VAT hike likely to be 'permanent'

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Prime Minister David Cameron has suggested that January's VAT rise, which saw the tax increased from 17.5% to 20%, is unlikely to be reversed as pressures to slash the deficit persist.

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In a television interview with the BBC, Cameron said that the measures the government has had to introduce to tackle the budget deficit would have to be 'pretty permanent'. However, in a sop to wealthier voters, he said he would aim to scrap the 50% top rate of income tax.

The government is anticipating that its decision to increase VAT will raise £13 billion a year, however there are concerns that as pressures on household budgets continue to rise it will hit retail sales.

The British Retail Consortium claims nearly two-thirds of retailers expect sales to fall in 2011 as consumers tighten their purse strings.

Indeed, according to's latest poll, 47% of people say the hike will curb their everyday spending, while 32% say it will make them think twice about making larger purchases. Only 21% say that the extra cost is minimal.

Labour, which temporarily reduced the rate of VAT to 15% in 2010 to stimulate the economy, claims it would not increase the tax because it hits the poorest hardest. Instead it says it would tackle the deficit by increasing national insurance contributions by 1% for both employers and their staff.

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