This week the Governor of the Bank of England had to write to the Chancellor as Inflation surpassed the 2.0% target. The actual Inflation number given was 3.5% however this is the CPI (Consumer Price Index) number, which is the index that does not take into account the cost of housing. The CPI number thus does not take into account what most of us would consider our most important and usually highest outgoing each month. The CPI measurement is the measure set by Gordon Brown when he became Chancellor for use when setting monetary policy.
The RPI (Retail Price Index) number does take into account housing, and is still used for the setting of benefits levels, public sector pay and index-linked government debt. This number was actually 3.7% and so is higher than the CPI number and is generally more reliable for us non-economists in measuring inflation against our changes in cost of living.
The banks however are a little more sophisticated and use their own measure or RPI which excludes interest charges (RPIX). RPI alone can distort because it reflects swings in mortgage rates, and at the moment rates are being kept low by the Bank of England. The RPIX number currently stands at 4.6%, and you won't need a calculator to see that is a full 1.1% above the official CPI number.
Inflation going up was the expected side effect of the recent Quantitative Easing programme, the fear was always that Inflation may reach a level that becomes difficult to control. I speak to the effect to us people on the street as we will feel this in increased prices in the shops and in our bills. The problem is that Labour and quite likely the Conservatives are making noises about a 20% VAT rate after the General Election. This of course relates to you and me as an additional rise of the price in the shops.
To me, I think the way forward is to help people hold on to more of their hard earned money, typically this will be used to either pay down personal debt or passed on in the form of spending. Both of these actions are good, personal debt is worryingly high and consumer spending is very low and this is fuelling this slowdown. With Interest Rates low, there may not be the inclination to put the money in the bank which at this time would not really help too much. However, the danger I see is if inflation takes hold, the Bank of England may see the need to start raising interest rates, which will in turn raise the cost of variable mortgages and make borrowing tougher which in turn will leave many people with less money and in turn stifle consumer spending which is already in the doldrums.
The Governments car scrappage scheme seems to not be a greatly inspired economic scheme. Yes, there were some tax payments, but there was also a large subsidy. However, the bulk of the cash spent on the cars then made it's way off shore back to the car producing nations that have exported to us. No wonder France and Germany came out of recession months before we did. What we also need, as I repeat over and over again is to export as much as possible to places like China where they are sitting on Billions of Dollars. Bring cash into the country, and let it circulate a bit to stimulate spending. When people are spending shops and domestic manufacturers start hiring.
With my usual caution about the lack of my economic credentials I submit this as my working theory as to why we should cut taxes now to reap as much of a benefit from the QE programme as possible.
Showing posts with label Tax Cuts. Show all posts
Showing posts with label Tax Cuts. Show all posts
Wednesday, February 17, 2010
Thursday, January 08, 2009
Economic Stimuli
The BoE has cut interest rates again by 0.5% to a base rate of 1.5%. Now I may be showing some economic ignorance here, but isn't this below where the ideal rate should be? It was a good move to start cutting the interest rates last year, in fact to my mind the cuts started a little late.
However, what benefit does the person on the street get from rates much below 3%? Not much unless you are on variable mortgages or rare products that track below 3%. Just the other day, the Tories announced a tax break for basic-rate savers this was well received, so why are we punishing savers with rates that are too low? The banks are now passing the rate cuts onto borrowers, not even the ones owned by the Government!
Sudden excesses in the printing money are like Guido says, Mugabinomics, and as such is the litmus test for any Governments level of desperation.
What do I think?
All of the world money is spinning around in Asia, we need to get some of it back over here. To do this we need to offer to the good people in Asia products and services that they want to purchase at competitive prices. Plans to stimulate the British Economy should focus on how we can grow our trade and presence in the emerging markets in the world. We should be looking to help British Companies that have the potential to do well in Asia help with grants and tax breaks. Why haven't we done this already? Probably because the UK no longer has any real ability to make trade decisions in the wider world, as this is a function of the European Commission. Could it possibly be that in times of economic depression the National Governments of the EU no longer have the executive means and independance in which to implement necessary changes to domestic economic policies?
So, why not just address this issue instead of sending the printing presses into overdrive and punishing those people that showed the wisdom to save instead of borrowing excessively? Probably so Mr Brown can tell the world that this way is better than being a “Do-Nothing Tory”.
However, what benefit does the person on the street get from rates much below 3%? Not much unless you are on variable mortgages or rare products that track below 3%. Just the other day, the Tories announced a tax break for basic-rate savers this was well received, so why are we punishing savers with rates that are too low? The banks are now passing the rate cuts onto borrowers, not even the ones owned by the Government!
Sudden excesses in the printing money are like Guido says, Mugabinomics, and as such is the litmus test for any Governments level of desperation.
What do I think?
All of the world money is spinning around in Asia, we need to get some of it back over here. To do this we need to offer to the good people in Asia products and services that they want to purchase at competitive prices. Plans to stimulate the British Economy should focus on how we can grow our trade and presence in the emerging markets in the world. We should be looking to help British Companies that have the potential to do well in Asia help with grants and tax breaks. Why haven't we done this already? Probably because the UK no longer has any real ability to make trade decisions in the wider world, as this is a function of the European Commission. Could it possibly be that in times of economic depression the National Governments of the EU no longer have the executive means and independance in which to implement necessary changes to domestic economic policies?
So, why not just address this issue instead of sending the printing presses into overdrive and punishing those people that showed the wisdom to save instead of borrowing excessively? Probably so Mr Brown can tell the world that this way is better than being a “Do-Nothing Tory”.
Monday, January 05, 2009
Tory Tax Cutters
I am very happy to hear today that David Cameron has unveiled a multi-billion pound tax cut today. These measures will have very little direct impact on someone like myself, I am on basic-rate but have little savings, and I am nowhere near being a pensioner.
But it is the message and direction that I am happy with. I have stated before on here that I am an undecided voter, todays announcement alone is not enough for me – but it is a very welcome first step.
Why do I think so?
Firstly, there is clear blue water now between Conservative and Labour Economic policies. It was only a few months ago that the Conservatives were still pledging to match Labour Spending plans in the event of the Conservatives taking office, they were slow to drop this pledge, and some of their other messages about the Government’s economic policies did not register. It also gives the Conservatives something to hit Labour back with when they chant their mantra about “Do-Nothing Tories”
Secondly, it is a good tax cut. Unlike a cut in VAT which we know is to be reversed, and which pales in comparison to some of the price slashing on the high-street. And unlike a suspension of stamp duty, these cuts are intended to benefit the people they target, and will likely be passed on to stimulate the wider economy. Families on basic rate incomes will not have much savings, but what is nested in the year will be for Holidays, Cars, Furniture, White Goods, School Uniforms, or for security, when things in life go wrong. Families need help, and will still be looking spend on, but only if they can afford to these types of things. It is likely to be struggling parents that have been loyal to Labour in the past decade that will decide the next election.
It should not be forgotten also that there is a large ex-pat community some of whom are living on savings interest that will also find this announcement appealing, many of whom are ex-pats because of a wider disapproval of the current government, but will be voting when the election comes.
I also welcome the increased threshold for pensioners. When a person reaches the end of their career they should not have to be worried about their incomes, this should be the time in which they enjoy life. MPs Pensions have sky-rocketed in the last decade, disproportionate to those people that they work for. It is right that Pensioners benefit early on for initial tax benefits.
The thing I like the most though is this line.
“We need to make a really big change: from an economy built on debt to an economy built on saving. From a country and government that has lived beyond its means to one that lives within its means.
“But Labour’s recession policy actually increases debt and undermines savings.”
This is the sensible Conservative statement Tory supporters have been waiting all of Mr Cameron’s reign for. I believe it will be well received across the MSM and the blogosphere. It is a hard statement for Labour to argue against, and as such Conservatives will be making sure this statement is repeated again and again.
But it is the message and direction that I am happy with. I have stated before on here that I am an undecided voter, todays announcement alone is not enough for me – but it is a very welcome first step.
Why do I think so?
Firstly, there is clear blue water now between Conservative and Labour Economic policies. It was only a few months ago that the Conservatives were still pledging to match Labour Spending plans in the event of the Conservatives taking office, they were slow to drop this pledge, and some of their other messages about the Government’s economic policies did not register. It also gives the Conservatives something to hit Labour back with when they chant their mantra about “Do-Nothing Tories”
Secondly, it is a good tax cut. Unlike a cut in VAT which we know is to be reversed, and which pales in comparison to some of the price slashing on the high-street. And unlike a suspension of stamp duty, these cuts are intended to benefit the people they target, and will likely be passed on to stimulate the wider economy. Families on basic rate incomes will not have much savings, but what is nested in the year will be for Holidays, Cars, Furniture, White Goods, School Uniforms, or for security, when things in life go wrong. Families need help, and will still be looking spend on, but only if they can afford to these types of things. It is likely to be struggling parents that have been loyal to Labour in the past decade that will decide the next election.
It should not be forgotten also that there is a large ex-pat community some of whom are living on savings interest that will also find this announcement appealing, many of whom are ex-pats because of a wider disapproval of the current government, but will be voting when the election comes.
I also welcome the increased threshold for pensioners. When a person reaches the end of their career they should not have to be worried about their incomes, this should be the time in which they enjoy life. MPs Pensions have sky-rocketed in the last decade, disproportionate to those people that they work for. It is right that Pensioners benefit early on for initial tax benefits.
The thing I like the most though is this line.
“We need to make a really big change: from an economy built on debt to an economy built on saving. From a country and government that has lived beyond its means to one that lives within its means.
“But Labour’s recession policy actually increases debt and undermines savings.”
This is the sensible Conservative statement Tory supporters have been waiting all of Mr Cameron’s reign for. I believe it will be well received across the MSM and the blogosphere. It is a hard statement for Labour to argue against, and as such Conservatives will be making sure this statement is repeated again and again.
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