LibLink: Tim Leunig – ‘Granny tax’ does not go far enough

Writing in the Financial Times (registration needed), Tim Leunig argues that pensioners have had an easy recession, with good pension increases and extras such as bus passes, free TV licences and winter fuel allowances.

The freezing of the tax allowance cuts a trivial 0.25% off pensioner incomes, Tim says, but, even then, the Institute of Fiscal Studies says that pensioners are better off, while working age people have suffered the worst of the government’s measures.

Tim argues that employees’ national insurance contributions should apply to pensioners’ income from employment.

* Paul Walter is a Liberal Democrat activist. He is one of the Liberal Democrat Voice team. He blogs at Liberal Burblings.

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  • The key point is that not all pensioners are the same in terms of income. We should absolutely be helping the poorest, but it’s fine for the top 50% to be affected by this minor ‘granny tax’ and right that those with the highest incomes – higher than most working age people, and often tax exempt at every stage – should pay more.

  • “We should absolutely be helping the poorest, but it’s fine for the top 50% to be affected by this minor ‘granny tax’ …”

    The trouble is that it’s the pensioners with higher incomes who _aren’t_ affected by the granny tax, because those with incomes about about £29,000 didn’t benefit from the higher age-related allowances. Those hit by it are those on lower and middle incomes.

  • Tim’s key point is a simple one. As succesive governments have used increases in National Insurance to pay for headline grabbing reductions in the basic income tax rate over the years, the income tax base has been reduced by virtue of the exclusion of over 65’s from NI. The cost of this exclusion is estimated at 7.2 billion by the IFS.

    The principle argument made by those opposing the combining of tax and NI into a single tax, is that it would penalise pensioners and unearned income. If NI was applied to over 65’s and the threshold remained at £5304 per annum, I would have some sympathy with the argument. If however, NI is combined with Income tax such that no tax or NI is levied on incomes below the tax personal allowance, then the argument in this article becomes that much stronger.

    The other argument sometimes proferred against combining income tax and NI is that if people understood what they were actually paying it would frighten the horses – so to speak. I think that is a somewhat spurious argument in the age of the internet and 24 hour news. In any event, with the introduction of personal tax statements, most people should, in future, have a good understanding of what they are paying and what it is used for.

  • Alex Sabine 23rd Mar '12 - 4:16pm

    Haven’t read Tim’s full article yet (my FT login isn’t working for some reason), but at face value I’d make the following observations on his suggestion:

    1. That would truly be ‘courageous’ in the Sir Humphrey sense! If you were surprised by the ferocity of the reaction to the ‘granny tax’, you aint seen nothing yet… Indeed, bigger worry is that this furore doesn’t bode well for a serious debate about the longer-term funding challenges of an ageing population and, in particular, for a proper debate AND ACTION on the Dilnot recommendations on long-term care.

    2. From a tax reform standpoint, extending employee NI to pensioners’ earnings would be a simplification measure; indeed it would make a full merger of income tax and at least the employee/self-employed side of NI look feasible, which would be a big prize. The extra revenue could be used to lower NI rates and thus the premium charged on earnings over other forms of income. It would also ensure that the burden of the overall austerity programme was more evenly (some would say more fairly) shared across generations.

    3. HOWEVER, the government would have to prepare the ground for such a big change and argue its case in the face of vocal opposition, not slip it out in a budget speech as a simplification measure. (Understandably, most voters are interested in the impact of tax changes on their wallets, not the elegance of tax system design. They are not reassured that a tax rise is justifiable because it makes the system simpler or more rational, however desirable a public policy goal that is.)

    4. This would raise the marginal tax rate on pensioners’ earned income from 20p to 32p (minus whatever reduction in NI rates could be afforded as a result of the broader tax base). Given that we know that certain groups are more responsive than others to work incentives – notably mothers of school-age children and people around retirement age – this might have a significant effect on labour market participation. To some extent there is a tension here between simplicity/neutrality and trying to maximise work incentives, but if this change resulted in fewer over-65s working then it could worsen the fiscal implications of demographic change. Of course, the gradual rise in eligibility for the state pension will be a more significant factor here though, so we might only see this behavioural change in people with decent levels of private savings.

    5. Osborne’s announcement that there will in future be some sort of automatic mechanism linking increased life expectancy to rises in the state pension age has generated much less reaction. Yet this will have a much bigger long-term fiscal effect than abolishing the age-related allowances. The lesson? When you protect current and imminent retirees, you can achieve much bigger changes that begin to address our demographic challenges in an equitable way.

    6. Sorry, Tim, if you have dealt with these hurdles in your article! I will buy a copy of the FT and read it properly…

  • David Blake 23rd Mar '12 - 4:17pm

    A particular problem is the impact of low interest rates on savings.

  • Nick (not Clegg) 23rd Mar '12 - 5:15pm

    @ David Blake

    That is a real problem.. Interest rates are typically below the rate of inflation, so savers (whether pensioners or others) are seeing the value of their nest-eggs eroded and, adding insult to injury, are, in many cases, paying tax on interest which is already insufficient to protect their savings from inflation.

  • I look forward to LibDem activists ‘doorstepping’ pensioners with the slogan, “The Granny Tax doesn’t go far enough”. After all, why be coy; we LibDems have the courage of our convictions, don’t we?

  • Whichever way you choose to argue/discuss the “new pensioner’s tax allowance arrangements”, arithmetic tells us that the pensioners are the ‘losers’ in all this whilst those earning c. 160K p.a. are the winners. Take from pensioners and give to the very well paid. Is this what LibDems should be about.

  • Foregone Conclusion 23rd Mar '12 - 7:49pm


    ‘Arithmetic’ (or the Red Book) tells me that the top rate cut cost £0.1m; the cut in the tax threshold for low and middle people under 65 cost ~£3bn. Add to this the fact that Stamp Duty/reliefs changes will claw back £0.5m from the super-rich*, it would be more accurate to say ‘middle-income pensioners pay for younger people on low and middle incomes.’

    *Not the same people, obviously. You will find millionaires getting tax cuts; you will also find multi-millionaires being hit by the Stamp Duty changes who never paid the 50p rate anyway.

  • Foregone Conclusion

    That 100m figure seems to be unreliable – nooone is coming out in strong support because none knows the figures and it could be wrong. Also, the apparent clawed-backed taxes from the rich-well we will see

    Arguing the detail of the budget with respect to tax and spending is fairly pointless though as the numbers are quite low. Presentationally it has been an unmitigated disaster.

    The biggest issue for me is that the projected growth figures for the rest of the department are wildly optimistic – where is 2-3% over the next few years coming from? If we see further downgrades over the coming year then the credibility of the treasury and OBR is gone – not to mention the impact on the public finances.

  • Thanks for your comments all –

    Alex, your comments are helpful and I hope you enjoyed the article. The marginal rate affecting whether older people work is valid, but it is usually people in their 50s we are worried about here, not people over 65. But it is worth bearing in mind.

    Godfrey – the IFS post budget analysis (available from their website) says that pensioners are net gainers from announcements made this year, in real terms.

    I agree with Bazzasc that the big issue is growth – it will return at some point, but whether it is this year or next or the year after or… is very hard to tell.

  • Bill le Breton 24th Mar '12 - 7:39am

    Growth? on which subject we have now had half a decade of inappropriately tight monetary policy – presently set to limit NGDP growth to around 3.5%. And the politicos have spent the last month and more obsessing over the fine shading of fiscal policy.

  • Bill le Breton 24th Mar '12 - 9:10am

    … …tax incidence and minor supply side adjustments.

  • Michael Seymour 24th Mar '12 - 9:15am

    My State pension is £105 and small change a week, will you survive on that?
    Get real! and don’t talk about ‘having an easy recession’
    Get out of that cosy club you are in and find out what its like in the real world!

  • Michael – None of my proposals would affect you at all! But they will make me poorer when I am an affluent pensioner. Surely we both agree that is a good thing?

    If your total income is £105 you should also be able to claim a range of benefits – such as council tax benefit. Google “turn2us” and fill in their quick benefits checker. Unless you have very unusual circumstances they will accurately calculate how much you can claim.

  • Bill le Breton 24th Mar '12 - 11:04am

    Oranjepan, that we have had a bank lending rate of .5% for a long time and will soon have had £300B of quantitative easing doesn’t mean that we have had sufficiently loose monetary policy.

    Paradoxically, a central bank interest rate can be (and is in this case) evidence of tight and not loose money.
    Low NGDP and falling inflation should signal to us that monetary policy is tight.

    We really have to get our heads around this counter-intuitive proposition.

    Tight monetary policy has been hampering recovery in Japan for over 20 years and in the UK, US and Europe for over five years.

    That is why the recovery from the lowest point of the Great Recession has been far slower and weaker than in any previous recession, including the Great Depression. There is no other explanation.

    You have to ask why it was that the US (Europe and ourselves) recovered from the bust – which was as threatening as the housing bust. The answer is that the Fed, the ECB and the B of E ran much looser monetary policy and the economy came back very quickly indeed.

    I do recommend monitoring blogs by the Market Monetarists such as Scott Sumner at

  • Bill le Breton 24th Mar '12 - 11:23am

    Further more, even if we accept your assumption that there is going to be ‘modest targetted fiscal stimulus’ are you sure that the MPC won’t just tighten monetary policy further and faster to offset this?

    As it has set its monetary policy to achieve a disired end, given a known fiscal policy, if you change that fiscal policy without changing the Bank’s target, it will off set what it anticipates to be the effect of the fiscal policy by changing its monetary policy.

    The Coalition should renationalize the Bank of England (as was done in the Great Depression) and assume democratic control of monetary policy … or use its authority to set a temporary relaxation of the banks inflation target.

  • Aside from the odd ‘look at me, I’m such a badly off oap’ we should indeed look to pensioners with substantial income to pay more. They need to realise too that having emptied the pension pots into their own pockets, retired as early at the liked and ten keptbworking tax free while also getting their pensions, and wanting the beleagured rest of us to support their care, heating costs, tv and even with 24 hour free bus travel here in wales, there might not be quite the sympathy for senior citiens that there once was.

  • Alex Sabine 24th Mar '12 - 3:40pm

    Bill – While on some broad measures of money supply growth monetary *conditions* remain tight, I’m not sure that a 0.5% interest rate for three years, a big QE programme and as a consequence negative real rates of return on saving indicate that *policy* has been tight; the question is how effective the policy has been and the transmission mechanism.

    (In a past example of this distinction between official policy and monetary conditions, in 1979-80 the avowedly monetarist Conservative government initially believed monetary policy wasn’t tight enough to combat inflation even when interest rates were at 17% and there were strongly positive real rates, because the money supply was still overshooting its target range. But the falling velocity opf circulation meant the monetary aggregates were misleading and there was in fact a tight credit squeeze while the high exchange rate was having a major dampening effect also. It was only when they finally grasped that the monetary squeeze was in fact muuch more severe than the headline numbers indicated that they switched the balance to a more appropriate one of fiscal tightening and monetary loosening in Howe’s famous 1981 budget.)

    You are right that nominal GDP growth is set to remain low, reflecting the debt overhang, weak demand for credit in the corporate sector (given that this sector is running a financial surplus equivalent to 5% of GDP it is unlikely to need to borrow) and continuing issues with the supply of credit to SMEs. This is consistent historically with what typically happens following financial crises and balance sheet recessions: a slow, choppy and drawn-out recovery.

    Surely your suggestion of a suspension of the 2% inflation target is exactly what the Bank, in practice, has been doing? Hence why it has missed the target for month after month with tacit support from the government.

    Yet, while this has had a limited effect on boosting nominal GDP and supporting asset prices, real GDP growth has remained weak while food and commodity price inflation has squeezed household incomes and thus consumer spending (indeed, probably much more so than the fiscal austerity has).

    If, in the current circumstances with another potential commodity price spike looming, the Bank were to deliberately pursue a further departure from the inflation target (say by deliberately targeting 4% inflation for a period now that it’s falling back towards 2%) and was successful in this, the danger is that the extra inflation will simply erode people’s real spending power further and thus worsen the recession.

    So, not only is there no stable long-term trade-off between higher inflation and higher growth, even in the short run higher inflation might actually dampen growth in current circumstances. It is a difficult judgement, admittedly, which is made that much trickier if we do get another bout of externally generated cost-push inflation.

    As Oranjepan says, the risks to recovery are largely external factors outside our control, although a more positive scenario has a calming of the eurozone crisis (at least for now) and a strengthening US recovery boosting our net exports and persuading companies to unlock some of the cash they are sitting on.

  • Philip Rolle 24th Mar '12 - 4:00pm

    Pensioners, ironically, probably brought the “granny tax” on themselves. Their savings income has been cut dramatically by the very low interest rates, but they have complained little about this. Osborne therefore probably thought that he could get away with this measure. He’s probably right.

    Although some pensioners should pay more, I would have thought that the winter fuel allowance would have been the place to start. Their is no good case for subsiding the well-off and the allowance ought to be restricted to those with modest incomes. Ditto Tv licences, bus passes…

  • Bill Le Breton,

    We are going in as bit off topic here and it might be useful if you could publish a post-budget Market Monetarist critique of current UK monetary and fiscal policy, that can be debated.

    My discipline is not economics but accounting and finance. As a consequence, I tend to focus on the accounting relationship aspects of economic analysis.

    You say above “You have to ask why it was that the US (Europe and ourselves) recovered from the bust – which was as threatening as the housing bust. The answer is that the Fed, the ECB and the B of E ran much looser monetary policy and the economy came back very quickly indeed.”

    It is arguable that the underlying economy did not fully recover from the dot,com bust. The build up of corporate sector surpluses has been occurring since the bust , indicating a retrenchment in productive investment by this sector, well before the financial crash. These surpluses have to be offest elsewhere in the economy and consequently we have seen the government running significant deficits (both on and off balance sheet) at a time when it should have been able to run a surplus. We have additionally seen a rapid increase in household debt levels.

    The recovery after the dot,com boom was led by easy credit and low interest. The resulting big increases in money supply manifested itself in a housing and financial asset bubble and investment in developing economies, not in the investment and productivity increases needed to sustain real increases in the domestic standard of living.

    Efforts to reflate the economy again utilising monetary policy alone are hampered by the disconnect that has occurred between central bank base rates and banks actual lending costs and rates.

    At present the corporate sector of the economy is sitting on large accumulated surpluses, lacks the confidence to undetake large scale investment in the UK (as oppossed to rapidly growing overseas markets) and will continue to do so without a significant aggrgate demand stimulus. It looks like Minsky’s liquidity trap.

    Vince Cable’s recent leaked letter to David Cameron and Nick Clegg set out a coherent approach to long term industrial and economic strategy. The final point in the letter reminds us of the importance that housing construction played in the 1930’s recovery and advocates a focus on this area and infrastructure as a means to economic recovery now.

  • toryboysnevergrowup 24th Mar '12 - 7:14pm

    You could at least get your facts right – the impact of freezing the allowance is not 0.25% of pensioners income – the amout lost is £260 per year and it is only lost by those with incomes up to c£25,000 as those above that level do not get the age allowance – where I come from that is a not so trivial 1%+ of income. Of course for those earning 6 times as much we cannot be bothered to collect a “trivial” extra 5% on their marginal income as they obviously have better entrepreneurial and mathematical skills.

  • Alex Sabine 24th Mar '12 - 7:39pm

    Agree with much of Joe’s analysis about how we got here. I would focus on trying to fix the transmission mechanisms of monetary policy (to deal with the disconnect he identifies between official base rates and the actual cost of finance) to help with short-term demand stimulus alongside the announcement of pro-growth supply-side reforms (in the areas of planning liberalisation, labour market, tax system) aimed at boosting confidence in the medium-term prospects for corporate profitability and thus unlock investment.

    Unless developments in the eurozone crisis completely change the context, I don’t think fiscal stimulus in the conventional Keynesian sense of deliberately increasing the deficit is as risk worth taking given the nervousness of bond markets and the rapid public debt build-up that we are still in the midst of.

    Declining gilt yields (until the recent pick-up) at least in part reflect confidence in the UK as a relative ‘safe haven’ for investors – both because we have a credible fiscal plan and because we can print our own currency – but have also been artificially suppressed by QE and the fact that the Bank of England has been the major buyer of government paper and in effect funded a large part of the deficit.

    So market confidence cannot be taken for granted, and any substantial rise in market interest rates (reflecting a higher risk premium) would not only make financing the deficit more expensive but would also actually reduce aggregate demand by squeezing the still heavily indebted household sector, leaving us with both an even bigger deficit and weaker growth. It is also questionable how strong the fiscal multiplier effect is for a small open economy with a floating exchange rate like the UK (some of the impact of the domestic fiscal expansion will leak abroad through imports).

    In extremis (a collapsing eurozone hitting exports and corporate investment) we might need to resort to a temporary fiscal stimulus counterbalanced by an explicit commitment to a larger tightening in later years – but for now I don’t think it is the right remedy. The one thing the Chancellor could do within the current spending envelope is to further adjust the balance between current and capital spending cuts by a targeted increase in infrastructure spending offset by a tighter squeeze on the current budget – given that capital investment is more likely to bear fruit in terms of private sector job creation.

    Likewise the increased personal allowance (even though fiscally neutral because of offsetting tax rises) might have a small stimulus effect given the higher propensity to consume among the middle-income households it primarily benefits, although a big chunk of the benefit will be cancelled out by the planned rise in fuel duty later this year.

    But, to put the limitations of discretionary fiscal policy in the current situation in perspective, the estimated benefit from even a significant temporary fiscal boost is of the order of 0.2-0.4% of GDP; it would not transform the reality of a slow and choppy exit from the financial crisis and recession.

    So on balance I think monetary and financial sector policy should remain the principal focus when it comes to sustaining aggregate demand. And although I don’t think changing the inflation target is warranted, in practice the Bank has shown plenty of flexibility and has honoured the 2% target in the breach rather than the observance.

    One further problem is that the government is trying to shore up bank balance sheets by imposing much higher capital requirements (a necessary medium-term change) at the same time as berating banks for not lending enough, whereas ideally the policy on capital ratios would be counter-cyclical rather than reinforce the cycle.

  • Bill le Breton 24th Mar '12 - 8:25pm

    I apologise if my contributions have taken matters off-topic. It would be useful to hear from Tim. I think he may be a believer in price level targeting which is just one remove from NGDP targeting – at least I think it was he who commissioned the Centre Forum pamphlet by Prof Crafts price level targeteer.
    I recall that he has argued elsewhere for a dose of inflation. This initiates the hot potato effect, increases V and gets AD moving.

    Alex, by targeting NGDP a central bank does not then have to worry about inflation shocks from oil price increases. The price rise reduces AD, and to remain on target the CB has to provide compensatory monetary stimulus or more exactly ‘readers’ of CB activity expect/anticipate the CB to provide that monetary stimulus to maintain the NGDP taget.

    You also say Howe switched the balance to ‘a more appropriate one of fiscal tightening and monetary loosening in his 1981 budget’. Actually the fiscal tightening was part of and fundamental to monetary policy. Increases in the money supply were then in major part caused by the PSBR. Fiscal tightening was aimed at reducing the PSBR in pursuit of reductions in the money supply. We are in exactly the reverse position with deleveraging in the private sector destroying money faster than it can be created. Add the destruction from deficit reduction and you have the deflationary cocktail that still haunts us.

    I know that Orangepan wants me to believe that tax changes provide a stimulus, but in many ways it only matters whether the MPC calculate that it will be a stimulation. If they do, they will tighten (further) monetary policy to compensate. So Joe it is not so much a criticism of the fiscal policy as a belief that without control of monetary policy, any change in fiscal policy with be neutralized.

    Also Alex you still call this a balance sheet recession. The deleveraging started prior to 2008. A more observant CB would have loosened monetary policy in response to this. It did not and put the GREAT into the recession. It was the reduction in asset values that followed which did for the banks. In fact when a wiser MPC should have been reducing interest rates it raised them! Recall that the B of E did not get interest rates down to .5% until SIX months after Lehman’s collapse. The ECB were even more negligent.

    I am sorry to say it, but Vince (and Huhne when a Cabinet Minister) are utterly ‘backdated’ (to borrow from the Who) on these issues. Nor would I pretend to be of any use in evaluating monetary policy. But we are in Government and we can bring in Market Monetarist advocates to argue it out in front of our cabinet members.

    Until then, I think we should all admit that under present policies growth is feeble, uncertain, inadequate and the prime cause of increasing debt problems in both the personal and public sectors. All this while the private sector sits on its cash and the private sector banks enjoy a relatively risk free turn on its deposits at the Bank of England. And who can blame them? Without a sign of AD rising, why should they take unnecessary risks?

  • patricia roche 25th Mar '12 - 7:51am

    do lib dems have to vote on the ‘granny’ tax? If they say yes does it mean they agree?

  • Alex Sabine 25th Mar '12 - 8:14am

    @ Bill

    On the historical point, I certainly didn’t mean to imply that there is a parallel between macroeconomic context in 1979-80 and today; the recession then was largely a consequence of the need to tame high inflation, whereas now it is the legacy of a financial crisis leading to private sector deleveraging, as you say.

    I was just making the point that there can sometimes be a sharp divergence between the stance of monetary policy as reflected in indices cited by policymakers (eg £M3 in the early ’80s, official interest rates etc) and wider indicators of monetary conditions (market interest rates, the exchange rate, broad measures of bank lending and liquidity etc).

    Regarding what actually happened in 1981, you say: “Actually the fiscal tightening was part of and fundamental to monetary policy. Increases in the money supply were then in major part caused by the PSBR. Fiscal tightening was aimed at reducing the PSBR in pursuit of reductions in the money supply.”

    I agree that is how the Medium Term Financial Strategy (the blueprint for the government’s macroeconomic strategy) presented and dovetailed its parallel objectives of curtailing monetary growth and reducing the Public Sector Borrowing Requirement. And some of its proponents tended (perhaps deliberately, or perhaps because they didn’t understand it) to conflate those two objectives, as if cutting the deficit was a necessary and sufficient condition to curtail monetary growth.

    In practice this symmetry may have served a useful purpose given both the inflation and the large structural budget deficit (5% of GDP) bequeathed by Labour. It was simplistic, but as Edmumd Dell remarked in his wonderful book ‘The Chancellors’, “given the inflationary situation in 1979, naive monetarism had found its transient niche in economic policy”.

    Yet the high priest of monetarism, Milton Friedman, insisted to the Treasury Select Committee in 1980 that the PSBR was largely irrelevant to the control of the money supply and had this to say about the linkage:

    “I could hardly believe my eyes when I read [in the government’s Green Paper] ‘The principal means of controlling the money supply must be fiscal policy – both public expenditure and tax policy – and interest rates.’ Interpreted literally, this sentence is simply wrong. Only a Rip Van Winkle, who had not read any of the flood of literature during the past decade and more on the money supply process, could possibly have written that sentence. Direct control of the monetary base is an alternative to fiscal policy and interest rates as a means of controlling monetary growth.’… There is no necessary relation between the PSBR and monetary growth.”

    Of course the main problem with the monetarist experiment was the difficulty in settling on an appropriate measure of the money supply and then finding an effective means of controlling it. Friedman, like Alan Walters, Gordon Pepper and others, was advocating a form of monetarism (targeting base money, ie notes and coins and the balances which commercial banks were obliged to keep at the Bank of England) which the Bank regarded as unacceptably primitive.

    The measure actually targeted in the early period was the broader £M3, which satisfied Treasury officials because it created a link between public borrowing and the money supply since (as you point out) the PSBR was one of the three principal counterparts of £M3 (the others being the volume of bank lending and financial flows across foreign exchange markets).

    But while reducing the PSBR would, other things being equal, restrain monetary growth, other things were not equal and in practice there was no reliable link between the two, as evidenced by the divergence in the two indices in the early 1980s.

    The effect of a declining PSBR on the money supply was dwarfed by the effects of financial liberalisation (the abolition of foreign exchange control and the ‘corset’ on bank lending) which had thrown a spanner into the works and caused the big overshoots in £M3 that eventually led the government to downgrade and then abandon the £M3 target when it realised it was giving a false reading of real-world conditions. The overshoots reflected no more than increased cash balances held by financial institutions in response to high real interest rates. And unlike during Tony Barber’s Chancellorship in the early 1970s, the government was financing its deficit not by increasing the monetary base (borrowing from the banking system, ie printing money) but by tapping the bond markets in the normal way.

    Desperate for respite from the high interest rates that the pursuit of £M3 had necessitated, Thatcher commissioned a review by the Swiss academic economist Jurg Niehans, who concluded that (despite persistent overshoots in the £M3 figures) the monetary straitjacket was in fact too tight and the high exchange rate that was doing such damage to the competitiveness of industry was being caused not so much by the effect on the balance of payments of North Sea oil but by the high interest rates.

    Too much political capital had been invested in monetarism to admit publicly to a change in strategy (“the Lady’s not for turning” and all that), but in fact the 1981 Budget did mark a decisive change shift from doctrinaire monetarism towards a more pragmatic policy mix, even as it flew in the face of Keynesian orthodoxy by raising taxes sharply (by the equivalent of at least £25 billion in today’s terms) in the teeth of recession and then following up with a big package of spending cuts later that year.

    By turning the screws on government borrowing while cutting interest rates it paved the way for a sustained depreciation in sterling which underpinned the recovery: in the very quarter that Howe was widely excoriated for that controversial budget the fall in output came to an end and over the following eight years real GDP grew by 3.2% per annum.

    As the Financial Times commentator Philip Stephens has written, “ultimately the significance of the 1981 budget lay in the subsequent fall in the exchange rate”, and as David Smith has argued, “the austere 1981 Budget was essentially a smokescreen for a relaxation of monetary policy”.

  • Bill le Breton 25th Mar '12 - 10:42am

    Alex I don’t mean to demean your excellent comment by a short reply, but what you describe is the change from targeting a measure of money to targeting the exchange rate.
    Coming back to today, I hope you agree that Friedman would consider today’s monetary policy as too tight given falling prices and feeble NGDP growth. It would be good to hear what you think of level NGDP targeting.

  • Bill le Breton 25th Mar '12 - 10:57am

    Also you quote Friedman as saying, “There is no necessary relation between the PSBR and monetary growth.” I would lay emphasis here on ‘necessary’. Had the PSBR at that time been ‘sterilized’ that would be the case, but I think in the 70s and perhaps even at this time a proportion was funded by private bank loans to Gov ie on sy pay cheques to gov workers – which was a form of money creation. Might he not have meant ‘not necessary if fully funded in the gilt market’?
    POst May 1979 did the IMF DCE equation still hold sway – and for how long?

  • Until the publicity of this week, many people approaching 65 were not even aware that they were going to benefit from a higher tax threshold, so how is this is creatively twisted to become a ‘tax’ is just amazing. Nice attention grabbing headline, which the BBC loved to promote further, but surely the fact is that this is a step in the right direction, of making taxation visibly fairer? Why should anyone get a higher allowance when our basic costs of living are broadly the same, which is all that the threshold is supposedly based upon? And hasn’t it been LibDem policy for a good long time to provide a decent pension for all, so that the winter fuel allowance, bus pass etc can be phased out.? Of course support should be available where needed but the benefit system should be the route to ensure that none fall below a safety net level.

  • Bill le Breton 25th Mar '12 - 7:50pm

    Oranjepan, you ask the most important question, what level of growth etc should we consider satisfactory? We need to express this not in real terms but in nominal terms.

    My first answer would be that it should be one that can be sustained. Stability is everything as we discovered in the Great Moderation. Until 2008 and for quite a long time the trend rate of growth was 5% (NGDP). So that should be our target: sustainable real growth of 3% and steady inflation of around 2%. Could you possibly agree on that?

    My beef with the MPC is that they look to be targeting NGDP at 3.5% or lower. This means that as soon as they think they are going to exceed this they pull back on the monetary stimulus. 3.5% is not sustainable as it holds out the prospect of deflation and certainly discourages people from spending now and therefore it discourages firms investing. King hides behind his hawks on the MPC, you can hear them beginning to squawk now. Monetary policy is too tight and is delaying recovery.

    Let’s have Alexander and Osborne announce that they have ordered the B of E and its MPC to target 5% long run growth in NGDP but in the next two years 7% to make up for the lost ground.

    You see, provided to accept the use of nominal and not real growth targets, we are agreed.

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    Empty?? Further from the Guardian...David Liddell, the chief executive of Scottish Drugs Forum, welcomed the announcement: saying, “The extension of record...
  • Brad Barrows
    It is unacceptable that the UK government refuses to allow safe consumption rooms to be established when medical experts and the Scottish government believes th...
  • Peter Martin
    @ John @ David, I'm not sure what "rising to the challenge" means here. New Zealand is genuinely independent in the same way that Scotland could be if it wan...