VAT increase starts the political arguments

MIDNIGHT on Tuesday saw the expected rise in VAT from 17.5% to 20%.  This policy is part of the spending deficit that the country finds itself in, and already – the political parties are at war.  Chancellor George Osbourne insists that this was the only way forward, whilst under pressure Labour leader Ed Miliband claims that it is ‘the wrong tax at the wrong time.’

The Treasury hopes to gain about £13billion because of the VAT increase, therefore cutting the expansive gap between government spending and income.  The new measure shouldn’t affect consumers too much, as it means that just 2p gets added onto every £1 item.  Only food and children’s clothes have survived the new increase, which is a permanent move, unlike the cut to 15%, put in place by former Chancellor Alistair Darling in November 2008.  However, the news won’t be great for some.

INCREASE: Petrol prices are set for another rise

Petrol prices, set to reach their highest levels for at least a decade later in the month, will increase by 3p a litre under the new restrictions.  Bigger and more expensive electrical items are also likely to be far more expensive than they were before Christmas.  Some televisions will be sold at £10 more than they were in 2010, whilst PC’s, laptops and game consoles will also be significantly affected. 

DECLINE: HMV faces an uncertain future

Retailers now have decisions to make and all are approaching it in different ways.  Debenhams has announced that it will only charge the new prices on its new season stock, whilst Superdrug has confirmed that its own branded products will remain at the same price.  However, with HMV and Next recently posting massive loss of profits over the festive season, the ways they want to implore the cost might well be as limited as a world class CD of your favourite songs. 

Retail outlets did report massive business over the course of last weekend, as television advertising campaigns were run regularly, urging customers to beat the VAT increase.  It seems like the ‘old’ tradition of the January sales have slumped to a halt.  Many retailers are very worried about the VAT hike, and are already forecasting tough years ahead of them, warning that thousands of jobs could go, due to the price increase.  Retail analysts do predict that on a long-term basis, it will be the customers who end up losing out the most under the new method. 

The Chancellor seemed confident about the changes, when he spoke to the media on Tuesday: “VAT is a powerful weapon to tackle debt and if we don’t use it, then the spending cuts would be over £13billion pounds bigger.”  

Unsurprisingly, Labour and its leader disagree; “When family budgets are already squeezed, now is not the time for a VAT rise to make it even harder for ends to meet.”

Whatever the final outcome, the retail industry is in for a very challenging and demanding year.