Chancellor George Osborne has announced that the government will increase the rate of VAT from 17.5 per cent to 20 per cent on 4 January 2011.

The decision will hit the retail and service industries and could also have a significant effect on tourism and hospitality, as the increase will directly increase the prices consumers pay for goods and services.

The decision was received with a mixture of disappointment, resignation and anger within the leisure sector.

Kirk Kinsell, president InterContinental Hotels Group, said: "We believe the Chancellor has missed an opportunity grasped by most of our European partners, to stimulate growth in the tourism sector by cutting VAT on hotel accommodation.

“The tourism industry is the UK’s fifth biggest industry employing 2.7 million. We have the capacity to create up to 200,000 badly needed jobs over the next few years."

Neil Robertson, chief executive of British Institute of Innkeeping, said: "We are disappointed that our members will face the burden of new VAT rates – although expected, this will damage the profitability of many pubs and we’ll be monitoring this carefully."

On spending cuts, the chancellor said that the government would not be making any further, immediate cuts in large capital projects, although he emphasised that in future, all projects receiving public funding would need to deliver "significant returns to the economy".

Osborne added that the government would look to identify projects that do not meet this criteria in the autumn spending review later this year.

The air passenger tax will also be reviewed, with the government considering to change the current per-passenger levy to a per-plane tax.

There will also be no new increases in duties on alcohol - news welcomed by the UK's troubled pub industry.

Brigid Simmonds, British Beer & Pub Association's (BBPA) chief executive said: "We applaud the government’s decision to freeze beer tax and deliver on its promise made in the coalition agreement to not penalise pubs, responsible drinkers and important local industries.

"This is a welcome relief for struggling pubs during difficult times.

“A beer tax freeze will also help the beer and pub sector’s ability to play its part in contributing to much needed economic growth and generating valuable private sector jobs."

Osborne made the announcements as part of his emergency budget, the first he has delivered since the formation of the coalition government last month.

The budget is part of the Conservative Party's promise of undertaking a review of spending and taxes within 50 days of winning the general election.