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A think-tank which might be aiming to be the most unpopular organisation in the country, after the Labour Party, has claimed this week that the government should impose VAT (value added tax) on food, children’s clothes and household energy.

These goods are currently exempt from VAT because they are considered necessities and therefore a tax would hit the poorest the most and be unfair.

The Reform think-tank makes the claim that eliminating the exemptions on VAT would make the levy a less complex tax and bring the UK in line with other nations.

Currently, between 50% and 60% of the items an average household buys includes a VAT levy. VAT returned to 17.5% in January after being reduced to 15% on 1 December 2008.

The UK is one of four EU countries to apply a zero rate to food and one of three to apply a zero or reduced rate to children’s clothes, the report highlighted.

Analysts have been quick to point out that politicians are unlikely to leap to implement this report since its proposals amount to a massive tax increase aimed disproportionately at the poor.

Many readers will remember the strong public reaction against moves to put VAT on fuel bills in the 1990s.

The Reform report states that, “unfortunately all three major parties are committed to the most economically damaging tax rises – those on income and employment. The 50p income tax rate is seen by business leaders as a tipping point for the UK business environment.”

The report makes some very good points but, like many think-tank reports, fails to take into account the role of public opinion to which politicians can be so slavish.

As well as the VAT change, Reform said that changes to the personal allowance would also make the tax system simpler.

This would raise extra revenue of £8.3bn in 2011-12 and £8.4bn in 2012-13, compared with the government’s plans which would raise £11.1bn in 2011-12 and £14.3bn in 2012-13, Reform said.

Under its suggestions, Reform calculated that households with incomes of less than £17,000 would, on average, see a tax reduction from lower National Insurance Contributions and protection from the broadening of VAT.

Households with incomes of over £17,000 would, on average, see a tax increase due to the broadening of VAT and, for higher rate taxpayers, replacement of personal allowances with a zero rate threshold. Individuals earning more than £105,000 would see a tax reduction.

Any move which lowers taxes for the rich while increasing them for the poor is unlikely to be seriously considered by any party, except perhaps the Lib Dem’s, in a general election year.

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The amount of debt that was written off because defaulting borrowers could never repay it increased hugely in 2009 according to new figures from the Bank of England (BoE).

The figures show that £4.1 billion of credit card debt was written off in 2009, compared to £3.2 billion in 2008. This represents an increase of 30% on what was already a record amount in 2008.

Meanwhile, the value of mortgage debt written off increased by more than 100%, from £408m in 2008 to £984m in 2009, although that increase was from a lower starting level.

The figures demonstrate the very serious effects of the recession on personal debt in the UK and how often lenders use this last resort shows their desperation, as well as that of the borrowers.

Besides credit cards and mortgage debts, other loans written off increased from £3.2bn to £4.2bn. This pushed up the total write-offs by UK lenders to individuals from £6.9bn to £9.3bn.

In addition to this, financial institutions wrote-off £5.9bn that was lent as business loans.

Banks have been revealing their own specific write-off levels during the current reporting season. The UK banks set aside millions of pounds to cover potential losses on their loans, but only when the loss is confirmed as unrecoverable is the money finally written off.

The main effects of the increased losses have been felt by those people who borrow but make repayments on time.

For example, it became more difficult during the recession for first-time buyers to get on the property ladder as lenders were making their criteria more stringent. Similarly, last month credit card rates rose to their highest level for 12 years, 18.8%.

The BoE figures suggest that the average rise was not so acute, but credit cards offered by banks and building societies have risen to their highest level since June 2006. At the end of January, the rate was 16.4%.

Borrowers who feel they are in a desperate position should be aware that lenders will not necessarily immediately write off debt. Most have processes in place that can take considerable time and will only write off debts when there is absolutely no chance of it being repaid.