Tom Clougherty, executive director, the Adam Smith Institute

There has been widespread criticism of the government's decision to raise VAT from 17.5 to 20 per cent. This is hardly surprising since the increase will hit every household in the country. Indeed, the Adam Smith Institute recently calculated Tax Freedom Day for 2011, and found that Britons would spend an extra three days working for the taxman, rather than earning for themselves, because of the VAT rise. Tax freedom will not come until 30 May as a result.

But raising VAT may hurt more than just our wallets. The Office for Budget Responsibility has revealed that it expects the VAT rise to destroy about £5bn of economic activity in 2011-12. The reason for this is simple: raising VAT will dent consumer confidence and discourage spending. Fewer goods will be sold and lower profits will be recorded. Small firms, which will have little option but to pass on the increase to their customers, may be hardest hit.

Inevitably, this will affect employment, as sellers cut overheads and producers reduce production. The British Retail Consortium has estimated that raising VAT will cost 30,000 jobs next year, and a total of 163,000 jobs by the end of 2014.

We should consider the impact that the rise will have on inflation, already high at 3.3 per cent. Economist David B Smith, a visiting professor at the University of Derby, suggests that inflation in 2011 will be 1.2 per cent higher as a result of the increase, a cruel blow to savers, who have already been hit hard by low interest rates and declining purchasing power.

The enormous budget deficit must be addressed. But as long as the government is ring-fencing wasteful health spending, increasing the foreign aid budget and lavishing costly gimmicks on pensioners in pursuit of the grey vote, the VAT rise will remain a bitter pill to swallow.

Graeme Leach, chief economist and director of policy, IOD

The impact of the VAT rise is difficult to gauge, but it's important to consider what you are comparing it with. The scale of the budget deficit means that we are not comparing the VAT increase with nothing. Instead, the comparison is with other tax rises or spending cuts which would need to be introduced to reduce the deficit.

The IoD has argued that deficit reduction should be overwhelmingly on the spending side and to the extent that taxes are raised, it's better that they be indirect not direct tax increases. In this sense the VAT rise could be said to be good-not bad-for business. The problem with direct tax increases is that they not only hit aggregate demand in the short term but aggregate supply in the long-term as well, by reducing the incentive to work, save and invest.

But this is not the end of the story. The VAT increase will squeeze consumers via higher prices. Consumers will have less money in their pockets-around £13bn per annum. The risk is that purchases were brought forward at the end of 2010, with the result that the first quarter of 2011 could be dismal on the High Street. But the reality may be less threatening. A key factor is, who pays the higher VAT? If companies pass on the rise to consumers it won't be so bad for business.

Providing consumers are not credit-constrained they may simply borrow a little more to maintain previous levels of spending. This is where the impact of the increase gets interesting, as it interacts with the legacy of the financial crisis. Not every household can afford to borrow more. But for most the VAT increase isn't big enough to prevent slightly higher borrowings and so consumption smoothing will be possible.