PwC: VAT hike added 1% to level of prices in 2011

ONE YEAR on from the government's decision to increase VAT to 20%, PWC has said that the rise added around 1% to the level of prices in 2011 which compounded the tough squeeze on consumers from rising energy and food prices last year.

"That is a temporary effect though that should not adversely impact growth or inflation in 2012 or beyond, assuming no further rise," said PwC's chief economist John Hawksworth.

Hawksworth added there will also have been positive economic effects from the VAT rise in terms of a smaller budget deficit and a consequent reduction in long term interest rate.

PwC partner Stephen Coleclough noted that other EU countries are now hiking up their VAT rate.

"It's increased in Italy and France, and in Hungary it's now up to 27%. These moves are inflationary and aimed at increasing revenues; they must also balance with the growth needs of the country," said Coleclough.