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A rise in VAT would cost 163,000 jobs

This is the headline figure published today by the British Retail Consortium following a study carried our by the Centre for Economics and Business Research using its model of the UK economy.

They found that an increase in VAT to 20% from its current level of 17.5% would result in the loss of 163,000 jobs over four years and a reduction in consumer spending of £3.6bn.

Such an increase in VAT would be appealing to the government as it would reduce the deficit by £11.3bn by the end of the first year at the stroke of a pen. However, the Chancellor, George Osborne, did seem to suggest this week that he was not planning to raise VAT. But, you never know.

Will the government take the easy route of raising VAT?

According to the BRC such a rise in VAT would cost 30,000 jobs in the UK in the first year alone, across all employment sectors.  The initial effect of an increase in an indirect tax such as VAT, is to push the supply curve upwards and to the left. This will result in an increase in market prices and a fall in quantity demanded, depending on the elasticity of demand for the various taxed goods.

The tax will serve to reduce companies’ margins, and the incidence will be greater upon them the more elastic is the demand for the product. As margins are squeezed, costs may be cut and fewer people employed.

BRC Director General Stephen Robertson summed up by saying: “The budget deficit is serious. It has to be tackled but proposals must be judged against the implications for jobs and growth revealed by this new information.”

“Business growth will get the country out of the hole it’s in, led by retail. The government must now deliver a route to stability that supports companies and customers by avoiding damaging tax rises.”

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Posted in Employment, Public Finances, taxation, unemployment

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