Experts have warned that the Government’s mounting debt problems render a VAT increase to 20 percent “inevitable” after the General Election.

According to analysts at consultancy Oxford Economics the Treasury will need to raise the tax rate, which is levied on all goods and services in the UK, to 20% in order to raise an extra £12 billion a year.

It is also possible that the retirement age will be put up to 68 in order to cope with the consequences of the economic crisis. Plans to increase the retirement age are already in place.

The warning has come after the Office of National Statistics showed that the Government has borrowed a record amount so far this year, spending almost £330 million a day.

Neil Blake of Oxford Economics said: “There appears to be a political consensus that spending cuts should form the bulk of the tightening but we can't see how the necessary adjustments can be made without further tax rises too.”

The VAT reduction of 2009 has now been reversed and has returned to the previous level of 17.5% which should help to raise more revenue over the coming months but it is being predicted that the rate will need to increase even more.

John Hawksworth, an economist at PricewaterhouseCoopers, commented: “Some sort of VAT rise is quite likely. Not necessarily immediately, but perhaps from 2011. But there would have to be a package of measures, not just one.”