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How will the VAT increase impact upon household incomes?

The 1 January 2010 will see the VAT rate in the UK return to its previous figure of 17.5% after a period during which it was reduced to 15%. While 2.5% may not seem an awful lot when you buy one item, if you replicate this additional cost across the whole of the UK economy, both for products and services, the impact will be marked. Not only will we see an increase in the cost of goods and products across the UK but we will also see an increase in the cost of providing these goods and services as well.

It is believed that consumer spending will fall by 0.7% in the first part of 2010, purely and simply because of the increase in the rate of VAT, and will also fall by a further 0.2% in the latter part of 2010. While the UK economy has been showing some signs of improvement there is no doubt that stagnation will occur, at best, and in some cases we could see the UK economy come under further downward pressure because of reduced income for consumers to spend. This is likely to occur during the general election campaign and while the government has yet to even consider retaining the 15% VAT rate in the short term, there will be growing pressure to do so.

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