A hike in VAT could cost 163,000 jobs over four years, the British Retail Consortium (BRC) has warned.
In its first year, a VAT rate of 20% would reduce the deficit by £11.3bn, but by the end of the 12 months there would be 30,000 fewer jobs in the UK - across all employment sectors - than if there had been no increase, an analysis commissioned by the BRC has found.
After four years, that figure would be 163,000 fewer jobs.
The BRC said there was no "silver bullet" that will allow the government to raise large amounts of revenue without having a substantial effect on the economy. Employment, consumption and GDP would all be hit significantly by tax rises, it added.
The study, carried out by the Centre for Economics and Business Research, predicts consumer spend would be £1.6bn less in the 12 months after raising VAT to 20%, and £3.6bn down after four years.
It cautioned that higher VAT meant lower demand for goods and services as prices go up and companies' margins are hit. This would mean they would have to cut costs to keep trading, by employing fewer people or holding back on job creation.
Recommendations include prioritising public spending cuts as a route to tackling the deficit, rather than tax rises, and halving the deficit over four years, not three, which would better support the recovery.
BRC director general Stephen Robertson said: "For the first time we have clear, independent evidence showing VAT and National Insurance increases will have a deep and long-lasting impact on jobs and growth.
"The budget deficit is serious. It has to be tackled but proposals must be judged against the implications for jobs and growth revealed by this new information.
"The main tool has to be cutting non-vital public spending. Removing some of the previously-planned National Insurance increases and signals that the Chancellor will look for an 80:20 split between public spending cuts and tax rises are a welcome start.
"Business growth will get the country out of the hole it's in, led by retail. The Government must now deliver a route to stability that supports companies and customers by avoiding damaging tax rises."
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