British chancellor of the exchequer George Osborne has defended the increase in sales tax, which came into effect today, as the "least damaging" way to tackle a budget deficit in excess of 10 per cent of national output.
Businesses in Northern Ireland fear the cut will lead to a reversal of the trend in recent years of shoppers from the Republic crossing the Border to avail of lower prices.
Britain's Labour Party has condemned the increase in Value Added Tax (VAT) to 20 per cent from 17.5 per cent as "the wrong tax, at the wrong time".
However, Mr Osborne said the increase would help to shore up public finances, rather than derailing economic recovery. The increase is expected to raise over £13 billion annually by the end of the current parliament in 2015.
"The VAT rise is a tough but necessary step towards Britain's economic recovery and it helps deal with those debts that everyone knows we've got to deal with," Mr Osborne told BBC Radio 4.
The coalition, which took office last May, has announced deep spending cuts over the next four years to help rein in the budget deficit. Most retailers are expecting lower sales in 2011, as weak consumer demand combines with higher inflation and taxes.
Glyn Roberts, chief executive of Northern Ireland's independent retail trade association (NIIRTA) told the BBC he believes the move will be counterproductive, warning it could hamper the economic recovery. "I think this is a major mistake by the coalition government at a time when we need to stimulate consumer demand," he said.
Mr Glyn told the BBC there it was "a considerable hassle" for small retailers to change their pricing "so soon after the New Year".
The Office for Budget Responsibility watchdog has said the rise will shave around 0.3 per cent off economic output in 2011/2012.
However, Mr Osborne said increasing VAT would pose less of a risk to the broader economy than increasing income or other payroll taxes.
"VAT was the least damaging tax rise. The main alternatives would be a rise in income tax or a rise in national insurance and we thought that both of those would be far more economically damaging and therefore to be avoided," he added.
Reuters