Remortgage hopes will fall if VAT rises

14 June 2010

A lot of two-year deals are about to come to an end. When that happens borrowers’ monthly costs will rise as there’s not much hope of remortgaging at a better rate - the country can’t afford it.

Consumer price inflation jumped to a 17-month high in April, driven by rises in taxes on alcohol and tobacco as well as higher prices for women’s clothes and food.

Meanwhile, the rate of wage growth is rising only slightly. In the three months to April the median rise climbed to 2%.

The situation is worst in the public sector where the median increase was just 1%.

Some 35% of public sector pay awards with effective dates in April resulted in freezes. Those affected included dentists, hospital consultants and family doctors.

So while most things are getting more expensive consumers are not earning more.

Meanwhile, the government’s attempt to curb the budget deficit will mean higher taxes. It looks as though the chancellor will have to raise VAT, but will he stop at 20%?

The European Union lets members raise VAT to 25%, which is the standard rate in Denmark, Hungary and Sweden. Greece recently ramped up its rate from 19% to 23%. As VAT is the third largest source of government revenue the chancellor might see 25% as an attractive option.

That would have a much bigger effect on the deficit than the £6bn worth of cuts already announced.

Whether it goes to 20% or 25% it will make us all poorer while making life even tougher when fixed rate deals come to an end.

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