Fears that today’s increase in VAT could hit the UK’s labour market hard may be “overplayed”, according to Paul Smith, senior economist at financial information services firm Markit.

Today VAT rose to 20% from 17.5%, while Labour leader Ed Milliband predicted that the move could cost the UK economy 250,000 jobs.

However, Smith told Recruiter: “The main impact of the VAT increase will be on consumer spending in areas such as hotel and restaurants where there is discretionary spend.

“Personally, I think the VAT increase may be overplayed. I’m not sure that it will impact heavily on people’s discretionary spend. If you have £1,000 to spend on something, will the VAT increase change your thoughts?

“I think the VAT increase will have a minimal impact. I’m not convinced by changes in VAT. Much more important is the government spending cuts.

“The bigger impact on the services economy will be on job cuts in the public sector and public sector contract losses. There is the indirect impact of losing public sector contracts which has impacted employment and hiring decisions which we have seen over recent months.

“Employment has hovered over that 50 no change mark [a common indicator from job indices] because people have remained uncertain over prospects for 2011. I think that has been a result of public sector losses. That has had more impact than the VAT rise.”