to think that if more money is available via tax cuts, then if we are in a supply side inflation issue, that will just drive inflation up?

[cakeorwine]

As far as I understand, we have a degree of supply side inflation. So high demand and not enough goods available due to various issues such as Covid.

So if more money is available, isn't that just going to increase inflation as people with money can 'outcompete' others for goods?

Of course. The government is basically working against the bank of England right now. BOE increases rates, govt reduce NI and stamp duty. It's not going to do the country any favours when people save money on a house purchase but can't afford one anyway because prices are rising so fast (houses and everything else!) And the pound will continue it's fall against the dollar which isn't great since oil is priced in USD. Basically its all madness.

So rising interest rates make it more expensive for businesses to borrow, reduce the amount of money in people's pockets and make borrowing more expensive...

so people and businesses have less money to spend?

And at the same time, taxes are being cut so some people have more money so the economy can grow?

We are in a supply side inflation spiral as the government printed too much money to pay for locking down healthy people to do nothing. Some of that money needs to be removed from the system. If you followed yesterday’s BofE announcement, they are also initiating quantative tightening, putting stress on bond markets.

More money being available is a blanket statement that fails to grasp what that money is being spent on. If the print money for people to plough into assets, as was the case for that last 2 years, that’s bad. If taxation is lowered so the consumption side of everyday economy continues to function, that’s not bad thing.

The government seems to have the right idea about tax cuts. But this needs to be backed up by some activity in the economy that’s is not zombie activity, i.e only borrowing to pay for everyday goods like energy. We need big infrastructure projects greelighted where the private sector can come in and get big projects underway. At the same time, although the low pound is bad for the average consumer, it’s great for exports. But our trade defecit is in trouble. So we need even more private sector investment to take advantage of the low pound to export more.

Overall, the government is making some risky decisions, which if they pay off, will pay big. But are risky nevertheless. Tax cuts good. Borrowing bad but a necesary evil. And we need even more of it, but for general spending but for big infrastructure projects. Then wait 5-10 years to reap the benefits.

If taxation is lowered so the consumption side of everyday economy continues to function, that’s not bad thing

If some people have more money to 'consume things (because the tax cuts are very targeted at the well off in society), why doesn't that fuel inflation if we are in a supply side inflation as you say?

One clear example is the housing market:
Kwasi Kwarteng is going to cut stamp duty on house purchases to encourage more people to buy houses and thereby keeping the housing market buoyant.
At exactly the same time the Bank of England is raising interest rates to combat inflation by reducing demand in the market. Higher interest rates and mortgages will discourage people from buying houses and therefore depress the housing market.

So the two actions are acting against each other and all that will be achieved is lower tax revenues from lower stamp duty and higher Government debt levels which in turn will require higher interest rates.

It is becoming readily apparent that after Cameron, May and Johnson - the Truss Government is very much the "D Team" if there ever was an A Team.

Not an economist, but cutting taxation will surely mean that there is less to spend on the people who really need it — the sick (NHS), the poor (benefits, housing and support services) and housing (we need to be building much more of it). Libraries, swimming pools, schools are all going to suffer. Businesses that can't afford to borrow will contract and lay people off leading to rising unemployment and people losing their homes as interest rates rise and they can't pay their mortgages.

Meanwhile the people who pay the most tax will be a bit better off and will be able to buy up the homes of those people who can't keep up with the mortgage and add them to their buy-to-let portfolios. Then they can charge the people who used to own those houses massive rents because of the shortage of property because of tax cuts..

The more equitable societies (Scandinavia, mainly) are all higher-tax countries. The lower the tax, the bigger the gap between rich and poor. Farewell levelling up.

@1dayatatime

I think re housing you're missing the point that the BOE is at least nominally supposed to be independent from the government, so it's not necessarily surprising that they can sometimes work in opposite ways.

The BOE is in charge of interest rate decisions, which is a very broad control that affects multiple and different sections of the economy in different ways. If those decisions affect some areas in particularly extreme ways, the government can implement more specific controls to mitigate the effect of rates on those areas.

Re the specific reference to housing, I think the market is toast, the effect of changing stamp duty will not counterbalance the effect of rate rises and so i think the market is doomed anyway. This leads into another reason why BOE and government policy might differ in the respect that the government has to be "seen to be doing something" whereas the BOE which is not elected does not. Even if the government knows the stamp duty cut won't work, it provides them with some basis to claim that they are doing something about the problem.

The other great wheeze in the housing market for politicians is to appear on a building site in a hard hat and high vis and announce there are going to be 250,000 affordable housing starts in the next year. Then in 2 years time you find that absolutely f**k all has been done. The public (middle class) voters only give a damn if their house prices drop in value, they don't care about the housing crisis or the fact that the entire market is dysfunctional so long as they are not getting hurt or are making cash out of it.

All this may sound a bit "Yes Minister" - ish, but over time observation has led me to believe that this interpretation is 100% correct.

@GasPanic

I fully agree with your post and that any cut in stamp duty will no impact in buoying up the housing market. If you can't afford to buy a house because higher interest rates make the mortgage unaffordable then whether or not the stamp duty is cut or not is irrelevant.
At best the higher mortgage costs would mean the home buyer has to go for a lower priced house which in turn would mean a lower stamp cost anyway.

However what cutting taxes (tax income) will do without cutting spending (Government expenditure) is increase Government debt.

The problem is then that the amount of Government expenditure on paying the interest on that debt goes up meaning that there is less money available for other Government spending such as health, education etc.

Pre Covid Government spending on debt interest was around £60 billion pa. Now it is £95 billion pa and rising. By comparison the entire education budget (primary, secondary colleges etc) is only £105 billion.

So negative. What's wrong with driving in the left hand lane of a motorway at 20 mph while comparable economies drive more quickly then simultaneously floor the accelerator, slam on the brakes and push the gearbox both into first gear and reverse. 12 years of economic genius have got the UK this far. Sunny uplands approaching. The future's so bright...

Am mildy sceptical about interest rates as an effective tool given the drivers of inflation but if BoE has a hammer then every situation looks like a nail.

Yes, of course it’ll drive inflation.
Also the money that was to be raised through the taxes has already been promised/spent elsewhere eg helping NHS. So that missing cash will have to be borrowed at a time of massive debt and rapidly increasing interest rates.
And this massive debt needs to repaid by us. But it’s huge and there’s nothing left to be privatised to help pay it off 😢

Did you hear the news today about the Gov making areas ‘growth zones’ with different business rates and different governance. I thought ‘charter cities’ was extremist scare mongering and conspiracy theory. Looks like I was wrong and they’re actually moving towards it. Google Charter Cities 😭

So you are advocating we increase taxation ?.

Looks like the bond vigilantes have woken up.

UK 10 year has gone up dramatically. We are going to be looking at Italian levels of yield pretty soon if this doesn't stop.

And the GBP:USD has dipped under 1.11 for the first time.

This is all a massive gamble. If it wasn’t my country being experimented on it would be fascinating to see if it pays off.

I think the overarching issue which would scupper this experiment is low productivity in many areas of the county and therefore I think the next action will be to reduce workers rights to force up productivity. Removal of restrictions over hours worked, removal of tax credits, tax penalties for economically inactive adults e.g. SAHP, more fire at will etc.

Its the logical thing and if you voted Brexit you were warned it would lead to free market extremism. So here we are.

Its the logical thing and if you voted Brexit you were warned it would lead to free market extremism. So here we are.

I could weep, so true