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Henderson’s Ward questions impending VAT hike

Henderson’s chief economist Simon Ward has questioned the Government’s decision to increase VAT to 20 per cent next year.

Ward says the latest public borrowing figures, which show an annualised total for borrowing of £144bn, are below expectation and will continue to improve through the year. The Office of Budget Responsibility predicted annual Government borrowing to be £149bn.

He says: “The benefits of economic recovery should grow as the year progresses and, secondly, the coalition has announced £8.1bn of spending cuts and tax rises in 2010/11, most of which has yet to take effect. Put differently, even assuming no further impact from an improving economy, these measures together with the recent run-rate imply borrowing of £136bn this year.”

As a result, Ward questions the need to increase VAT to 20 per cent, which will raise £2.9bn next year and £12.1bn in 2011/12.

He says: “This increase threatens to weaken the economic recovery and was not strictly necessary to meet the new fiscal target of current budget balance by the end of the parliament, even according to the OBR’s June forecast.”

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