Written question asked by Lord Ouseley (Crossbench), in the House of Lords. It was answered by Lord Sassoon (Conservative) on Monday, 24 January 2011.

Taxation: VAT

Question: To ask Her Majesty’s Government, prior to the VAT increase to 20 per cent on 4 January, what consideration was given to the earlier forecast from the Office of Budget Responsibility that such an increase would reduce gross domestic product by 0.3 per cent next year; and how the VAT increase will affect the economic recovery.

Answer: Decisive action taken by the Government in the spending review and June Budget, including the increase in VAT, will put the public finances and spending on a sustainable footing. This is already helping to keep long-term interest rates low and encourage businesses to invest and grow. The Office for Budget Responsibility’s forecasts show that the Government’s plans will deliver sustainable growth for each of the next five years, with employment rising by 1.1 million by 2015, and the deficit falling. These forecasts took full account of the VAT increase. The Budget assumed no further change to the 20 per cent standard rate of VAT, which is a structural change to the tax system to deal with a structural deficit. The VAT increase is broadly progressive in terms of households’ expenditure; and, overall, the Budget will have no measurable negative impact on child poverty in the next two years. The poorest will benefit from other measures announced in the Budget including the £1,000 increase in the income tax allowance, the increases in child tax credit, and new triple-lock annual increases in the state pension. In addition, VAT on everyday essentials like food and children’s clothing will remain zero-rated and household energy will remain subject to the reduced rate.

Secondary information