OXFORDSHIRE families will feel budget pain every time they hear shopping tills ring after the Government decided to hike VAT to record levels.

Chancellor George Osborne announced the rise, from 17.5 per cent to 20 per cent, as part of the Government’s emergency Budget yesterday.

Value Added Tax, which is paid on goods and services, will rise next January 2011 to its highest level since it was introduced in 1973.

This will mean the following VAT rises:

  • The tax on a typical weekly shop costing £120 will go up from £4.35 at the moment to £4.97 from next January.
  • The average British Gas customer’s annual gas and electricity bill is £373. With VAT at 20 per cent it will be £382.32.
  • The current average cost of a litre of unleaded petrol is £1.20 a litre. VAT at 20 per cent will see motorists pay £1.23 a litre, taking the cost of a 30-litre fill to £36.90, compared with £35.10 last December, when VAT was 15 per cent.

Parents will see child benefit payments frozen for three years and child tax credits will be reduced for families earning more than £40,000 a year.

Thousands of public sector workers in the county will go without a pay rise for the next two years, although lower paid workers will get a flat £250 annual increase, and public sector pensions will be put under the microscope as Mr Osborne seeks to cut costs.

But there was some cheer as the state pension will be increased by a minimum of 2.5 per cent each year and the income tax threshold was increased by £1,000, putting an extra £170 a year into the pockets of those earning less than £40,000.

Council tax bills will be frozen for 2011-12, and Oxfordshire’s councils are also preparing for significant cuts in funding from the Government after Mr Osbourne said there would be an average 25 per cent cut in departmental spending, which includes grant support for local authority services.

More will be revealed to councils in October, when the Government announces its spending plans for the next three years.

Oxford City Council leader Bob Price said reduced growth figures and public spending cuts would increase unemployment.

He said increases in VAT would also hit the council’s coffers as people tightened their belts and spent less at leisure centres and swimming pools and on car parking if they cut out shopping trips.

He added: “It would be difficult to be confident that it will not affect our frontline services.”

Oxfordshire County Council’s leader Keith Mitchell said: “We know this is going to mean some pain here in Oxfordshire, as well as across the country.

“We now know departmental budget cuts will be at least 25 per cent over four years.

“For local government it’s likely to be more, given that other budgets (including defence and education) will receive levels of protection.”

Chris Mundy, a tax partner at the Oxford offices of finance firm Grant Thornton, said: “The increase in VAT was predictable and an easy way for the Government to raise funds.”

Ian Wenman, the chairman of the Oxfordshire branch of the Institute of Directors, said: “It was very interesting to note the emphasis on help for businesses outside the South East, because this places even more emphasis on us all to make Oxfordshire plc a county to be proud of, a county people will want to come to and one they will want to base their business in.”

Iain Nicholson, of the Oxfordshire Town Chambers Network, said: “The Chancellor has set Oxfordshire business a challenge and we will be redoubling our efforts to make the most of it.”