Chancellor George Osborne has called the increase in the top rate of VAT a ‘tough but necessary’ step towards econmic recovery.
The rise from 17.5% to 20% is expected to raise an extra £13bn in revenue.
Osborne told the BBC this the measure was more ‘progressive’ than increasing income tax or National Insurance and would lead to an increase in employment. But Labour said the rise would ‘hit the poor hardest’ and business groups have warned retailers of the negative effects of the rise to their businesses.
The chancellor said: ‘I didn't come into politics and become chancellor of the exchequer wanting to increase taxes. I'm actually someone who believes we want to try and lower taxes in this country.‘But when you've got a very large budget deficit and you've in the middle of a European sovereign debt crisis - and you've decided that at least part of dealing with the deficit has to come from tax rises - then I think VAT presents itself as the choice.
‘And interestingly enough of course, my predecessor - Alistair Darling - came to exactly the same conclusion, wanted to increase VAT in office and made it very clear after the election that he would have increased VAT had he remained the chancellor.’
But Labour’s shadow chancellor, Alan Johnson, said: ‘This is a broken promise - this was the big issue of the general election campaign.
‘It does nothing for jobs and growth - this year has to be all about continuing the growth momentum. It hits the poorest hardest. For those three reasons this is the wrong tax at the wrong time.’