Happy New Year?

Published on Incomes and Inequality

Well, after lots of talk of fiscal consolidation, the first real day of reckoning has arrived: today VAT rose to 20% – the first increase in the main rate of VAT since 1991, moving the UK from below average to nearer the top of international comparisons.

Fiscal consolidation may be necessary – to some degree at least – but the big worry about VAT is that it’s regressive. Low-to-middle earners, who spend a greater proportion of their income than higher earners (including on fundamental commodities – such as housing, transport and food – most difficult to cut back on) have already been impacted by greater inflationary increases in the cost of living, and now face a larger proportionate impact from the VAT rise than for higher earners. Estimates vary, but based on the Government’s revenue predictions, our recent audit showed that LME households are set to be around £270 a year worse off as a result of the VAT increase alone in 2011-12. And that’s assuming retailers won’t ‘round up’ their prices.

Alongside painful increases to rail prices and energy bills that LMEs have already had to swallow – it’s hardly the Happy New Year most would hope for, setting the scene for what is likely to be a hugely difficult year for Britain’s 11 million low-to-middle earners.