New Year VAT increase to trigger £2.3bn consumer squeeze

Shoppers: sales may be hit by VAT hike
Shoppers: sales may be hit by VAT hike

Marketing strategies for the New Year may need to be adapted as consumers face a £2.3bn squeeze on discretionary spend when the new headline VAT rate of 20% comes in on 4 January.

Despite retailers expecting a bumper Christmas this year, the outlook for the New Year is more uncertain.

The coalition government will raise the basic rate of VAT to 20% on 4 January as part of its austerity package.

Data company Acxiom says the tax hike will not have a uniform effect, and some groups’ spending will be curtailed more than others.

Its Affordability report, published today, says low income groups will continue to struggle, but "comfortable" groups will be hit disproportionately and their spending power hit.

A 2.5% increase in VAT will mean a £6.2bn increase in household spend. "Discretionary" income – what is left after essential spending such as mortgages and bills – will drop by £2.3bn in 2011.

The average UK household will be £225 a year out of pocket, with this figure rising to £448 for some groups.

Stephen Whyte, Acxiom Europe chief executive, said: "The VAT rise of 2.5% may seem insignificant, but is actually going to have a major impact on many UK households' finances.

"For marketers, Affordability gives a unique insight in that it shows the effect of the increase not just at a national or regional level but at household level. This throws up some interesting detail of who is really going to be impacted by the VAT increase.

"Our Affordability analysis is helping brands plan campaigns to ensure budgets are not wasted on targeting the wrong consumers."

Married pensioners, married couples living with grown-up children and childless couples aged 25 to 34 will be the hardest hit, particularly those in Hull, Gwent, Stoke-on-Trent, Leicester and Middlesbrough, where prices have risen.

At a regional level people in Wales and the East Midlands will suffer most.

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