Can interest rises work?

[Spandaubaggie]

I'm one of the unfortunate ones who will soon be ending my fixed rate and am faced with finding hundreds of extra pounds a month.

I do not pretend to be some economic master, but I am struggling to see how inflation can be curbed using this as the only tool. Simply many in fixed rates for the next couple of years or so will spend as per usual and meanwhile the ones being clobbered are those normal people who are working and have families, who have stretched themselves to get on the property ladder.

Meanwhile the moneyed crowd rejoice at seeing their savings rise meaning they have even more spare money.

I'm counting my blessings in that I think I have the income to weather this storm, but really what is the answer to the inflation/interest/recession conundrum, especially as the Bank of England don't really seem to have any other answer.

I genuinely feel for those with very young families, normal jobs, childcare etc who are about to be exposed to this. Families are going to be destroyed on an industrial scale due to these interest rates with house prices having been inflated due to a decade of historically low rates. Repossessions, divorce, suicide etc, etc, it's all coming.

I would think the most sensible thing for all would be an emergency budget with income tax raised for all, but of course self-serving politicians would not do this in part because most of the public are too stupid to realise the situation we find ourselves in.

Interested to hear the thoughts of the wise owls and what will happen with interest rates as I muse over how I play it when I am exposed to the mess in a few months.

[Borin' Baggie]

The very fact that taxes need to go up to enable fiscal tightening and cover day-to-day expenditure but the government won't do it kind of indicates that they won't do it to reduce the amount of money in the economy either.

They could also abolish employees NI and fold it into income tax, should raise around £11bn per annum, but they won't.

[Protheroe]

The very fact that taxes need to go up to enable fiscal tightening and cover day-to-day expenditure but the government won't do it kind of indicates that they won't do it to reduce the amount of money in the economy either.

They could also abolish employees NI and fold it into income tax, should raise around £11bn per annum, but they won't.

As I posted in another thread, the huge tax rises already implemented are altering firms' and individuals' behaviour already.

You will simply not get more blood out of the stone.

The *only* way embedded inflation has ever been defeated is by means of an employment recession. I cannot understand why this fact escapes so many people - particularly our politicians on all sides. 

The BoE and the Treasury's economic competence is shot. They encouraged the behaviour that led us here, didn't act quickly enough when it was obvious inflation was building and now have to overreact as a consequence. The attention is on mortgages, but the aim of the policy will also be on corporate borrowings - I know of one PE-backed firm whose borrowings were at base +7% in 2019, goodness only knows where they'll be when they refinance later this year.

[Borin' Baggie]

The very fact that taxes need to go up to enable fiscal tightening and cover day-to-day expenditure but the government won't do it kind of indicates that they won't do it to reduce the amount of money in the economy either.

They could also abolish employees NI and fold it into income tax, should raise around £11bn per annum, but they won't.

As I posted in another thread, the huge tax rises already implemented are altering firms' and individuals' behaviour already.

You will simply not get more blood out of the stone.

The *only* way embedded inflation has ever been defeated is by means of an employment recession. I cannot understand why this fact escapes so many people - particularly our politicians on all sides. 

The BoE and the Treasury's economic competence is shot. They encouraged the behaviour that led us here, didn't act quickly enough when it was obvious inflation was building and now have to overreact as a consequence. The attention is on mortgages, but the aim of the policy will also be on corporate borrowings - I know of one PE-backed firm whose borrowings were at base +7% in 2019, goodness only knows where they'll be when they refinance later this year.

Income tax and VAT rises are pull money out of the economy in the same way interest rate rises do by incentivising saving (especially tax-wrapped savings) in turn reducing business and consumer spending which would trigger a recession. 

Tax receipts also need to go up to tighten government fiscal conditions as what we have isn't sustainable, preferably by means that are more difficult to avoid than corporation tax. Unfortunately this isn't the 1980s anymore and we can't rely on natural resources to cover the shortfall in the Exchequer as Thatcher relied on. We need to go back to a Gladstonian line of thinking and accept we need to pay more tax.

[igorbalis]

The short answer is no. I'm no ecomomist but isnt it inherent within capitalism that we get cycles, periods of booms and then it all goes to shit i.e bust. People can see the system isn't working but I fear that it will take a masive global event to change things in any meaningful way, probably not in my lifetime but one day I'm sure as the growth in world population is just not sustainable imvho.

[Protheroe]

The very fact that taxes need to go up to enable fiscal tightening and cover day-to-day expenditure but the government won't do it kind of indicates that they won't do it to reduce the amount of money in the economy either.

They could also abolish employees NI and fold it into income tax, should raise around £11bn per annum, but they won't.

As I posted in another thread, the huge tax rises already implemented are altering firms' and individuals' behaviour already.

You will simply not get more blood out of the stone.

The *only* way embedded inflation has ever been defeated is by means of an employment recession. I cannot understand why this fact escapes so many people - particularly our politicians on all sides. 

The BoE and the Treasury's economic competence is shot. They encouraged the behaviour that led us here, didn't act quickly enough when it was obvious inflation was building and now have to overreact as a consequence. The attention is on mortgages, but the aim of the policy will also be on corporate borrowings - I know of one PE-backed firm whose borrowings were at base +7% in 2019, goodness only knows where they'll be when they refinance later this year.

Income tax and VAT rises are pull money out of the economy in the same way interest rate rises do by incentivising saving (especially tax-wrapped savings) in turn reducing business and consumer spending which would trigger a recession. 

Tax receipts also need to go up to tighten government fiscal conditions as what we have isn't sustainable, preferably by means that are more difficult to avoid than corporation tax. Unfortunately this isn't the 1980s anymore and we can't rely on natural resources to cover the shortfall in the Exchequer as Thatcher relied on. We need to go back to a Gladstonian line of thinking and accept we need to pay more tax.

As the Treasury isn't yielding what it thought it would from the enormous tax increases already implemented, what on Earth makes you think further increases in tax would work?

Personally I'm delighted the great British public are acting rationally and avoiding paying for the mess created by the BoE and Treasury.

[Borin' Baggie]

The very fact that taxes need to go up to enable fiscal tightening and cover day-to-day expenditure but the government won't do it kind of indicates that they won't do it to reduce the amount of money in the economy either.

They could also abolish employees NI and fold it into income tax, should raise around £11bn per annum, but they won't.

As I posted in another thread, the huge tax rises already implemented are altering firms' and individuals' behaviour already.

You will simply not get more blood out of the stone.

The *only* way embedded inflation has ever been defeated is by means of an employment recession. I cannot understand why this fact escapes so many people - particularly our politicians on all sides. 

The BoE and the Treasury's economic competence is shot. They encouraged the behaviour that led us here, didn't act quickly enough when it was obvious inflation was building and now have to overreact as a consequence. The attention is on mortgages, but the aim of the policy will also be on corporate borrowings - I know of one PE-backed firm whose borrowings were at base +7% in 2019, goodness only knows where they'll be when they refinance later this year.

Income tax and VAT rises are pull money out of the economy in the same way interest rate rises do by incentivising saving (especially tax-wrapped savings) in turn reducing business and consumer spending which would trigger a recession. 

Tax receipts also need to go up to tighten government fiscal conditions as what we have isn't sustainable, preferably by means that are more difficult to avoid than corporation tax. Unfortunately this isn't the 1980s anymore and we can't rely on natural resources to cover the shortfall in the Exchequer as Thatcher relied on. We need to go back to a Gladstonian line of thinking and accept we need to pay more tax.

As the Treasury isn't yielding what it thought it would from the enormous tax increases already implemented, what on Earth makes you think further increases in tax would work?

Personally I'm delighted the great British public are acting rationally and avoiding paying for the mess created by the BoE and Treasury.

It's like you have an inability to read what has actually been written.

Raising corporation tax is ineffective, that is the only tax that has gone up in nominal terms. We have data that shows that raising it or cutting it doesn't appear to actually raise the amount as a percentage of GDP. The two taxes that there is data that indicates a link are NIC and income tax (don't even need to increase the rates, just abolish employee NICs and fold into income tax, calculated at £11bn), but they're only increasing in line with fiscal drag and not in nominal terms. Then there's things like the reduction in revenue generated from fuel duty owing to the cut in fuel duty and the reduced fuel usage, as fuel duty isn't a rate but a fixed quantity relative to the carbon content of the fuel.

It's not about "further" tax increases, it's about the reality of taxes need to be raised to eliminate the deficit coupled with the government being too scared to raise the taxes that will make a difference. The government are engaged in fiscal cakeism.

[Protheroe]

If you dismiss fiscal drag so flippantly I simply don’t believe you know what you’re talking about. You won’t get blood from a stone. And if you roll NI into income tax you’ll kill a major incentive to wealth creation. Now pensioners paying NI, that’s another thing entirely…

[Borin' Baggie]

Where did I dismiss fiscal drag? Please, point out where I did, quote me if you wish to. Point out exactly where I dismissed fiscal drag. Do you think I want tax bands to be frozen or something? Fiscal drag is as a result of the government being too scared to up the headline rates to the necessary levels or reform the tax system to eliminate the deficit lest they be challenged on it.

As for your opposition to rolling employee NICs into income tax, prioritising investment into property over other investment opportunities and encouraging passive income is one of the reasons we're in the productivity and low growth hole of shite. "Wealth creation" my arse.

[Protheroe]

Where did I dismiss fiscal drag? Please, point out where I did, quote me if you wish to. Point out exactly where I dismissed fiscal drag. Do you think I want tax bands to be frozen or something? Fiscal drag is as a result of the government being too scared to up the headline rates to the necessary levels or reform the tax system to eliminate the deficit lest they be challenged on it.

As for your opposition to rolling employee NICs into income tax, prioritising investment into property over other investment opportunities and encouraging passive income is one of the reasons we're in the productivity and low growth hole of shite. "Wealth creation" my arse.

"but they're only increasing in line with fiscal drag" sounds pretty dismissive to me. 

Fucking *only*?

The following calculations show how much more tax earners on different incomes would see their tax increased, assuming wages rise in line with OBR forecast inflation by the end of 2023/2024 and then by 2%.

Those earning £15,000, £20,000 and £30,000 will see their income rise by 21% based on the assumptions above.

But their tax bills will increase by 106%, 50% and 33% respectively. This would add £861 to these earners’ tax bills.

Meanwhile, high earners on over £50,000 would see a 35% increase in their tax and a 21% increase in wages – adding a whopping £1,905 to their tax bill. I doubt any government is brave or stupid enough to consider increases in marginal rates as well.

And roll NICs into income tax and all you'll achieve is even greater avoidance.  I, and virtually every other company director already have a plan for that eventuality which will result in absolutely no benefit to the Treasury whatsover.