Chancellor George Osborne was accused by a consumer group of hitting the poorest people hardest today as he announced that VAT would rise to 20% in January.
The increase, from 17.5% at present, comes despite the Tories' claims before the general election that they had no plans to put up the sales tax in their first Budget.
The Liberal Democrats actively campaigned against it. But the Chancellor, flanked on the Government benches by the Tories' Lib Dem coalition partners, said today the VAT hike was inescapable.
It will be implemented on January 4, 2011, and is expected to generate up to £13 billion a year for the Treasury's coffers by 2015.
Struggling to be heard over Labour jeers, Mr Osborne told the Commons: "The years of debt and spending make this unavoidable.
"This single tax measure will by the end of this Parliament generate over £13 billion a year of extra revenues. That is £13 billion we don't have to find from extra spending cuts or income tax rises."
The 17.5% rate of VAT has been in place since 1991, except for the temporary reduction to 15% introduced by Alistair Darling as the last Government sought to tackle the recession.
It applies to all purchases except certain exempted goods such as basic foodstuffs, children's clothing, books and newspapers.
Consumer groups warned that the increase would have a disproportionate impact on the poorest members of society.
Mike O'Connor, chief executive of Consumer Focus, said the Budget would be "setting off alarm bells".
"Thousands of the things we buy everyday are going to get more expensive," he said. "The VAT rise will hit the poorest consumers hardest as people who earn least already spend proportionately more of their income on VAT and it will be even more important for consumers to shop around for the best bargains.
"All too often the poor pay more because many don't have access to cheaper online or direct debit deals and often have to resort to higher cost borrowing."
A further move to increase insurance premium tax in line with VAT would also introduce "difficult choices" for the less well-off.
The higher rate of insurance premium is to rise from 17.5% to 20%, and the standard rate from 5% to 6%.
"Putting up tax on insurance may lead to already hard-stretched people deciding it is a safety net they can live without," Mr O'Connor said. "For the poorest consumers this would make the unexpected, like being burgled, a disaster, and may force more people to borrow from expensive lenders in order to get by."
Mr Osborne promised that the coalition Government would maintain exemptions for everyday essentials for the rest of the parliament. The reduced VAT rate of 5%, for items including domestic fuel and power, will stay the same this year.
But the British Retail Consortium said the VAT rise would hold back the recovery and affect jobs.
Director general Stephen Robertson said: "It'll hit jobs, consumer spending, the pace of recovery and add to inflation but we accept the Government has no easy options.
"It's some consolation that the range of VATable products isn't being extended.
"Changing computer systems and shelf prices on tens of thousands of products is a huge, costly exercise for retailers. Planning for catalogues is a particular nightmare.
"The start date, in the middle of the busy and crucial post-Christmas sales period, will be difficult but retailers would rather have more notice than less."
