An increase in the standard VAT rate from 17.5% to 20% would raise an extra £13 billion a year for the public purse. And levying VAT on food - which is currently exempt - albeit at a lower rate of 5%, would bring in an additional £3.5 billion a year.
As reported in the Times last week, regardless of which party wins the next general election, an increase in the standard VAT rate to 20% now seems inevitable.
While levying VAT on food remains a politically sensitive topic, domestic heating fuel and children's car seats are already subject to the reduced 5% rate, so it should not be ruled out.
The scale of the problem
Figures from the Office for National Statistics show that public sector net debt reached £870 billion at the end of December 2009. And net debt, expressed as a percentage of gross domestic product, was 61.7%.
(NB. This compares with net public sector debt of £733.9 billion - or 51.7% of gross domestic product - in December 2008.)
The net borrowing requirement for 2009/2010 is forecast to be £178 billion so unless the UK experiences some kind of economic miracle public sector debt will rise again this year. Obviously this level of debt is unsustainable.
Levels of VAT / sales tax overseas
Across Europe VAT rates vary from 15% to 25% - the European average is somewhere around 20%.
In the USA, however, where sales tax is levied at the state level, tax rates range from nil (in Montana, New Hampshire, and Oregon) to 8.25% (California).
Australia has a Goods and Services Tax rate of 10%; New Zealand has one set at 12.5%; and in Canada sales taxes vary from 5% to 15.5% depending on the province you're in.
Why the difference?
European countries tend to spend more on public services - such as education, healthcare, and social services - than other nations. Hence they need to raise more revenue to pay for them through higher taxes.
** VAT Rates - Additional Information & Advice **
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