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Tax Rises and Inflation : Economics (not Politics)

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dealtn
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Re: Tax Rises and Inflation : Economics (not Politics)

#444460

Postby dealtn » September 22nd, 2021, 3:12 pm

odysseus2000 wrote:
dealtn wrote:
1nvest wrote:
IMO with £2T+ debt levels more likely the Bank of England will keep interest rates low and let inflation run to erode that debt in real terms as that avoids also having to increase taxes.



It's not the BoE's debt, nor do they control fiscal policy and taxes.


BOE claim they do set interest rates:



Agreed, and have I made a claim otherwise?

Technically they only set the short term policy rate, which is devolved to an independent Monetary Policy Committee, although the majority of its constituents are BoE members.

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Re: Tax Rises and Inflation : Economics (not Politics)

#444470

Postby scrumpyjack » September 22nd, 2021, 3:51 pm

TUK020 wrote:
scrumpyjack wrote:Maggie was the only British Prime Minister to make a serious attempt at controlling it, fairly successfully.

Interesting perspective.
It wasn't her that made the BoE indepemdent and explicitly charged it with keeping inflation under control. Low inflation really started in the late nineties, under Tony Blair, with Gordon Brown as his chancellor.
Later GB debased the terms "prudence" and "invest" and started to let things slip, but the period 1997-2007 was an excellent decade from a view of monetary soundness.


It chancellor Geoffrey Howe and Margaret Thatcher's government in 1981 who took the bull by the horns and instigated the policies that cutback inflation
https://www.nytimes.com/1981/03/11/worl ... -goal.html

Subsequent PMs generally all agreed that what she did was essential (including Blair) and got us out of stagflation and the British disease.

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Re: Tax Rises and Inflation : Economics (not Politics)

#444476

Postby Alaric » September 22nd, 2021, 3:58 pm

TUK020 wrote:.
It wasn't her that made the BoE indepemdent and explicitly charged it with keeping inflation under control. Low inflation really started in the late nineties, under Tony Blair, with Gordon Brown as his chancellor.


What they didn't do was to go the extra mile and target 0% rather than 2% removing all the automatic inflation linked price rises in the process. They also played little or no attention to stability of asset prices, housing in particular.

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Re: Tax Rises and Inflation : Economics (not Politics)

#444497

Postby ursaminortaur » September 22nd, 2021, 5:10 pm

scrumpyjack wrote:
TUK020 wrote:
scrumpyjack wrote:Maggie was the only British Prime Minister to make a serious attempt at controlling it, fairly successfully.

Interesting perspective.
It wasn't her that made the BoE indepemdent and explicitly charged it with keeping inflation under control. Low inflation really started in the late nineties, under Tony Blair, with Gordon Brown as his chancellor.
Later GB debased the terms "prudence" and "invest" and started to let things slip, but the period 1997-2007 was an excellent decade from a view of monetary soundness.


It chancellor Geoffrey Howe and Margaret Thatcher's government in 1981 who took the bull by the horns and instigated the policies that cutback inflation
https://www.nytimes.com/1981/03/11/worl ... -goal.html

Subsequent PMs generally all agreed that what she did was essential (including Blair) and got us out of stagflation and the British disease.


Thatcher's period in office saw inflation fall from the excessive levels seen in the 1970s back down to the more normal levels seen in the 1960s (reaching a minimum of 3.43% in 1986) and then saw it rise again towards the end of her term in office reaching 8.06% in her last year in office (1990). Major and Blair (and their chancellors) then bought it down and kept it pretty much within the 1% to 3% range from 1993 until the financial crisis in 2008 and subsequent governments even with the financial crisis etc have only allowed inflation to exceed that range (on both the upside and downside) by a fairly small amount. This long term stability is undoubtedly down to Brown as chancellor having made the BoE independent and setting them a 2% inflation target.


https://www.macrotrends.net/countries/GBR/united-kingdom/inflation-rate-cpi


dealtn wrote:Technically they only set the short term policy rate, which is devolved to an independent Monetary Policy Committee, although the majority of its constituents are BoE members.


Technically they only set the rate in accordance with the targets set by Government policy (which so far has been to target an inflation rate of 2%). Governments could change that target and even target things other than just purely inflation but so far have not done so.

Alaric wrote:What they didn't do was to go the extra mile and target 0% rather than 2% removing all the automatic inflation linked price rises in the process. They also played little or no attention to stability of asset prices, housing in particular.


There seems to be a general consensus that 2% inflation is good for the economy. Many other countries including the US target a 2% inflation rate.

https://www.federalreserve.gov/faqs/economy_14400.htm

Why does the Federal Reserve aim for inflation of 2 percent over the longer run?
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It appears that the 2% target came about following an off the cuff remark made by a New Zealand finance minister in 1988.

https://qz.com/2022696/where-did-the-feds-2-percent-inflation-target-come-from/

No, Douglas replied, adding that he’d ideally want an inflation rate of between 0 and 1%.
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The remark was entirely off the cuff, Brash said, but now that it had been made, the Reserve Bank had to work out what the inflation target should be. After Brash joined the Reserve Bank, he and his colleagues learned from the literature on cost-of-living estimates that there tended to be an “upward bias” to these calculations—that an inflation rate worked out to be 1.7%, say, might in reality be closer to 1% or 0.7%.

Brash and his team estimated the bias for New Zealand to be around 0.75% and rounded it up to 1%, which gave them a maximum target boundary of 2%. “It wasn’t ruthlessly scientific,” Michael Reddell, one of Brash’s colleagues at the Reserve Bank, admitted. But once the target was set, its gospel had to be spread, so that people could factor the 2% figure into their economic activities. “I spent an endless time traveling the country,” Brash said. “I talked to farmers, to Rotary groups, to anyone who would listen, saying: ‘This is going to be the target, so adjust your plans to that, or the social and economic costs will be considerable.'”
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But 2% also had a pragmatic ring to it. For one thing, countries like New Zealand had learned that high inflation didn’t necessarily bring high economic growth with it, so bankers wanted a low, stable number. At the same time, 2% didn’t feel too low; too low would have been undesirable, because it would have pushed down interest rates so much that, if a recession came around, bankers couldn’t have cut rates much further to boost the economy.

In 1992, the Bank of England began aiming at an inflation target of 1-4%. Five years later, the UK put into place a structure similar to New Zealand’s, in which the government would declare the inflation rate it desired, leaving the Bank of England to meet that demand. The target announced that year, of 2.5%, was revised to 2% in 2003, when King became the Bank of England’s governor.

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Re: Tax Rises and Inflation : Economics (not Politics)

#444520

Postby dealtn » September 22nd, 2021, 5:40 pm

ursaminortaur wrote:

dealtn wrote:Technically they only set the short term policy rate, which is devolved to an independent Monetary Policy Committee, although the majority of its constituents are BoE members.


Technically they only set the rate in accordance with the targets set by Government policy (which so far has been to target an inflation rate of 2%). Governments could change that target and even target things other than just purely inflation but so far have not done so.



Again, technically, the Bank Of England Act 1998 sets out how this works and annually this means the Chancellor instructs the Governor of the Bank of England on what that "target" is. Here is the latest.

https://assets.publishing.service.gov.u ... March_.pdf

From which it can be seen that despite this being a symmetric target, and "at all times", in practice scope is given to the MPC to deviate in the short term from its application, but any variance greater than 1% either side of the target requires a letter communicating the reason(s) and thinking of the committee. You can see that the target isn't actually solely about inflation. There is also a remit to support the policy of Her Majesty's Government's broader economic policy. In addition, from this year, the remit also had its scope broadened to encompass the Government's support for a transition (as part of its economic policy) to a net zero emissions economy.


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