Rishi Sunak will be presenting his autumn budget on 27th October. Currently inflation is rising with wages increasing up to 7% in some sectors, quantitative easing is due to end at the end of the year. Rishi Sunak has stated he wants to reduce the deficit.
The economic outlook is not clear, but I think Rishi Sunak should assume that the increase in inflation will only be short-term and the government and the Bank of England will not need to take any action to reduce inflation. The ending of the Covid support schemes will reduce government spending by £100 billion. While household savings have increased, I don’t believe all of these savings will be spent into the economy next year, or will be large enough to make up for the £100 billion being removed from the economy.
Therefore I believe that the Chancellor should not remove all of the £100 billion from the economy but should commit to continue to spend up to £40 billion of it. I suggest he should make the following changes above the normal upgrades and what has already been announced.
Benefits are due to increase in line with the inflation rate of September which was 3.1%. The triple lock on pensions has been suspended for next year, so instead of pensions increasing by 8% (the expected increase in earnings) they will be increased by 3.1%. As the party now supports a UBI we should be moving towards the idea that a couple receives twice the amount as a single person. Therefore I would make an exception for the couple’s Guaranteed Pension and instead of increasing it by 3.1%, increase it by 8% to £291.92 a week. This would move it from being 1.53 times the single rate to 1.6.
Party policy to scrap the ‘bedroom tax’ and the benefit cap should be implemented.
If the Local Housing Allowance rate was restored to the 50th percentile more than 32,000 households would be lifted out of relative poverty including more than 35,000 children (based on Crisis 2019 figures). Therefore the Local Housing Allowance should be increased to the 40th percentile from April 2022 and the 50th from April 2023.
These four measures should remove many pensioners from poverty.
Universal Credit and the legacy benefits should be increased by 3.1% of their current value in addition to restoring the Universal Credit £20 a week uplift and extending it to the legacy benefits, so those who received the uplift have more benefit next year than this year. This would increase Universal Credit for those aged 25 and over to £97.31 a week for a single person and £141.32 a week for a couple.
In addition to this the Universal Credit work allowance should be restored for single people and couples without children (it was abolished from April 2016). The work allowance is the amount of money a person can earn before they start to lose their Universal Credit.
This is the time to really invest money in people. This is an opportunity of a lifetime. It is not often that the government increases spending by such a hug amount as it did for Covid support. When this support is no longer needed is the time to use part of it to help the unemployed gain the training and experience they need to do the jobs out there without this being a huge stimulus to the economy. The party policy of new Jobs and Training Guarantee schemes should be implemented. I suggest that £11.7 billion a year be allocated to it. This should finance having 1 million unemployed people on the schemes. Those on these schemes shall be provided with the training and work experience for them to be employable in the roles where there are currently lots of vacancies. (The government talks of investing for jobs, but their Restart scheme has only been allocated £2.9 billion with the aim of helping one million people; £2900 per person. They are trying to do it on the cheap.)
Central Government support to local authorities has declined from £36.4 billion in 2009/10 to £24.8 billion in 2018/19. I suggest it should be increased by £4 billion this year of which I would ring-fence £3 billion for social care. This would be on top of continuing support to meeting 100% of the extra costs and reduced income due to Covid.
There has been criticism of the decision to increase National Insurance by 1.25% for both workers and employers. The Conservatives call National Insurance payments for employers a tax on jobs. At this time I don’t think the government should be increasing the tax burden on employers. It could be replaced by increasing all income tax rates above an income of £32,000. The reason for picking £32,000 is that medium average earnings is £30,212 (August 2021). This means that less than half of people will pay this new tax. This might raise about £9 billion.
These changes (in the region of £40 billion) I believe are mainly targeted to help the unemployed and the poorest in society.
* Michael Berwick-Gooding is a Liberal Democrat member in Basingstoke and has held various party positions at local, regional and English Party level. He posts comments as Michael BG.
Follow @LibDemVoice on Twitter
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
Is it me, or is British politics missing a Conservative Party?
The very lost tunnels of the Hereford and Gloucester Canal
Do those "Winning Here" posters and bar charts really actually work?
Are some premature births caused by a average lower mitochondrial membrane potential in the baby?
Black History Month
Katharine Pindar
Ian Patterson
nvelope2003
David Warren
Peter Martin
44 Comments
Thank you for your thoughtful article!
What is L D policy on tax havens?
Why should the chancellor assume that “the increase in inflation will only be short-term”? This is unexplained. CoVid might at some point be under control (more or less), but the effects of the systemic damage due to Brexit are set to increase as import and other controls are eventually implemented.
As a result of inflation and an unresolvable shortage of workers in some sectors there will be an inevitable pressure for wages to increase. The government will only relent in the public sector once it is too late: with shortages leading to a deterioration in provision in services, health, education etc.
@ Martin,
It looks like Brexit might be having a worse and more widespread effect than many of us predicted, except for your good self of course!
US inflation has just topped 5% and they are short of truck drivers too!
https://www.bloomberg.com/news/articles/2021-08-02/a-trucking-crisis-has-the-u-s-looking-for-more-drivers-abroad
“Rishi Sunak should assume that the increase in inflation will only be short-term and the government and the Bank of England will not need to take any action to reduce inflation. ”
The problem is that Rishi Sunak doesn’t know what those in the MPC or BoE may or may not do and vice versa. It’s like trying to steer a supertanker with two lots of independent controls, each with separate Captains, and who may or may not speak to each other.
Whoever came with the notion that that the BoE can be regarded as independent and somehow separate from Govt must have rocks in their head instead of brains!
Steve Trevethan,
I expect the Lib Dems are against tax havens. We were when in government (https://www.theguardian.com/politics/2012/sep/24/vince-cable-crackdown-tax-havens).
I couldn’t see anything in the 2019 specifically about tax havens, but on page 23 we talk of action against tax evasion and avoidance (https://www.libdems.org.uk/liberal-democrats-2019-manifesto).
Martin,
Deciding if our inflation is short-term or will be a long-term problem is not easy. However, the multinational investment bank Citi state that “the drivers (of inflation) – such as energy prices and trade disruption – seem largely transitory. Looking through the coming economic reconfiguration, the risk of a persistent domestically driven inflationary surge remains more contained …”.
The government is supposed to be taking steps to alleviate the HGV driver shortage. While we may think they are not doing enough Rushi Sunak should act on the assumption that they are. The ending of quantitative easing (which I mention) will stop demand in the economy growing from that source and reduce inflationary pressure. The economy is still weak with 553,000 people not working compared to before Covid. The OBR has predicted that by the end of the year another 600,000 people will lose their job. Both of these groups will have less money to spend that they once had and so reduce inflationary pressure. As I mention the removing from the economy of the Covid support measures will reduce total demand and inflationary pressure and I don’t think that people spending the savings they have accumulated during the lockdowns will replace all of this demand. I am not aware that the government has plans to impose new tariffs or increase tariffs on goods coming into the country.
I am suggesting that £11.7 billion is spent to retain and give relevant experience to one million unemployed people in the UK so they are employable in the areas where we have a shortage of workers.
Most of this weeks budget has been pre-announced. There will be £7bn of capital investment over three years for transport connections outside London; £5bn for digitising the NHS; £3bn for the Lifetime Skills Guarantee; £1.4bn to subsidise foreign investment in science and tech; £850m for museums and galleries; £700m for coastal patrols; another £700m for sports pitches; £560m for adult maths coaching; £500m for family hubs (a kind of reinvention on small scale of Sure Start); and £435m for crime.
The main fiscal decision was taken in September: the rise in national insurance contributions to pay for clearing the NHS backlog, with perhaps a bit left over for social care in a few years. There is not that much left for Rishi Sunak to announce on Wednesday, with a lot of attention devoted instead to the spending review, which has been combined with the Budget this year. These are the government’s plans for public spending over the next three years – in effect the period up to the next election.
There is still a possibility that there may be some concessions on the withdrawal of the Universal Credit Covid uplift, perhaps in the form of increased work allowances.
Sarah Olney has been writing about the problems with the new national schools funding formula https://www.independent.co.uk/voices/education-funding-pandemic-schools-b1944010.html echoing Ed Davey’s conference focus on education catch-up funding. The party has said it will deliver a £15 billion package of education catch-up funding, as recommended by the Government’s former Education Recovery Commissioner, Sir Kevan Collins.
There is close coordination between monetary policy and macroprudential policy as the BofE remit notes https://www.bankofengland.co.uk/-/media/boe/files/letter/2021/march/2021-mpc-remit-letter.pdf?la=en&hash=C3A91905E1A58A3A98071B2DD41E65FAFD1CF03EF03E
The objectives of the Bank of England shall be:
a. to maintain price stability; and
b. subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.
Interest rates are rising around the world. Russia, Brazil and South Korea have all increased their central bank rates as have Norway and New Zealand, with the US and UK expected to follow next year. It would be wise to factor in these global interest rate movements in developing economic policy.
Michael BG:
“I am not aware that the government has plans to impose new tariffs or increase tariffs on goods coming into the country”
How can you be so unaware? WTO rules mandate that tariffs for the EU are the same as for other countries. This is very well known as is that the government has delayed and delayed again the implementation of controls on goods entering the UK from the EU. If this persists, other countries will demand access equal to that of the EU, in accordance with WTO rules. You need to know there is more Brexit related trade disruption in the pipeline.
Nothing the government has done so far will do much to solve the HGV driver shortage. In fact I can see more incentive for UK HGV drivers to seek work in the EU, than for EU drivers to look for short term work in the UK. Although there is also a shortage of HGV drivers in the EU, in contrast to the UK, supply lines and essential services are being maintained. But this is simply symptomatic of many other examples of Brexit self harm that will impede recovery. Erecting trade barriers with your nearest and largest trading partner comes at an important cost that can only be expected to depress the economy.
Thanks to M B-G!
Might the L Ds be a little more definite and forceful?
Might significant sections of societies not paying their equitably due taxes result in national ignorance of the real tax base, the encouragement of commercial success through tax manipulation rather than commercial prowess and harm to the vital social purposes and benefits of taxation?
A well-argued case for a Budget which would benefit some of the poorest, young and old, as you show, Michael. The trouble is, of course, that this government has no interest in helping the poorest people, particularly if they are not in work. And if they are in work, it’s just hard luck apparently that the Universal Credit restored level won’t be enough to keep many people from the unfreedom of debt, despair and the food banks. ‘We’re increasing the minimum wage!’ is the government’s excuse, heard on Any Questions at the weekend, an excuse to which there will have been a silent scream from hundreds of listeners, ‘Just you try living on it for any length of time!’
@Peter Martin
“Whoever came with the notion that that the BoE can be regarded as independent and somehow separate from Govt must have rocks in their head instead of brains!”
I seem to remember it was a Conservative party idea that a newly elected Labour party actually carried out. …
“As the party now supports a UBI we should be moving towards the idea that a couple receives twice the amount as a single person.”
This would also suggest the party needs to be moving towards the idea of a couple’s income – a couple with one earner should receive a similar level of income as a couple with two incomes.
@ Roland,
You’re right. Unfortunately politicians with neoliberal rocks in their heads aren’t confined to the Tory party. It should have been obvious to anyone of any intelligence that monetary and fiscal policy needs be co-ordinated. The problem for years has been that fiscal policies have generally been too tight and those in charge of monetary policies have tried to compensate by having too loose monetary policies.
That’s why interest rates are ultra low.
The looser fiscal policies of the last year or so has changed that so now we will likely see tighter monetary policies used to try to correct too loose fiscal policies. It is no way to run your economy.
Let’s hope Larry Elliott is right about this crazy system not surviving the next crash!
https://www.theguardian.com/commentisfree/2019/sep/12/central-banks-political-independence-monetary-fiscal-policy
@ Martin,
“WTO rules mandate that tariffs for the EU are the same as for other countries.”
No, they don’t, because we have a FTA with the EU but we don’t have one with most other countries.
Thank you everyone who has posted a comment on my article.
Joe Bourke,
I am not sure what your point is about the spending which has already been announced. You didn’t point out how much of the sums you give are new money rather than what has been announced earlier in the year or before. Of the £6.9 billion for transport only 1.5bn is new money. The Lifetime Skills Guarantee is not new and I couldn’t find anything about it being given any new money. The ‘£1.4bn to subsidise foreign investment in science and tech’ was announced in January 2020 and only part of the money is new. It is not clear how much of the £850m for museums and galleries is new. Of the £500m for family hubs only £350m is new. (https://www.theguardian.com/uk-news/2021/oct/24/autumn-2021-budget-what-do-we-already-know-about-rishi-sunaks-plans)
Thank you for reminding me about the lack of money to fund Covid education catch-up. I think 3.1bn has been announced in two stages for the next three years. And Sir Kevan Collins believes the total should be £15bn. A shortfall of £11.9 billion. The government should provide this approximate £4 billion a year for Covid education catch-up.
Just because of other countries have or are expected to increase their interest rates should not automatically mean we increase ours. The decision should be made in relation to the amount of inflationary pressure in the economy and the effect on inflation and production if the value of the pound falls.
Martin,
As Peter Martin pointed out “we have a FTA with the EU”. The ‘most favoured nation’ rule does not apply to trade deals. We have a trade deal with the EU – the UK-EU Trade and Cooperation Agreement. I think it came into force on 1st May 2021. “The UK and the EU agreed to zero tariff and zero quota trade on goods, meaning that businesses will not face costly tariffs. However, to qualify for tariff-free access, firms will need to ensure goods meet Rules of Origin requirements as set out in the treaty, ensuring these goods meet the ‘local’ qualification criteria” (https://www.cbi.org.uk/uk-transition-hub/exporting-goods-to-the-eu/).
Katharine,
In the news tonight is that the National Living Wage is being increased to £9.50 an hour. The increase of 59 pence is 3.5% above the inflation rate of 3.1%.
I would disagree on the work allowance. Each £1000 of work allowance is equivalent to a £24 per fortnight rise in basic UC for those in permanent work but it gives nothing to the poorest (the unemployed) is almost impossible to calculate for those in casual work especially self-employed and is only given once per household. Better to put the money straight on the basic allowance.
How come the Tory ‘money tree’ is so much more acceptable than Labour’s? Payback time will come one day, possibly sooner than some of us think.
A Tory government splashing the cash in a dash for growth, a fractured opposition, a rise in inflation, oil prices soaring. Does it remind you of the 1970s, without the EEC and the prospect of a North Sea oil bonanza? I’m not sure about the industrial unrest; but you never know.
Michael BG:
While tariffs might be nominally free (for some but not all products, I think), necessary controls do add to the cost, but these have been delayed again: https://www.reuters.com/world/uk/britain-delays-implementation-post-brexit-trade-controls-2021-09-14/
Quite likely they will be delayed again next January.
The government can create any amount of money they wish to shape a society which is good for all of us. If that money creation is inflationary, they can remove some of it through taxation.
(From Lord Sikka)
https://www.taxresearch.org.uk/Blog/2021/10/26/the-truth-about-money-in-the-house-of-lords/
@ Steve,
Lord Sikka is quite right. The problem, though, is that the mainstream of the economics profession are wedded to the notion that increased interest rates rather than taxation removes spending capability.
It does for those who are borrowing but actually increases it for those who are lending. Whereas increased taxation could be more sensibly targeted and directed for counter inflationary purposes.
Thanks to P.M!
Would it be reasonable to say that mainstream economists hold to inflation theories which further enrich the already wealthy to the cost of the not so?
Lord Sikka is arguing against the suspension of the triple lock and allowing the stare pension to increase by 8.1% https://hansard.parliament.uk/Lords/2021-10-13/debates/7CEE6115-3BE0-409E-BACC-517493188571/details#contribution-BEC014A4-3786-4BF7-91D8-69A6D1301839. He bases the argument on redistribution by taxation.
“The extra £5 billion that is needed for the triple lock is already available. The 2020-21 cost of paying the state pension to 12.4 million retirees is £101.2 billion compared with £98.7 billion for 2019-20. If you look at the National Insurance Fund accounts for the year to 31 March 2020—the most recent information—they show a cumulative surplus sitting there of £37 billion. That is more than enough to meet the triple lock obligation of £5 billion. Will the Minister explain why this surplus is not being used to honour the triple lock?”
“They could utilise the £37 billion surplus in the national insurance fund; they could restore the 18% Treasury supplement which was removed by the Thatcher Government. They could find the money by taxing capital gains in exactly the same way as earned income, which would raise £17 billion a year more and another £8 billion in national insurance contributions—at the moment, unearned income is exempt from national insurance. They could tax dividends in the same way as earned income, which would raise another £5 billion in taxes plus another £1 billion in national insurance. They could extend the current 12% rate of national insurance contributions to earned incomes above £50,300, which would raise another £14 billion a year. The Wealth Tax Commission told us earlier this year that, with an asset threshold of £2 million, a wealth tax could raise up to £80 billion a year. Billions could also be raised by extending the scope of financial transactions tax.”
These arguments have nothing to do with macroeconomic fiscal and monetary policy. They are entirely based on tax equity and redistibution of incomes.
Peter Martin,
the mainstream of the economics profession advocates increased interest rates rather than taxation to curb inflation with good reason. Money has a simple purpose. To provide for a store of value and act as a medium of exchange. The government’s ability to spend is not bound by tax collection or debt issuance, other than by its own institutional checks and balances. However, In order to retain confidence in the purchasing power of a currency, government spending is bound by the combination of taxation and debt issuance. Interest rates can be increased quickly to address inflation. Fiscal policy takes time and often has lags of up to 18 months by which time conditions have changed, for better or worse.
The BofE monetary policy committee has operational independence, but operates in accordance with the mandate set by government as linked above. That gives it a wide degree of flexibility in over or under-shooting mandated inflation targets, when considered appropriate. Independent central banks are part of the institutional checks and balances that serve to retain confidence in fiat currencies.
Based on past experience, there is no reason to believe that an elected government, without the constraint of institutional checks and balances, would manage economy policy other than for short-term electoral advantage, regardless of immediate inflationary consequences i.e. the stop-go policies of the post-war period.
Monetary policy and fiscal policy do require coordination but the risks are not symmetric and in a situation of stagflation – declining growth and rising inflation – may take opposite directions.
Michael BG,
countries are raising interest rates around the world in response to global inflation. Russia has hiked rates to 7.5% https://www.financial-world.org/news/news/economy/8502/russia-hikes-rate-to-75-in-battle-to-tame-inflation-signals-further-rise/
Infation is spiralling in Turkey as the Turkish Lira weakens https://www.paturkey.com/news/turkey-on-the-verge-of-a-weak-currency-inflation-spiral/2021/.
US consumer price inflation is already over 5% and likely to persist for some time https://www.ft.com/content/36f0b102-b9a0-4f52-96b3-fc3a51729375.
Even Germany is experiencing much higher inflation than normal https://uk.finance.yahoo.com/news/exclusive-german-govt-expects-inflation-090309691.html
Some pressures may be transistory, but the uplift in prices is expected to be permanent in the UK, meaning wages will have to continue to rise to maintain living standards. Higher inflation of perhaps 4% to 5% is likely to be with us for several years https://moneyweek.com/economy/inflation/604011/this-inflation-surge-is-definitely-not-transitory. Higher taxes to address inflation rather than improve public service provision will only depress living standards further. What is required is higher long-term interest rates to contain new credit creation in line with supply constraints. That will also help in slowing the growing chasm in housing and wealth inequality in the UK by slowing house price and rent inflation.
Steve Trevethan,
the impact of a low interest rate envioronment on wealth inequality has been exhaustively studied by the Dutch central bank https://www.dnb.nl/media/jbybr2et/working-paper-no-632_tcm47-383633.pdf
The problem is that the average Joe is persuaded to believe that higher interest rates are harmful. We are led to believe that if interest rates rise and our cost of debt rises, this would be a killer of wealth. Who wants to spend more money servicing debt? However, the Dutch Central bank found that this was, in fact, not the case. The statistics demonstrated that higher interest rates helped reverse the share of wealth held by the top one percent. In other words, you and I may pay a little more on a loan, but the wealth inequality is smaller. The study actually showed the opposite. We have a higher quality of life during times where interest rates are higher. Of course, many people don’t care about their qualify of life. They just want to have slightly more money than their friends and neighbours.
The paper from the Dutch bank concludes “loose monetary conditions strongly increase the top one percent’s income and vice versa”.
Peter Davies,
I am not sure if your comment is addressed to Joe Bourke who wrote, “There is still a possibility that there may be some concessions on the withdrawal of the Universal Credit Covid uplift, perhaps in the form of increased work allowances” or to me. In the article I wrote, “In addition to this the Universal Credit work allowance should be restored for single people and couples without children (it was abolished from April 2016).”
Indeed, a work allowance of £1000 a year is worth just over £12 a week. Until April 2016 a single person or a couple without children had a work allowance of £111 a month (£1332 a year). A single person or a couple with children currently have a work allowance of £287 a month. The purpose of the work allowance is to make work pay and not increase benefits for those not in work. As only those in work have a work allowance it costs the government less to increase it than to increase the benefit rates for everyone who receives that benefit.
John Marriott,
The economy works the same for the Conservatives as it does for Labour. It was possible for the government to stimulate the economy in 2010 (which was our policy). You should understand that the national debt does not have to be paid back. I don’t think there was any “payback time” on the large deficits run up during the Second World War, so there doesn’t have to be any economic downside of the Covid support the government provided financed mostly by quantitative easing.
Oil and Gas price rises are a concern for the whole global economy. If the global economy goes into recession then demand for energy will fall and so will the price. However, it seems oil prices are not quite as high as they were in 2018 (see Brent crude oil price chart https://www.bbc.co.uk/news/business-58727437).
Steve Trevethan,
I prefer your re-wording of Lord Sikka to what he actually said. However, I would rather the government didn’t create the inflation in the first place. Doing so creates a “go” period followed by a “stop” period. In the 1950s there was talk of “stop-go” economic policies. The government needs to manage the economy to create economic growth but not too much inflation and reduce the number unemployed at a rate the economy can cope with and so get to full employment.
Both Conservative and Labour governments adopted similar economic policies in the post-war period – so called Butskellism. It featured current budget surpluses in every year from 1947-48 to 1973-74 with much higher levels of capital spending on public housing and investment in nationalised industries than what we have seen since.
The Covid debt will likely need to be refinanced over many decades. Fortunately, debt service costs are currently relatively low (around 6% of tax receipts). However, what the future refinancing costs will be in years to come and whether growth rates will exceed interest rates is unknown.
The spending review over the next three years is the key element to tomorrows budget.
There is an urgent need for significant green investment to put the UK on track to meet its legal net zero emissions target and its commitment to nature restoration. It is estimated additional investment of around 30 billion per year would create over half a million jobs, spread throughout the country.
Social care needs much higher investment. At least £11 billion in additional funding is needed to deliver free personal care for the over-65s, secure a pay rise to the Real Living Wage for social care workers, and improve access to care in people’s own homes. To build an adult social care system in which all those eligible get care free at the point of use, both for adults aged 18-64 and those over 65, would require £29bn a year.
As emphasised in the LibDem 2019 manifesto, around £10bn a year over and above current spending is needed for childcare, enabling parents of young children, especially women, to participate fully in the labour market, and thereby to earn incomes and spend them in the economy.
Capital spending can and should be financed by amortised borrowing. While recurring current spending can be initially financed by borrowing (when there are sufficient under-utilised resources available in the economy), that is only a short-term and non-permanent source of cash flow. Ultimately, recurring annual expenditures require tax financing to secure public service provision on a permanent basis and avoid future spending cuts or drastic hikes in interest rates.
@ Joe @ Steve,
“the impact of a low interest rate envioronment on wealth inequality has been exhaustively studied by the Dutch central bank”
It’s interesting that a bank can do this study. What a clever bank! OK so you really mean a few guys who happen to work at the bank. I hadn’t been aware that De Nederlandsche Bank was such a centre for radical thinking. I doubt that it is. If “the bank” is linking tight monetary policy with lower wealth inequality that’s probably because “the bank” wants tight monetary policy rather than reduced inequality.
The period of the tightest monetary policy would have to be in the early years of the Thatcher govt. So the good authors of this report, who are happy to introduce 4 x 4 matrices into their argument, would argue that this would have produced more equality whereas us “average Joes” had it all wrong, when we accused Thatcher of putting class interests before country. Or did we?
Except I don’t think we did at all. Let’s just leave the complex maths out of it and ask everyone what they prefer.
@ Joe,
It ( Butskellism) featured current budget surpluses in every year from 1947-48 to 1973-74
The Government had spent lots into the economy during the war at the same time as the population hadn’t much to spend their money on. Naturally when the war ended there was a desire to make up for lost time and spend again on such luxuries as food and clothing. The end of a war is always a dangerous time, though. The population is happy that peace has returned and wants to spend but the economy hasn’t made the transition to enable that spending to occur without creating inflation.
The German government got around the problem by scrapping its old currency and introducing a new one. In the UK that wasn’t politically possible so an ultra tight fiscal structure had to be maintained to prevent inflation. It shouldn’t be taken to mean that this it is always the best policy.
The period up until the early 70s was when the £ was fixed to the dollar which in turn was on a gold standard. MMT economists often make the point that we are no longer attached to gold, and haven’t been for half a century, so different considerations now apply. The mainstream carries on as if nothing has changed.
Your last paragraph is typical neoliberal mumbo jumbo. The level of government spending and the types of spending, relative to taxation, cannot be subject to arbitrary rules especially when those rules take no account of the level of private savings in the economy and nor any account of the international balance in trade.
@Michael BG I get your reasoning. There will always be a trade off between helping those in greatest need and incentivising work but choosing a work allowance that specifically excludes the unemployed does not sit well with your title “a budget for the poorest in society”.
The reasoning given when the work allowance was first introduced is that there is a cost to working. For full-time work that might be close to a fixed amount that all low paid workers require but the reality of today is that nobody in full time work can earn anything like as little as the work allowance. The people on really low incomes are working part time or intermittently That means work costs are largely proportional to how much work they get. The majority of working people on permanent UC are actually earning enough to be paying NI and often income tax. (minimum wage anywhere near full time does that). That’s where the read disincentives are.
@ Joe,
“Interest rates can be increased quickly to address inflation. Fiscal policy takes time and often has lags of up to 18 months by which time conditions have changed, for better or worse.”
An overreliance on monetary policy, or interest rate adjustments, plus a neoliberal disregard for necessary credit regulation, has led us to where we are with unaffordable housing for the young. It only seems to bring inflation under control if you don’t include property prices. But as the ruling class generally own property they don’t particularly mind property price inflation. That’s good inflation to them whereas a rise in someone’s wages is bad inflation.
Monetary policy is a blunt tool. It works the same in Redcar as it does in Richmond upon Thames. But we don’t have the same inflation problem in the two towns. Fiscal policy can be tailored. Monetary policy cannot.
The danger is that if you keep tightening with small steps in the interest rates you’ll crash the economy 2008 style. Just look at the staircase pattern prior to 2008.
https://ichef.bbci.co.uk/news/2048/cpsprodpb/5336/production/_116820312_uk.interest.rate.png
Peter Martin,
the level of government spending should be determined by the wage and goods and services needs of the NHS, Schools, local authorities and other public services (Resource spending) as well as pensions and social welfare (Annually managed expenditure), capital expenditure and debt service costs.
Those spending needs don’t change because public savings or trade balances go up or down.
Government budgets distinguish between capital spending and current spending as do most informed economic commentators such as the IFS or resolution foundation.
Investment in public housing is financed by borrowing for land acquisition and construction. Repayments are financed by rents. Investments in economic infrastructure are financed by borrowing and repayments from the proceeds of growth that the investments facilitate.
Current state spending of circa £950 billion (excluding capital spending) is financed principally by taxation and other receipts (around £850 billion) with the balance currently financed by borrowing subject to the level of tax receipts i.e. the cash flow of the business cycle.
There are times for fiscal stimulus and times for retrenchment when the private sector is expanding at a healthy pace. It is the growth rate of the private sector that determines the borrowing needs of the government to finance current spending and that borrowing is driven largely by automatic stabilisers (lower than projected tax receipts and higher annually managed expenditure). It is the governments Investment program in public housing, infrastructure, research and skills development that determines the borrowing requirement for capital spending that adds additional fiscal stimulus to automatic stabilisers. It is necessary to maintain an adequate level of public investment to ensure the growth of supply capacity and productivity in the economy, particularly green investments as we transition to a net zero economy.
The proportion of national income that is allocated to public spending is a political decision rather than an economic one. The level of living standards are determined by productivity and competitiveness. You can run a successful economy in a low tax environment such as Singapore or in a high tax environment such as in the Nordic model. In the UK that proportion has historically been around 40% and is currently around 42% of GDP. It seems likely that in an ageing society, healthcare and social care costs will see that proportion rise further.
@ Joe,
“Those spending needs don’t change because public savings or trade balances go up or down.”
Unfortunately, and relative to the levels of taxation revenue, they do.
So, for example, when the 2008 GFC struck and there was a switch in the private sector from wanting to net borrow to wanting to net save the levels of taxation revenue fell. The correct course of action was for Government to spend more because everyone else was spending less. Instead the Coalition Govt did the opposite and worsened the situation.
Our overseas trading partners are also savers and spenders. If they wish to spend less on buying goods and services from us than they earn selling us goods and services they are net savers. Vice versa if they want to spend more. If they want to spend more, then Government spending, relative to taxation revenue has to be lower. Conversely……..
To some extent this is self correcting but we need to understand that it is. This means not panicking if deficits seem high and conversely not thinking the spending taps can be opened up if they aren’t.
Setting fiscal targets which ignore the arithmetic realities makes no sense at all. They probably won’t be met in any case because they can’t be.
Peter Martin,
inflation is am economy-wide phenonemon and needs to be addressed on a macroeconomic basis. Raising interest rates to address inflation is not an over-reliance on monetary policy. It is targeting the source of excess credit creation.
Public spending needs do not change as public savings or trade balances go up or down. There are automatic stabiliser adjustments in the form of lower tax collections and some elememt of automatic increases in benefit payments, but the basic resourcing needs of the NHS, Schools, state pension provision etc remains unchanged.
There may be a need for short-term fiscal stimulus to pump prime the economy during times of recession but that, as the name suggests, is a temporary stimulus (often in the form of temporary tax cuts or accelerated capital spending) designed to revitalise private sector activity, not a replacement for private sector spending.
Setting budgets for spending, tax receipts and deficits/borrowing requirements is simply part and parcel of the management of pubic finances. Any party incapable of competently managing public finances has no place seeking tp govern other peoples affairs.
@ Joe,
If raising interest rates to address inflation was a good idea why have the monetarists pushed them down to nearly zero in the first place? Why allow the build up of so much private debt in the economy by lowering interest rates if it needs to be tackled by higher rates? The monetarists made the same argument prior to the 2008 crash and said rates needed to rise to slow down the economy.
Sure it did that effectively enough!
The sign of having some intelligence is to learn from previous mistakes.
Not everyone agrees with the work kindly cited by J. B.
https://voxeu.org/article/monetary-policy-and-inequality
Might it help to look in more detail at extreme poverty and wealth, their contexts and their connections?
The economy seems to be affected/controlled through monetary and fiscal factors so might we look at them in combinations?
The child poverty metrics alone show that our current set up is not efficient/effective for enough of our people.
Might we also bear in mind attitudes cultivated by the main stream media?
Might opportunity costs be considered?
We have spent so many lives and so much money through our optional involvement in Afghanistan where we helped to destroy an O. K. government by means of a an extreme group which we helped to gather, train, arm and pay only to be defeated by them.
https://en.wikipedia.org/wiki/Operation_Cyclone
Might these resources have been saved or better used?
Might we bear in mind the comment by leading economist, Joan Robinson?
“The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”
Joe Bourke,
I hope Lord Sikka’s figures are correct as he set out a number of ways of raising extra income for the government, which we should all be aware of us, so we can argue using them for the things we wish to see the government spend money on (such as benefits increased to the poverty line, or a UBI set at the poverty line).
It is possible for fiscal changes to take place immediately rather than in April each year. A tax increase or an interest rate rise can have the same economic effect with the same time-lag for the full effect to come into force, especially if we include the multiplier effect. However, interest rate changes can have immediate effects on the exchange rate and so can have an immediate effect on some causes of inflation.
Higher interest rates adversely affect people with large debts and those with a mortgage. Their living standards are reduced. They also remove demand from the economy. However, it is the effect on business which can cause the most damage to the economy and living standards. This could be particularly bad at this time because of the huge amounts of debt that businesses have because of Covid. Business are likely to go bust if they can’t service their debts because of higher interest rates. If this happens more people will be made unemployed and so we will go into recession. Then as you often point out higher interests mean because borrowing costs more that businesses put off investing in their business to improve productivity and this means the growth from that investment doesn’t happen.
All UK post-war governments had a deficit on their spending for every year between 1947 and 1975. There was a surplus in 1947 and in 1975. In 1948 the deficit was £185 million, in 1973 it was £1.631 billion. The highest was in 1970 at £3.928 billion. The second lowest was £251 million in 1961 (https://www.ukpublicspending.co.uk/spending_chart_1947_2021UKm_17c1li011tcn_H0t_UK_Deficit_Since_World_War_II).
The total amount of government spending and their planned income (and therefore tax rates) should be determined by the state of the economy. If there is spare capacity in the economy the government can spend more; if inflation is rising and likely to continue to do so then the government needs to either reduce spending or increase taxation.
Peter Davies,
I have suggested not only restoring the £20 a week Universal Credit uplift and extending it to the legacy benefits but also increasing the current rates by 3.1%. This means if someone only receives the basic amount of Jobseekers Allowance and are aged 25 or over they will receive the inflation up-rate of £2.32 and £20 a total increase of almost 30%.
For one member of a household to be in work is more expensive than if the whole family is not working. I support the idea that there should be an amount a person can earn before they start to lose benefit. Therefore I support our policy to introduce a new second-earner work allowance. I think it should be at least £217 a month for each person in work. As you point out it is very important for those who only work part-time.
Imagine a single parent working 20 hours a week at the current National Living Wage, giving them a weekly income of £178.20.They don’t earn enough to pay NI or Income Tax. If there was no work allowance they would currently lose £112.27 of their benefit (the taper will be reduced to 55% from December) and so would only be £65.93 better off. For every pound they earn they lose 63 pence. (When they pay NI and Income Tax they only benefit by 20 pence for each pound they earn. {As you point out a large disincentive.} Earlier I gave the lower rate work allowance for last year not this year.) With a work allowance of £67.62 a week, they would lose £69.67 and so be £108.53 better off.
Increasing the Income Tax Personal Allowance and National Insurance Primary Threshold in line with inflation (by 3.1%) would cost about £4.43 billion. People paying both would be about £113.33 a year better off.
It’s difficult not to feel outrage about some statements of the Chancellor in this budget. I heard him saying about reducing the taper rate for working people on Universal Credit so instead of losing 63 pence from each extra pound earned they would ‘only’ lose 55 pence. Apparently they might be a thousand pounds a year better off! Congratulated by this wealthy man! Meantime the carers in the home, the parents of infants, the sick and disabled who can’t work, will suffer the deprivation of that vital £20 a week that UC had temporarily. I heard a single mother of three on the radio saying she had had to give up the television as it wasn’t a necessity! Realities of this unequal society that the current government is likely to make worse. And for most people, the IFS already saying, a static standard of living or worse for years to come.
I don’t think reducing the taper to 55% is the best way to help the poorest in society. It helps people the more they earn and if they earn nothing they do not benefit from this change.
Imagine someone receiving £20,000 a year in benefits (benefit cap level outside London) and they get a job paying £40,000pa, currently they would expect to receive a net income of £31,573.54 from their new job and with a work allowance of £293 they would lose £19,706.74 of their benefits leaving them £293.26 a year. If their net income is increased by a further approximate £466 they would receive no benefit. However, with the new taper of 55% they only lose £17,204.30 leaving them receiving £2795.70 a year in benefits. Now their net income has to increase by about £5084 a year for them to receive no benefit. This means someone earning about £47,470 would still receive a small amount of benefit.
Of course the better policy for the poorest in society would have been to restore the £20 Universal Credit uplift and extend it to the legacy benefits. In the news it is being stated that the Universal Credit uplift affected 6 million people but the change to the Universal Credit taper only affects 2 million people. If the chancellor had wanted to just help the poorest people in work on Universal Credit he should have, instead of reducing the taper, provided a work allowance for people without children and increased it by £1588 a year those who have one. A work allowance of £1588 a year or an increase of £1588 would make a person £1000.44 a year better off (therefore it would cost about £2 billion the same as the taper change).
Joe Bourke,
You seem to believe that inflation is caused by excess credit and therefore the amount of credit available should be reduced by increasing interest rates. However, credit is only excessive if it increases demand, if it is being used to increase productivity it is a good thing. The way increased interest rates effect consumer demand is by reducing the amount some people have to spend. I am not aware of my credit card interest going up and down according to the bank rate and my credit limit has never gone down. Interest rate increases seem to be a good way to discourage business investment and a poor way to control consumer spending.
For the record, the withdrawal of benefit is based on net income after NI and Income tax so before the NI rise you kept just under 25% of your income and when that and the reduced withdrawal rate kick in you will keep just under 30%. Your 20 hour per week worker whose new minimum wage leaves them paying NI will keep 39% up from 33%
I was a little surprised that neither Joe Bourke nor Peter Martin questioned my allocation of £11.7 billion for Jobs Guarantees and Training Guarantees as this works out at £11,700 per person. I think they both want to pay people on their Job Guarantee at the National Living Wage. With a 37 hour week and an hourly rate of £8.91 (old rate) this is £17,142.84 a year gross, which I calculate is £15,482.10 net. The £11.7 billion is the extra cost on top of the cost of the benefits people receive. I allocated £1.5 billion for extra staff and administration costs of the schemes and an average of £10,200 a year for each person. This is based on an average of £100 a week to cover their travelling costs and the extra payment they receive for being on the scheme of £50 a week. Plus an average of £5000 per person for other costs such as training courses and exams.
I have started to read the Budget book and saw in paragraph 2.94 (on page 66) that the government is also “increasing the amount that households with children or a household member with limited capability for work can earn before their Universal Credit award begins to be reduced – the Work Allowances – by £500 a year”. This is worth £275 a year with a taper of 55%. I am disappointed that the government has not restored a work allowance for single people or couples without children not with limited capability for work.
Peter Davies
I don’t know how I made the mistake in calculating how much a person would keep after paying NI, Income Tax and then having the taper applied. If applied separately in the correct order they end up keeping 26.05% with a 63% taper (100-12-17.6-44.35). With a taper of 55% they end up keeping 31.68% (100-12-17.6-38.72). Sorry for my mistake. However my person earning £178.20 a week would not pay National Insurance because an employee only starts paying NI on income over the Primary threshold of £184. You are correct that next year with an hourly rate of pay of £9.50 they would pay NI, but only on £6 a week and only if they had no work allowance. The marginal rate would be 39.6% (100-12-48.4) of this £6.
That’s the amount they keep. The normal definition of marginal rate is 100% – that.
The easy way of calculating the amount they keep is just multiplying the fraction they keep at each stage e.g. 0.665 (after 20% tax and 13.5% NI) * .45 (55% withdrawal rate) = .29925. A tad under 30%.
Peter Davies,
You are correct 39.6% is the percentage that they keep. Where did you get a NI rate of 13.5% from? The current rate is 12% and it is increasing by 1.25% (not 1.5%). Using the new rates and your method we get 0.8675 x 0.8 x 0.45 = 0.3123.
I was wrong about the National Insurance Primary Threshold (NIPT) not being increased for April 2022. (I thought it had been announced that both NI thresholds and the Income Tax allowances were all being frozen.) I wrote about a person being paid at the National Living Wage having their income increased because the NLW is being increased to £9.50. This increases their income to £190 a week. Currently the NIPT is set at £184 a week. Hence my £6 a week. However, the National Insurance Primary Threshold is being increased to £190 a week.
National Insurance and Income tax both work on the gross so you subtract them both at the same time .6675 * .45 = 30.0375 %