Cameron says 20% VAT rise to stay

Prime Minister David Cameron has hinted that raising the Vat tax from 17.5% to 20%, will remain permanent. He also told news media, that measures to tackle the budget deficit would have to be “pretty permanent” – but he hoped the 50p tax rate for top earners would be scrapped. Labour’s Alan Johnson said it would be “extraordinary” to scrap the 50p rate, not the VAT rise which hit the poor. BBC

The rise in the VAT tax last week, was the second increase in a year. This all came after Labour chancellor Alistair Darling restored the 17.5% rate in January 2010, having temporarily reduced it to 15% for 13 months to stimulate the economy. Cameron was asked it this meant the rise would be permanent, and he said that is structural, that’s not going to go away because of the growth, so the changes we are making have to be pretty permanent too.

The government also hopes the tax will raise £13bn a year but it is predicted to hit retail sales. The prime minister said it was part of an economic policy which was forecast to lead to an increase in employment in the next five years. It is unknown how many jobs will be lost because of the rise. Mr Cameron said any tax rise would have an impact on the economy but the government was having to deal with a “vast pit of debt” and if the budget deficit was not tackled confidence would “sap” out of the British economy.

Meanwhile, Labour had planned to increase National Insurance Contributions (NICs) by 1% for both employers and employees. But the coalition is raising the starting point for employers’ NICs to reduce the cost to firms, and is leaving in place the higher levies on employees.

Cameron also hopes the rise in the tax would not be permanent because it would discourage people from working, living in the UK and getting on. The government is determined that the richest should pay the most, not only in cash terms, but also as a share of their income, and that is what the Budget and spending round achieved. Also, another change is that about 800,000 people will be lifted off the income tax altogether, because the income tax levels were going to be raised.

Cameron did admit that 2011 was going to be a tough year. Labour says the increase in VAT will cost the average family £7.50 a week.

Shadow Chancellor Alan Johnson told Sky News: “I now hear the prime minister has said, whereas the 50% tax rate for the richest in our society would not be permanent, the VAT increase would. “Now that’s extraordinary given that it has twice the effect on the poorest in our society as on the richest.” BBC

Johnson also defended plan to increase NI contributions – something the Conservatives described as a “tax on jobs” – saying it was a “tough decision” but raising VAT was “regressive” and hit pensioners and the poorest – and for employees, National Insurance was being raised anyway.Mr Johnson was criticised after appearing to stumble over the current rate for employer’s National Insurance contributions in an interview on Sky News.

And LIb Dem Stephen Williams said Johnson was clueless on basic economic.