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Schroders – Expect VAT to rise to 19 per cent

Schroders European economist Azad Zangana expects VAT to rise to 19 per cent after the general election.

Zangana says that despite both Labour and the Conservatives having unveiled their manifestos recently, the most important factor for UK inflation is that neither has ruled out an increase in VAT from the current rate of 17.5 per cent.

He says: “We believe that raising VAT from its current rate of 17.5 to 19 per cent would make not only make a significant contribution to the black-hole in the government’s budget forecast, but it would also be the most efficient way of collecting revenues quickly – as a result, we expect VAT to be raised to 19 per cent after the general election.”

“We assume that the increase will be pre-announced in order to generate a boost in demand – albeit a temporary one -, and in order to avoid further distortions in the year on year measure, the increase to be introduced in January 2011 – one year after VAT was re-instated at 17.5 per cent.”

Zangana expects there to be no effect to the 2010 CPI forecast; but Schroders has raised its forecast for 2011 from 2.2 to 2.8 per cent.

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