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Is an increase in VAT viable?

As we approach the first coalition government budget on 22 June there is intense speculation that the government would increase the basic rate of VAT to 20% and possibly extend VAT to items which are currently exempt. However, the British Retail Consortium (BRC) has attempted to join the fray with a suggestion that an increase in VAT to 20% could cost over 160,000 jobs and extract £3.6 billion from UK consumer spending over the next four years. But what are the options for David Cameron?

Despite the fact that retailers up and down the country are up in arms about the potential increase in VAT it is believed that many businesses are already making plans for an increase to 20%. David Cameron has already indicated that for every £8 of savings in the public sector we will see an increase in tax of around £2 for the UK public. While associations such as the BRC welcome this approach to reduce the UK public sector budget deficit and rebalance the UK finances there is a concern that introducing budget cuts too quickly and increasing taxes too quickly may well cut dead any potential UK economic recovery in the short-term. David Cameron is well aware of this although unfortunately his hands appear to be very much tied at the moment.

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