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Treasury written question – answered on 18th January 2011.

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Photo of Grahame Morris Grahame Morris Labour, Easington

To ask the Chancellor of the Exchequer what recent assessment he has made of the likely effects of the increase in the rate of value added tax on (a) businesses, (b) employment and (c) economic growth in the (i) North East and (ii) UK.

Photo of David Gauke David Gauke The Exchequer Secretary

The answer to this question falls within the responsibilities of the Office for Budget Responsibility (OBR), and I have asked the OBR to reply.

Letter from Robert Chote, dated 13 January 2011:

As Chair of the Budget Responsibility Committee of the Office for Budget Responsibility, l have been asked to reply to your recent question.

The OBR's November forecast incorporated the estimated impact of policy measures announced at or before the June Budget, including the increase in the standard rate of VAT from 17.5 per cent to 20 per cent that took effect from 4 January 2011.

We have not assessed the impact of the change in VAT on businesses or levels of employment. However, the OBR applied a range of fiscal multipliers to help inform its judgement on the impact of VAT on aggregate demand in the economy. These multipliers are set out in Table C8 of the interim OBR's June Budget document. A figure of 0.6, for example, means that a measure which has a direct effect of raising revenue by 1 per cent of GDP is estimated to reduce aggregate demand in the economy by 0.6 per cent in the short run.

The interim OBR's June 2010 Budget forecast and the OBR's November forecast assumed that the increase in the standard rate of VAT from 17.5 per cent to 20 per cent would reduce the level of real GDP in 2011/12 by around 0.3 per cent.

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