Today's VAT hike will hit the poor and cost jobs

January 04, 2011 11:16 AM

Value Added Tax (VAT) goes up today, increasing the price we pay for most goods by 20 per cent instead of 17.5. If retailers pass this on to consumers, prices in the shops will rise by 2.1 per cent. But it could be worse than that for consumers. Prices tend to be set at psychologically significant points: either at or a penny off round numbers. Retailers’ costs have been rising recently but until now they have felt unable to pass on the costs to customers and have suffered deteriorating margins in order not to lose sales to competitors. But analysts predict the Chancellor’s VAT hike will prove too much for retailers and they will pass on their other rising costs at the same time.

Retail expert Jason Gordon at consultancy Booz & Co said:
"From the retailers I've been speaking to, I expect prices to increase by between 5 per cent and 8 per cent. The majority of retailers will 'round up' rather than 'round down'. There have been so many years of price deflation, retailers need to move up prices to stay profitable. The pressure to increase prices has been building for some time, and that time has come now."

The VAT rise will hurt consumers, hitting the poorest hardest, and could cost jobs. The Government needs to address the massive deficit, but it should be tackling waste more aggressively and rethinking what it spends our money on rather than wringing our wallets for even more cash in these already difficult economic times. Cancelling the 30 per cent increase in overseas aid spending and binning the High Speed Rail project are two big savings that spring to mind, and there’s plenty more out there.Value Added Tax (VAT) goes up today, increasing the price we pay for most goods by 20 per cent instead of 17.5. If retailers pass this on to consumers, prices in the shops will rise by 2.1 per cent. But it could be worse than that for consumers. Prices tend to be set at psychologically significant points: either at or a penny off round numbers. Retailers’ costs have been rising recently but until now they have felt unable to pass on the costs to customers and have suffered deteriorating margins in order not to lose sales to competitors. But analysts predict the Chancellor’s VAT hike will prove too much for retailers and they will pass on their other rising costs at the same time.

Retail expert Jason Gordon at consultancy Booz & Co said:
"From the retailers I've been speaking to, I expect prices to increase by between 5 per cent and 8 per cent. The majority of retailers will 'round up' rather than 'round down'. There have been so many years of price deflation, retailers need to move up prices to stay profitable. The pressure to increase prices has been building for some time, and that time has come now."

The VAT rise will hurt consumers, hitting the poorest hardest, and could cost jobs. The Government needs to address the massive deficit, but it should be tackling waste more aggressively and rethinking what it spends our money on rather than wringing our wallets for even more cash in these already difficult economic times. Cancelling the 30 per cent increase in overseas aid spending and binning the High Speed Rail project are two big savings that spring to mind, and there’s plenty more out there.

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