by business editor Trevor Sturgess

A rise in value added tax would be disastrous for financial services and could hit interest rates for savers, a building society chief has warned.

Experts are speculating that the dire state of UK finances could persuade the Chancellor of the Exchequer George Osborne to announce in his Emergency Budget tomorrow an increase in the standard rate of Vat from 17.5 per cent to 20 per cent.

Mike Lazenby, chief executive of Kent Reliance Building Society, said that Vat on some of its operations could not be reclaimed.

He said: "It will be a real cost to the business and that would have a severe impact on the kinds of rates that we could offer in a difficult market that is already under some duress."

Rates were already challenging, he said, and a Vat rise would be "a really bad move."

He urged the Chancellor to stimulate the housing market which was the "boiler-room of the economy".

"As the housing market picks up, everyone feels a bit better."

Raising the lower limit for stamp duty from £125,000 would help, he said.

But with spending cuts and tax increases widely expected, there is unlikely to be much good cheer, although leaked reports suggest that council tax will be frozen for a year.

Mr Lazenby forecast that the combined effect of the measures would lead to a dip in retail sales with shoppers wary about buying big-ticket items.

But he added that pain in 2010 would be followed by gain in 2011-2012 as the impact of the London Olympics started to be felt.

He expected house prices to rise in London and around the capital and that would ripple out to Kent and the south east.

"We've had a lot of pain, but let's see some gain," he said.