UK Politics

VAT rise to 20% will stay, Cameron hints

Prime Minister David Cameron has hinted that the rise in VAT from 17.5% to 20% will be permanent.

He said 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.

He also told the BBC the coalition was "strong" and would not change course because of the threat of strikes.

Labour's Alan Johnson said it would be "extraordinary" to scrap the 50p rate, not the VAT rise which hit the poor.

Last week's VAT rise is the second increase in a year, 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.

Mr Cameron was asked about whether the rise was a temporary measure, following comments from his chancellor, George Osborne, who last week said he regarded it as "permanent".

The prime minister told the BBC's Andrew Marr Show the government was trying to deal with the "structural budget deficit" - the gap between spending and taxes.

"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," he said.

Job losses

The government hopes the rise in VAT will raise £13bn a year but it is predicted to hit retail sales.

However 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.

Asked how many jobs were predicted to be lost as a result of the VAT 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.

Mr Cameron said: "If you didn't do VAT, what tax would you do? The first category there would probably be National Insurance. that's what Labour have committed to - and putting up National Insurance when you're trying to get the economy growing and jobs growing would be a perverse thing to do."

Labour had planned to increase National Insurance Contributions (NICs) by 1% for both employers and employees.

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.

'Tough year'

Mr Cameron also said he hoped the new 50p top rate of income tax would not be permanent because it would discourage people from working, living in the UK and "getting on".

But he said the government was "determined" that the richest should pay the most "not only in total cash terms but also as a share of their income, and that is what the Budget and spending round achieved".

He said 800,000 people were being also lifted out of income tax altogether because it was raising income tax thresholds.

"That will help all people who are basic rate taxpayers... it is going to be difficult but we did things in the Budget to help the economy, to help business, to make it cheaper to employ people."

Mr Cameron said he was optimistic about the future but admitted 2011 was going to be "a tough and difficult year". But he said the government was "very strong" and would not change course because unions wanted to "kick off".

"The trade unions need to know they're not going to be able to push anyone around by holding this strike or that strike or even a whole lot of strikes together - they can forget it."

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."

He defended Labour's 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.

But Mr Johnson was criticised after appearing to stumble over the current rate for employer's National Insurance contributions in an interview on Sky News.

Lib Dem MP Stephen Williams said it showed Labour was "completely clueless on basic economics".

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