VAT rise looms as coalition deal adds estimated £10bn to debt

King of Capital: Sandy Weill and the Making of CitigroupPlans raise fears of blow to already fragile consumer confidence and more upward pressure on inflation

There were warnings tonight that the government will be forced to hit consumers with a VAT hike to 20% if it is to reduce the country's gaping budget deficit and retain the confidence of jittery financial markets.


Such a rise could cost every household in Britain £425, but the government may have little choice given the state of the public finances, economists warned. The coalition's plans outlined so far on the deficit quickly came under City scrutiny, with one institution warning that in their current state they would actually worsen the country's budget position.

Credit Suisse said the measures announced would add close to £10bn per year to the deficit, contrasting with the incoming government's emphasis on the need for "a significantly accelerated reduction".

The easiest solution would be a VAT rise, Credit Suisse added, echoing other economists but raising fears of a blow to already fragile consumer confidence and more upward pressure on inflation.