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| Taxes, not interest rates, should rise – ignore the bullies | Taxes, not interest rates, should rise – ignore the bullies |
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| Why would the Bank of England raise interest rates this week? The bad reason is to save its pride and credibility. Its governor, Mark Carney, has threatened it so often, raising the hopes of market makers and asset owners, that they mock him as a “bad boyfriend” for breaking his word. | Why would the Bank of England raise interest rates this week? The bad reason is to save its pride and credibility. Its governor, Mark Carney, has threatened it so often, raising the hopes of market makers and asset owners, that they mock him as a “bad boyfriend” for breaking his word. |
| He had good reason to deter lenders pouring shedloads more bad debt into the pockets of those who couldn’t afford it, by warning of imminent rate rises. But why harm a weak economy just to prove his cojones? His monetary policy committee yearns to “do something” even when doing nothing is wiser. | He had good reason to deter lenders pouring shedloads more bad debt into the pockets of those who couldn’t afford it, by warning of imminent rate rises. But why harm a weak economy just to prove his cojones? His monetary policy committee yearns to “do something” even when doing nothing is wiser. |
| As rates haven’t risen for 10 years, surely if it is considering a rise, the MPC must see some sign that the economy is humming, overheating even? But as the chancellor glumly studies the books for his 22 November budget, looking at yesterday’s Institute for Fiscal Studies (IFS) hard facts, he sees no green shoots, but things withering around him. In his speech, Philip Hammond will be hard-pressed to find those traditional opening lines crowing of success and fine prospects. He can boast of jobs created and low unemployment – though, as Larry Elliott wrote yesterday, his figures hide unrecorded unemployment while new jobs are mainly low skilled, with the lid firmly bolted down on pay. | As rates haven’t risen for 10 years, surely if it is considering a rise, the MPC must see some sign that the economy is humming, overheating even? But as the chancellor glumly studies the books for his 22 November budget, looking at yesterday’s Institute for Fiscal Studies (IFS) hard facts, he sees no green shoots, but things withering around him. In his speech, Philip Hammond will be hard-pressed to find those traditional opening lines crowing of success and fine prospects. He can boast of jobs created and low unemployment – though, as Larry Elliott wrote yesterday, his figures hide unrecorded unemployment while new jobs are mainly low skilled, with the lid firmly bolted down on pay. |
| With personal debt perilously high, even a first small rate rise, let alone the suggested gradual return to 2% from the current 0.25%, will bankrupt many low-paid families. Expect repossessions of mortgaged homes. As wages fall behind inflation year by year, many are worse off, racking up credit card debt to survive, some resorting to food banks. Average pay is no higher than it was in 2006, finds the Resolution Foundation. As the low paid are switched to the disastrous universal credit, their incomes fall again. Already there has been a steep rise in personal insolvencies. Why add to these woes? | With personal debt perilously high, even a first small rate rise, let alone the suggested gradual return to 2% from the current 0.25%, will bankrupt many low-paid families. Expect repossessions of mortgaged homes. As wages fall behind inflation year by year, many are worse off, racking up credit card debt to survive, some resorting to food banks. Average pay is no higher than it was in 2006, finds the Resolution Foundation. As the low paid are switched to the disastrous universal credit, their incomes fall again. Already there has been a steep rise in personal insolvencies. Why add to these woes? |
| The orthodox reply is that the bank is mandated to keep inflation at 2%: now it’s 3% and forecast to rise again. That 2% rule, written by Gordon Brown when he handed rate-setting to the bank in 1997, came from an era of alarmingly high inflation fresh in his memory, when wages soared to keep up, causing inflation to rise again. But the opposite is the case now. Inflation springs from rising import prices, due to the plunge in sterling caused by Brexit – not from rising wages, which are stuck at little over 2%. Raising rates will hardly affect foreign prices – sterling may plunge again if the Brexit deal looks bad. | The orthodox reply is that the bank is mandated to keep inflation at 2%: now it’s 3% and forecast to rise again. That 2% rule, written by Gordon Brown when he handed rate-setting to the bank in 1997, came from an era of alarmingly high inflation fresh in his memory, when wages soared to keep up, causing inflation to rise again. But the opposite is the case now. Inflation springs from rising import prices, due to the plunge in sterling caused by Brexit – not from rising wages, which are stuck at little over 2%. Raising rates will hardly affect foreign prices – sterling may plunge again if the Brexit deal looks bad. |
| This is a moment to examine the government’s abysmal stewardship of the economy. Just about everything done in the past seven years of taxing and spending has dug a deeper hole in the national finances and in most people’s pockets – apart from the soaring number of super-rich, beneficiaries of quantitative easing that sent mostly untaxed wealth and property sky-high. | This is a moment to examine the government’s abysmal stewardship of the economy. Just about everything done in the past seven years of taxing and spending has dug a deeper hole in the national finances and in most people’s pockets – apart from the soaring number of super-rich, beneficiaries of quantitative easing that sent mostly untaxed wealth and property sky-high. |
| The rate of growth has been sluggish, and is now lowest of all OECD economies. Companies hoard cash, refusing to invest due to the Brexit uncertainty ahead. High street spending is falling fast. New car sales have plunged 9.3%; car manufacturing is down too, with consumer and business optimism dropping. The erstwhile party of business now regularly attacks the CBI, the Institute of Directors and Chambers of Commerce as fellow travelling enemies of the people because (still too politely) they urge a long transition to a soft Brexit to minimise the harm they can clearly see coming. | The rate of growth has been sluggish, and is now lowest of all OECD economies. Companies hoard cash, refusing to invest due to the Brexit uncertainty ahead. High street spending is falling fast. New car sales have plunged 9.3%; car manufacturing is down too, with consumer and business optimism dropping. The erstwhile party of business now regularly attacks the CBI, the Institute of Directors and Chambers of Commerce as fellow travelling enemies of the people because (still too politely) they urge a long transition to a soft Brexit to minimise the harm they can clearly see coming. |
| The IFS points to a £20bn hole in public finances, with the deficit likely to be twice as high as pledged for 2020. The weak productivity of the past seven years is the endemic disease, lowering growth and Treasury income. The trade deficit is widening, the construction industry flattening. Severe cuts to public spending have indeed reduced the deficit – though missing its original timetable by goodness knows how many years to come. But the price has been grievous, in growth, in Treasury receipts – and above all in the unpaid bills of threadbare public services that can no longer be ignored. | The IFS points to a £20bn hole in public finances, with the deficit likely to be twice as high as pledged for 2020. The weak productivity of the past seven years is the endemic disease, lowering growth and Treasury income. The trade deficit is widening, the construction industry flattening. Severe cuts to public spending have indeed reduced the deficit – though missing its original timetable by goodness knows how many years to come. But the price has been grievous, in growth, in Treasury receipts – and above all in the unpaid bills of threadbare public services that can no longer be ignored. |
| Petitions mount on the chancellor’s desk, not just from desperate services but from his own party. Which damage inflicted in recent years should he repair? The list is long. The NHS may fall over this winter: social care is close to collapse, with care homes closing. Prisons are at boiling point. Universal credit is a scandal needing much more than a reduction in the waiting time. In-work credit needs to be restored so more than a million families stop losing £2,770 a year, with twice as many single parents losing out: how can he boast that the credit is a work incentive when claimants lose 63p for every extra pound earned? | Petitions mount on the chancellor’s desk, not just from desperate services but from his own party. Which damage inflicted in recent years should he repair? The list is long. The NHS may fall over this winter: social care is close to collapse, with care homes closing. Prisons are at boiling point. Universal credit is a scandal needing much more than a reduction in the waiting time. In-work credit needs to be restored so more than a million families stop losing £2,770 a year, with twice as many single parents losing out: how can he boast that the credit is a work incentive when claimants lose 63p for every extra pound earned? |
| Surely Hammond must lift the seven-year pay freeze on public servants. What about the cost of childcare, now taking 33% of parental incomes, compared with the OECD average of 13%, as nurseries close for lack of funds? What of the police, with crime up and capacity falling? He should set councils free to issue bonds to build social housing, when even Sajid Javid, erstwhile Ayn Rand fan, calls for a £50bn building loan. Even Oliver Letwin, who sat at Rand’s feet as a child, calls for a hypothecated tax rise for social care. | Surely Hammond must lift the seven-year pay freeze on public servants. What about the cost of childcare, now taking 33% of parental incomes, compared with the OECD average of 13%, as nurseries close for lack of funds? What of the police, with crime up and capacity falling? He should set councils free to issue bonds to build social housing, when even Sajid Javid, erstwhile Ayn Rand fan, calls for a £50bn building loan. Even Oliver Letwin, who sat at Rand’s feet as a child, calls for a hypothecated tax rise for social care. |
| Raising taxes is the only way out – and there is plenty of scope. Stop raising the tax threshold, which mostly benefits higher earners. Raise the top rate of income tax: latest research quoted by tax specialist Richard Murphy shows a top rate of 60% would aid growth. Block offshore scams: attempts so far have been half-hearted. Raise capital gains tax to equal income tax rates, Nigel Lawson’s one rational act. Borrow to invest, and use the state-owned bank to lend to entrepreneurs and home builders and for rail renewal – why were these low-interest years wasted for investment? | Raising taxes is the only way out – and there is plenty of scope. Stop raising the tax threshold, which mostly benefits higher earners. Raise the top rate of income tax: latest research quoted by tax specialist Richard Murphy shows a top rate of 60% would aid growth. Block offshore scams: attempts so far have been half-hearted. Raise capital gains tax to equal income tax rates, Nigel Lawson’s one rational act. Borrow to invest, and use the state-owned bank to lend to entrepreneurs and home builders and for rail renewal – why were these low-interest years wasted for investment? |
| Of course the drumbeat for tax cuts also resounds in Hammond’s ears – everyone from estate agents and Jacob Rees-Mogg wanting a stamp duty cut, to Drinkers’ Voice and the Taxpayers’ Alliance calling for alcohol tax cuts. “Between a rock and a hard place”, the IFS calls Hammond’s conundrum, but he has plentiful tax-raising and invest-to-grow options, if he dares. It was a bit dispiriting yesterday to hear Labour yet again swearing only the top 5% need pay more tax, when the truth is most above the median should pay more. But all parties like the fantasy promise of Swedish services on US tax rates. | Of course the drumbeat for tax cuts also resounds in Hammond’s ears – everyone from estate agents and Jacob Rees-Mogg wanting a stamp duty cut, to Drinkers’ Voice and the Taxpayers’ Alliance calling for alcohol tax cuts. “Between a rock and a hard place”, the IFS calls Hammond’s conundrum, but he has plentiful tax-raising and invest-to-grow options, if he dares. It was a bit dispiriting yesterday to hear Labour yet again swearing only the top 5% need pay more tax, when the truth is most above the median should pay more. But all parties like the fantasy promise of Swedish services on US tax rates. |
| This to Carney: ignore bullies representing wealth owners and take care of the growing army of the precarious low paid who cannot afford rate rises on their debts. | This to Carney: ignore bullies representing wealth owners and take care of the growing army of the precarious low paid who cannot afford rate rises on their debts. |
| • Polly Toynbee is a Guardian columnist | • Polly Toynbee is a Guardian columnist |