Economics
The Bank of England’s got it in for us
I just posted this video on TikTok and YouTube:
The Bank of England has never said it wanted to create a recession, a cost-of-living crisis and unemployment in the UK, but that is exactly what it is doing, but that is exactly what it is doing. Why is the government letting this happen?
I am aware that the embedding of this video has proved problematic. It can be found on YouTube here.
Why does the average higher rate tax payer get more subsidy for their pension savings each year than anyone on Universal Credit is paid?
I published this video on TikTok this morning.
As I noted on Twitter:
Why does the average higher rate tax payer get more subsidy for their pension savings each year than anyone on Universal Credit is paid and many old age pensioners get per annum? What is the sense in that? And where is the fairness?
The transcript is as follows:
People who are wealthy in the UK get benefits of, on average, at least £8, 000 a year. Why is that? And why is that fair?
Now let's be clear what I'm talking about. The benefits that the wealthiest people in the UK get on average, and I stress that ‘on average’ point, relate to the pension contributions that they make to their pension funds every year.
The total cost of the tax subsidy to those who are wealthy in terms of the pension contributions that they make amounts to at least £38 billion a year. At the time that I was doing the data and in the year that that information relates to, there were around 4. 4 million higher rate taxpayers - there are more now, but the data on tax relief costs will have gone up as well - that's an average of over £8,000 pounds a year for each and every one of them.
Now, of course, some of them don't pay anything into a pension and some of them pay a great deal more than average into a pension. But we're still in the situation that they get benefits of more than £8,000 a year each on average.
Compare that to a person who's on the old estate pension scheme. This year, they're going to get around £8,800 a year in pension.
Compare that to a person who's on the new state pension scheme, which applies to younger state pensioners. They get £11, 500 a year.
Compare it also to a person who's on Universal Credit. A single person who's on Universal Credit and is over the age of 25; they get around £4,800 a year.
So why are we giving such an enormous amount of money to the wealthy to subsidise their pensions when there are people who are living in poverty in the UK who have such small amounts to live on?
It makes literally no sense at all. So, I've made a straightforward recommendation in the Taxing Wealth Report, and that is that the tax relief on the contributions that the wealthy make to their pensions should be reduced to the basic rate of tax. At present, they get that tax relief at either the 40 percent tax rate or even the 45 percent tax rate if they are earning over £125,000 a year.
If we reduce that to the 20 percent tax rate, which the 85 plus percent people in the UK pay in terms of income tax, then we would save £12. 5 billion a year of the cost of subsidising the savings of the wealthy. And that will be enough to give every single old age pensioner in this country an extra £1,000 of income a year.
Now, which is better? That we subsidise the wealthy, or we give those who are in need a bigger pension? I think the answer is glaringly obvious. It's even obvious for the economy as a whole. Because those pensioners would spend that money and give a massive boost to the economy, literally lift growth, and deliver a better outcome for everybody in society, including the wealthy, because we'd all be better off because of their spending.
This current structure of giving subsidies, benefits if you like, to the wealthy for their pensions does not make sense. We have to create a fairer, better and more honest and accountable system where people know just how skewed our society's system of benefits is towards those with wealth. It's unfair. It has to end. And I'm suggesting to you that you should be asking your politicians about how they will deliver better outcomes for us all.
There is more on this in the Taxing Wealth Report 2024, here.
Are those calling for more defence spending simply trying to stoke inflation?
According to historian Niall Ferguson, we are, apparently, incredibly close to the onset of World War III.
There is a land war in Ukraine. There are considerable tensions in the Middle East, which has already resulted in real conflict. China is also threatening Taiwan with considerable international implications.
Fergusson’s suggestion would appear to be that just as we fell, almost by accident, into World War I, so could we into World War III.
This is not a prospect that I really want to consider. Who would? But, that said, several aspects of it do seem to require consideration. in particular, as Matthew Syed noted in the Sunday Times this weekend, this possibility combined with the possibility that Trump might be re-elected as president of the USA on an isolationist ticket, creates real economic risk for European countries in particular. That is because, if US rhetoric is to be believed, the members of NATO have been free-riding on the USA for decades when failing to meet their obligation to appropriately fund their defence budgets.
I do not accept this argument. In my opinion, the US accepted the obligation to defend the West following World War II in exchange for the West’s use of the dollar as the world reserve currency. This is something it did in fact demand as a key component of the postwar economic settlement negotiated at Bretton Woods in 1944. However, my disagreement is of little consequence if a US president does not accept that argument.
How should the UK and other EU member states react to current demands for increased spending in that case? Firstly, they could heed the advice of Lord Keynes when he made his recommendations in ‘How to pay for the war’. In that slim book, Keynes suggested that when the defence of the realm was a priority, then this must come at a cost to consumption, with those with the greatest capacity to spend being necessarily required, as a consequence, to make the greatest contribution to any such cost if inflation is to be avoided. In other words, he promoted the taxation of the wealthiest. Whether twenty-first-century European states would accept this as an acceptable approach is a matter open to argument, even though the logic is impeccable.
Alternatively, it would be entirely plausible for a WWI approach to the funding of this expenditure to be adopted. In other words, the deficit could be allowed to accumulate, funded by war bonds.
Thirdly, for those who are familiar with the detailed history of the issue of those bonds at the beginning of that conflict, the other alternative is that quantitive easing be used. This is a fair description of what happened when the issue of the first tranche of war bonds failed, and they were purchased by the Bank of England on behalf of the government at that time.
These are the choices available to us. That is hardly rocket science, presuming that grants and loans from a foreign power (the USA) are not available. Economics really has little else to offer.
There is, however, a potentially more significant question, which is whether and on what such sums could be expended. An increase in UK defence expenditure to bring that budget up to 3% or more of GDP, to match the USA, would require an additional £20 billion or so a year to be spent for this purpose. Whether there is capacity within the economy to actually do that, both in terms of defence procurement and in terms of personnel availability, is the real question, presuming that conscription would have very little role to play.
Finding the money to fund a war is one thing and a matter for columnists to muse upon. The setting of the whole economy on a war footing that might be required if additional funds were to be spent in the short time demanded by some is something else, and even then, open to question as to plausibility.
In other words, have the debate on how we fund a war effort by all means (the entire range of viable choices on that being set out above). But also, please, decide on what the money will be spent on first, or else all you are discussing is how to create that perennial partner to war, otherwise called inflation.
Why do we give the Bank of England so much power?
Andy Haldane’s contribution to public debate since leaving the Bank of England has not been as significant as I think many hoped it might be given that he enjoyed a reputation as one of its more enlightened monetary policy setters whilst working at the Bank as its chief economist.
That said, this final paragraph from an article on inflation and economic forecasting in the FT this morning is good:
John Kenneth Galbraith famously said economics was extremely useful — as a method of employment for economists. The same could be said of inflation forecasts and central bankers. For all Bernanke’s sound analysis, forecasting is likely to remain interpretive dance — always mysterious, occasionally enlightening, a show without much tell.
Of course, Haldane is referring to Ben Bernanke’s review of the Bank of England’s forecasting techniques, which I have already reviewed somewhat negatively here.
Haldane is also negative, which leads to the obvious question as to why he spent so much of his life dedicated to the task he now treats with such contempt.
Saying that, it’s hard to disagree with Galbraith, as usual. But in that case, and given the massive flaws in most central bank estimates, meaning that in general the quality of their forecasting is abysmally poor for reasons I noted in my previous piece, why do we give them so much power?
Eurofanatiker försöker köra över folket igen
Efter att ha misslyckats med att få in Sverige i euron på demokratisk väg försöker nu marknadsliberaler andra metoder. ”Jag ser inget behov av en ny folkomröstning om euron” säger Liberalernas ordförande Johan Pehrson … Syftet med demokrati är inte att folket alltid vet bäst. Det är att eliter alltid lider av grupptänk och hybris, […]
‘Crowding’ in – and out
Contemplating the necessity of additional state expenditure forcefully suggested in the video in the previous post and thinking again in simple conventional economic terms, Will Hutton has pointed out in his new book ‘This Time No Mistakes’ that the additional state spending, such as that proposed by Prem Sikka, would serve to ‘crowd-in’ private expenditure... Read more
The state has become a killing machine…
…Which is how this twelve minutes of fighting talk from Lord Prem Sikka concludes: This is all excellent stuff in my view – and although he mentions Modern Monetary Theory (MMT) in passing, he doesn’t use it in his arguments preferring just to point out all the unused tax possibilities that there are. Now I’m... Read more
Privatisation has failed. The only problem that we have is a shortage of politicians that will admit this.
The very slightest editing of an FT headline this morning makes it read as follows:
Rail chaos on England’s West Coast line as Link to London suffers sustained delays, cancellations, slashed timetables, overcrowding and poor customer service
Let’s be clear; this is not the result of strikes. This is the consequence of profound mismanagement by Avanti, who are the private sector operator of this line which has now been in chaos for so long that the despair of those who need to use it is utterly justified.
We are used to hearing about the total failure of water companies by now.
Avanti’s management of the West Coast line, which has not enjoyed the benefit of being subject to occasional state ownership, which advantage the East Coast route has enjoyed, has been absolutely disastrous. A policy of underinvestment, most especially in staff training, seems to be at the heart of what is wrong. But, deeper that that there is a more significant malaise. They run this railway with the intention of making a profit, which the state essentially guarantees to them. Their incentive to actually serve the public is almost non-existent.
It is time that the whiole concept of privatisation was abandoned. There are services, including water, rail, gas, electricity, post, healthcare, education, buses and more that need to be under state control to ensure that they are delivered to meet need. The only problem that we have is a shortage of politicians that will admit this.
Spekulationsbubblor
Spekulationsbubblor får konsekvenser för hela samhället. Men hur skapas de? Priserna på finansmarknaden sätts efter en annan logik än varor i vår vardag, säger professor Lars Pålsson Syll. Man köper tillgångar, inte för att använda dem, utan för att sälja dem vidare. Tulpanmanin i Holland på 1600-talet är den först kända spekulationsbubblan. Då drabbades bara […]
Just wait: politicians will be shaking the magic money tree very soon
The situation in the Middle East looks to be very volatile. Israel’s attack on an Iranian embassy has given rise to an almost inevitable counter attack. No one’s actions are justified, let alone proportionate. I condemn the aggression on all sides: there are always better ways to solve disputes. No one knows what will happen next, barring one thing that is.
What I can guarantee is that whatever the cost of military action might be, the money to pay for it will be found.
The magic money tree at the Bank of England will be shaken in the short term, as it can always be.
In the longer term, more bonds will be issued.
So-called government debt will increase.
And all because payment will have been made for military action undertaken at ministerial behest for which Parliament will never be asked to give sanction.
In the short term, no taxes will rise and no other spending commitments will change.
Later, that might alter because the increased debt will be used as yet another excuse to impose austerity by those always looking to find one, even though the cost will already have been paid for and the debt need never be repaid.
So why note all this? Simply because what it proves are three things.
First, spending not only can, but always does precede taxation.
Second, spending capacity can always be found whenever it suits a politician to find it.
Third, there is no reason why such costs need suppress other spending. They are exceptional, but also affordable: if there were not the capacity to actually undertake the military activity then the cost could not have been incurred.
So what’s the point of saying all this? It is simply to point out that the scale of government spending, and what it is spent on, is always a matter of political choice, but that the capacity to fund the choices made can always be created if the ability to undertake the chosen activity it is to be spent on actually exists.