything we wanted - of course you can't - but we have protected the vulnerable and the Liberal influence on the Government will remain as strong as ever and today's Budget shows that."

The general secretary of the PCS union told Channel 4 News that budget was a "scandal" and warned that the cuts would provoke anger from workers.

"I think we will see a resistance built up to this budget," Mark Serwotka told Channel 4 News.

"When we see VAT going up, jobs losses…I think there is going to be an explosion of anger.

"I think this is a Tory budget - the Liberals have sold their souls for ministerial jobs. If you look at what is announced today with Danny Alexander and Nick Clegg sitting beside the Chancellor nodding - it is against all the things the Lib Dems voted against. Millions of people voted for the Lib Dems for exactly the opposite reasons.

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