VAT on processed food will rise to 20%, says economist

Speaking at last month's Outlook 2010 conference in London, organised by beef, lamb and pig producing bodies EBLEX and BPEX, Tom Vosa, head of market economics, wholesale banking, with National Australia Bank, said an increase on existing VAT-liable items from 17.5 to 20% "would not surprise me".

While he didn't expect any incoming government to extend the range of VAT's coverage to include fresh food and ingredients, he expected highly processed foods to be hit. "We expect higher prices and some reduction in demand." He also argued that the restaurant trade would be "badly affected".

Vosa said the UK's economic recovery was very fragile and might not be sustained. He warned that it might be "short-lived" and sterling would "remain weak" following the pound's "collapse".

In the short-term, he predicted the pound's value would remain at about 85p against the euro, falling to 78p in the longer term. However, he added: "We will not see that any time soon."

The low value of the pound has been a major fillip to exporters, however, most recently demonstrated by the record food and drink (non-alcoholic) export levels of £9.65bn in 2009, showing a value growth of 4.4%, for the fifth consecutive year, according to new research from the Food and Drink Federation.

Vosa, who also advises the Clydesdale and Yorkshire Banks, said: "Overall, there is contraction of credit in the UK and that is going to continue for some time." He expected the UK economy to grow by 0.9% later this year rising by 2% thereafter.

Globally, he said the developing world's demand for cereals and meat will grow, while "food price inflation will remain volatile".

Siôn Roberts, chief executive of English Farming and Food Partnerships, said: "Market volatility will be driven by shortages in supply."