Writing in the Independent today, Vince Cable said:
The geopolitical earthquake in Ukraine will generate an economic tsunami, sweeping away comforts and orthodoxies with which we have become familiar in recent decades. We don’t yet know the height of the waves, but we know they are on their way.
The era of low interest rates is first to go. Central banks, including our own Bank of England, are becoming alarmed about inflation and are moving to higher rates, which further depresses consumer demand and investment. Despite rate rises, some forecasters believe the UK could hit 10 per cent inflation by the end of the year and be in recession.
Sunak’s guilty secret is that higher inflation will actually help the Treasury in budgetary terms. Income tax is set to rise because tax thresholds are being eroded in value by rising prices: so-called fiscal drag. And public spending is squeezed in real terms because departmental spending has been fixed in cash terms over several years. Inflation tax is a big earner…
There are strong but competing demands to ease the pain of the current cost of living crisis. The best option is to concentrate resources on low-income households, who are the main sufferers from high domestic energy and food costs. The most obvious step would be to increase universal credit (and pensions) beyond the 3.1 per cent uplift currently planned…
By combining tax hikes for the corporate bogeymen with some spending on a hard-pressed public, Sunak may not hold on to his “hero” status.
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One Comment
Vince argues for a targeted income boost to lower income families. How can this not appeal to the Treasury? My final salary pension is enough to make me a net saver, like most working people on decent salaries, and that means any hand-outs like the £150 or the winter fuel payment goes straight to savings and effectively disappears from the economy. The hard-pressed lower income families will spend everything they get, boosting economic activity – good for small (and large) businesses, and employment – and then returns money to the government through taxes. I’m not an economist. What is wrong with this theory? A by product would be ‘levelling up’. Even the Conservatives have said they support that.