LONDON - The U.K. will pay 2.5 percent more on goods and services with the increase in the value-added tax rate from 17.5 percent to 20 percent, Bloomberg reports. This week, British Chancellor of the Exchequer George Osborne raised the VAT, which is levied on goods and services, to decrease the nation??s deficit.

This marks the first permanent increase to the VAT in nearly 20 years. "The years of debt and spending make this unavoidable," Osborne told Parliament.

The rate increase will start in January 2011 and is expected to generate more than $19 billion annually in additional revenue by the end of 2015. "That is 13 billion pounds we don??t have to find from extra spending cuts or income-tax rises," said Osborne.

Earlier this month, Prime Minister David Cameron noted that the British people needed to make sacrifices in order to lower the deficit. VAT brings in around 15 percent of total government spending.

Retailers believe the hike could decrease consumer spending just as the economy recovers from a recession. "We understand that the budget deficit needs to be tackled but we think the focus needs to be cutting public spending over tax rises," said Krishan Rama, a spokesman for the British Retail Consortium. "What we??re concerned about is that the recovery at the moment is very fragile and consumer confidence is also fragile, so we don??t want something to fracture that."

The consortium said last month that increasing the VAT by 2.5 percent would mean 163,000 jobs lost over four years and a reduction in consumer spending by 3.6 billion pounds during that same time.

Britain currently has one of the lowest VAT rates among large western European nations. Spain??s VAT is 16 percent, while Germany, France and Italy have rates of 19 percent, 19.6 percent and 20 percent, respectively.