Paul Dundon’s Weblog

Icon

A little cheese and a little whine

One way to manage inflation

The Bank of England sets interest rates in order to keep inflation under control. This approach has at least three problems:

 

  1. By increasing the cost of borrowing, the bank makes it more difficult for businesses to control costs and therefore prices
  2. The approach basically depends on cutting people’s disposable income so they buy fewer things they don’t actually need. This clearly runs into trouble if inflation is being driven by commodities like energy and food rather than FMCGs and luxury goods
  3. The financial system as a whole assures a flow of money from borrowers (people who have less money than they need) to lenders (people who have more money than they need). For a democratic government to rely on this as a tool of economic management – to keep the economy healthy by increasing the exploitation of the poor by the rich – is nothing short of a disgrace.

     
     

    So, I have a suggestion: introduce a tax, at a very low rate (say 1%) on repayments on personal credit, and let the Bank of England set the rate of this tax. There is an existing legislative framework for what counts as personal credit, and almost without exception the bodies issuing such credit can easily vary their charges and interest rates and make regular calculations of interest due, so all the infrastructure needed to implement such a tax is already in place. While there would be some additional burden on banks to implement the scheme, it would be a small change in the context of their credit operations.

    Naturally, banks would pass this tax on by increasing interest rates, much as they pass on increases in interest rates now. However, the tax would put the Bank of England in a position to increase the cost of consumer borrowing without increasing the cost of business borrowing, by increasing the consumer credit tax rate and leaving interest rates alone. Further, the additional revenue – which is, in effect, an inflation tax in any event – would now be a tax proper and under democratic control (well, as near as we’re going to get to that). This means the government could deploy the money to do things like invest in energy and food production (or wherever supply-side factors were hurting the economy and demand-side factors were difficult or impossible to manage). There might not be enough income from such a small tax to make a huge difference in those areas but spending the money in this way would be both more productive and equitable than handing it to shareholders and people with savings accounts.

     

Advertisements

Filed under: Politics

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 13 other followers

My Bookshelf

The Golden Bough
The Value of Nothing
The Fire
A Wolf at the Table
Devil Bones

My del.icio.us links

%d bloggers like this: