No one wants to see a rise in VAT but it looks like it could be back on the cards after the general election. Labour had previously said that no new tax rises would be necessary to tackle the huge black hole in Britain's finances but it seems like a rise in VAT could still go through according to Labour Chief Secretary to the Treasury Liam Byrne, who has refused to rule out potential reviews in the future.
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The deficit, which is currently believed to stand at £178billion, now looks set to be around 12 per cent of GDP this year, which is unsustainable in the medium term according to Deputy governor Charlie Bean.
"The recent depreciation of sterling appears to owe something to heightened fears about the UK's fiscal prospects," he said. "Fortunately, all political parties recognise the need to put in place a credible plan for the consolidation of the public finances over the medium term, even if their preferred routes to doing so differ."
According to Mr Bean, growth in the first quarter of this year was likely to be around 0.3 per cent - a similar figure to that in the final quarter of last year. And while a return to growth is certainly good news, it is clear we still have a very long way to go before recovery from the Great Recession of 2008-9 is complete.
Both leading parties are thought to be considering raising VAT after the general election by as much as 20 per cent - the European average. Such an increase would raise £13billion a year, enabling the Treasury to pay off some of the nation's debts more quickly.
Speaking in Downing Street last night, Gordon Brown said: "We are going to cut our deficit by half over the next four years. But what we will not do is put the recovery at risk. The EU Commission has made clear that we should not have the fiscal stimulus removed until the recovery is assured."
No one wants the current financial situation to drag on longer than necessary, but would pushing through spending cuts unpopular with the public result in huge social unrest, as Liberal Democrat leader Nick Clegg has suggested?
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