Will VAT go up in the New Year?

Harman says the planned post-Christmas VAT hike is "under review". Darling says the tax hike must proceed. Who are we to believe? My money is on Harman.

The decision to cut VAT in the first place was ill-conceived. It was supposedly done to encourage a pre-christmas shopping boom. It did nothing of the sort. GDP has continued to contract for the nine months after Darling cut 2.5 percentage points off this vital revenue raising tax.

The cut did, of course, create a huge hole in the public sector accounts. If Harman gets her way, and delays this planned increase, next year's fiscal deficit can only become larger. It was already projected to be well over 12 percent, even with the anticipated increase in the VAT rate.

However, there will be an election half way through next year. New Labour has already abandoned any serious attempt to maintain fiscal discipline. The VAT rise will come just six months before the election.

It will be painful and unpopular, which means that New Labour will do what it always does - delay the pain and hope for the best. There will be no VAT increase next January.