IFS: VAT rise to be negated by cut in consumption

Date: 8th February 2010

The amount of additional money the government will raise through reverting to a 17.5 per cent VAT rate will be negated by a drop in consumption.

This is the view of the Institute for Fiscal Studies (IFS), which said that on the back of the reversion, consumer spending is likely to decrease by one per cent which will "reverse the increase it produced".

According to the organisation, many consumers brought forward purchases ahead of the return to the higher rate.

VAT has been charged at 17.5 per cent since January 1st following a temporary reduction to 15 per cent, which the government installed in a bid to boost consumer spending during the recession.

The comment comes as the IFS published its annual Green Budget which warned that whoever is in power after this year's election will need to "put in place a fiscal tightening more ambitious over the next Parliament than that set out in the Pre-Budget Report".

However, the IFS added that any measures should not put the economic recovery at risk of include "significant extra tax increases".