Inflation and interest rates

[Sallywallywoowoo]

The BOE keep raising rates to curb inflation. I understand that is the only thing that the BOE can actually do and so they've got no choice. But isn't there anything else the govt can do? It's genuinely scary seeing articles on the BBC how 1 million mortgage holders will see their payments increase by £500pm by 2026. Literally nobody I know could afford that. And it doesn't even include renters in that number. Presumably loads of them are in the same boat or worse. If their LL mortgage costs go up, then so will their rents.
It seems to me the financial burden could be spread more fairly. Anyone who owns outright isn't feeling the pain. And for the most part that group is likely to be the ones who could most afford it. Especially if they have a load of savings that they're now getting a nice high rate of interest on. Surely things COULD be done differently if the will was there?

Increasing interest rates is a very blunt and unfair way to reduce inflation (though it may well be necessary given that this is a worldwide issue and everyone else is increasing interest rates).

Increasing taxation would be a much fairer way to take money out of the economy and target those who are more able to afford it. Our tax rates on income are so high for high earners though that they probably couldn’t be pushed much higher. A major issue with Liz Truss’ budget was that it cut tax at a time of high inflation and therefore put money back into the economy fuelling more inflation.

If someone posted to say that they had prudently studied and got themself a high paying job so why should they subsidise the low paid via taxation, mumsnet would come down on them like a tonne of bricks. But for some reason the conversation is completely different when mortgages are involved and people who have bought a totally normal house are characterised as reckless and extravagant.

By far the biggest factors in having a small or no mortgage are how old you are, whether you had family help or inherited and where in the country you live. There will be a group who took on a £400k mortgage when they could have had a £200k one who should arguably bear the consequences of taking that risk but I doubt that’s a significant proportion.

So we are fighting inflation by taking money off young families who probably haven’t had family help to buy whilst older people or those who have inherited are relatively unaffected. This is unfair and regressive when inflation is an issue for everyone and comes on top of a lot of policy which has on average benefitted older people. And curtailing the spending power of people in loads of debt isn’t very effective at fighting inflation anyway because this group doesn’t have loads of discretionary spending. So you have to raise interest rates really high in order to make a tiny dent in inflation and the consequence is that some people are financially destroyed by it. A progressive tax policy would never have this affect as it would take a little bit off a lot of people.

I don’t know what the answer is but it feels like there must be a better one!

@Circe7 I agree with everything in your post.

Isn’t the goal to stop people overspending? High rated also apply to credit cards in the view that it will stop people from using credit as
much.
For mortgages the idea is not to stop them but encourage people to be more reasonable in how much they borrow.

@Circe7

The answer is what you said (and I did several posts ago). Increasing taxation, and it will be on everyone, tapered or otherwise.

But no government will as it’s political suicide.

@Circe7 great post. I really can't believe how unfair the current system is and the attitude of a lot on here. Implying that mortgage holders brought problems on themselves is actually horrible. FWIW we will be ok (I think) we bought in 2014 so have paid off a bit, and DH has been promoted so our earnings are about £20k more than when we took out our loan. But that doesn't mean I can't see the inherent unfairness of the policy. And I really do feel for those people who are worri d about losing their homes. I'd be happy to look at re-jigging tax to mean everything is shared out. It absolutely should happen.

The tax system you say ? The PAYE system is punitive for salaries over £100,000 in all sorts of ways with a marginal tax rate of 60 odd %. Not sure any more can squeezed out TBH.

TBH the issue in this country is that lenders almost exclusively offer variable rates / fixed only for x years.
In France you can fix for the whole length of the mortgage and most people do that. (Or at least did when I was still living there)

Tax wise I'd like to see an increase in capital gains tax, VAT on luxury goods, VED on certain vehicles, council tax (re-banding rather than an across the board rise), and the introduction of a UHNW wealth tax. I'd also like to see the tax laws reviewed to close as many of tax avoidance loop holes as possible.

Service wise is a bit more difficult. I know this will set the touch paper on fire but, if I had to pick I'd focus on services for the over 65s. Partly because that is where spending is the highest but also partly because I don't think younger generations should be footing the bill, financially and physically, for the poor planning of the older ones while they are largely protected / isolated from the negative impacts.

I'd also like to see individual tories being punished for their utter ineptitude in running the economy and country over the last 13 years.

@Goldencup so not PAYE then. Tax wealth. Do it through council tax and inheritance tax. That would be way fairer anyway. And stop with all the extra benefits given to the over 60s. If they need them, then fine. But blanket benefits (other than state pension but without the triple lock) are wrong. Things should be means tested

@Thebestwaytoscareatory yes! I'd agree with pretty much all of that

Scrap NIC and add it to income tax rates. "Workers" won't be affected at all - they've been hit badly enough over the past decade or two. Those who WILL be affected are those living on investment income (interest, dividends), property lettings (currently no NIC on rental profits), pensioners (currently no nic on pensions), foreign income (again no NIC). Let the "non workers" pay a bit more tax rather than the burden always being on the workers. Of course, there's always the tax free personal allowance so the genuinely "low" income people who don't currently pay tax still wouldn't pay even if tax rates were increased.

The government did so a lot to help cause it never mind solve it.

-Throwing money at people who didn’t need it
-Brexit has caused a very tight labour market leading to big pay rises.
-They chose to give a 10% rise to pensioners which then sets the precedent for high public sector wage demands.

Until wage demands cool, inflation will stay high in this country.

so if I have £500 to buy a sofa and I make £50 in interest on the money but the sofa is now £650 due to inflation - how is that not losing money ?

@Sallywallywoowoo

If you want to curb inflation it would be tax hikes for everyone, not just the rich. Issue with only taxing that bracket more is it’s counter-productive as people leave the workforce (as seen recently) and we have a productivity issue in the UK which makes inflation higher.

Agree some people have no empathy at all. When we took ours out 5 years ago they means test to make sure if there is an increase then we can still afford the mortgage but it has gone up more than a couple of percent that they look at means testing. The Older generation have been the worst saying ah but we had to do 15% yeah you did but wage to property ratio is no where near as high as it is now and it’s not our fault the housing market boomed when it came to us to buy our house. It’s like you’ve been through it yes but why does that mean you cant show a bit of sympathy to the ones who are going to go through it not it’s a really bad trait some people have. Since we bought our house we have had 2 kids so increase in childcare fees, good shopping is just ridiculously at the moment and I think everyone should just be more kind when someone expresses concern about their situation rather than people jump on them saying “well you should have budgeted for us, we had to go through it” etc its just not helpful to an already stressful situation for many young families

Until wage demands cool, inflation will stay high in this country

where are you going to get employees from? Aging population and not enough immigrant ion with a falling birth rate for the last 5 decades - there isn’t enough labour

@Wimbo but if they're not taxed on their earnings but on their wealth then there's no reason for them to quit working. But actually I liked the NIC idea a PP suggested

^Correct.

A family we know are in the process of buying a £1.2m house with cash.

They have also bought a new car and are going on holiday a few times this year.

They own several mortgage free rental properties and run a property business that took a bounce back loan they didn't need. They used the money to do up a house that they then sold to a FTB last year.

And they aren't alone. 3 houses on my road have sold to cash buyers so far this year.

These are the people who need to stop overspending, not a middle income family with a £400k house and two kids in nursery.

People were warned over and over again that interest rates would rise and they should plan to pay a much higher mortgage in the long run.As someone who didn’t upsize for this reason I have little sympathy. House price inflation was caused as much by people willing to pay as much as it was the cheap money.

It’s definitely not just millionnaires.

I bought my house last year for £200k, currently pay £700pm, at interest rates as they are now I’d be paying £400 extra a month, minimum.

But no, homeowners don’t need or deserve extra help! We are lucky to have enough money to buy, and made our choice. Taking on debt is always a gamble, nobody owes us home ownership.
If we can’t afford our houses any more we will have to sell up and buy somewhere cheaper, or rent privately, or apply for social housing.

Now I DO think that the country needs much much more social housing, and quickly. That is one thing I think should happen asap.

And as for handling inflation, taxing super high earners would be a start. They are the ones swanning about spending their Covid savings (which many of them got by selling their countryside housing portfolios at astronomical prices in 2021) while the rest of us are tightening our belts.

I’m not disagreeing principally but you’re conflating multiple issues. Wealth tax alone will not ease inflation for all the reasons described on this thread.

100%

Ah but the over 65s have the most enormous demographic bulge who vote in huge numbers

I’m in my late 50s and think a lot of the over 60s would actually agree we don’t need stuff like free prescriptions from age 60 onwards. It should be means tested.
So many people get free prescriptions these days I often think the chemist looks surprised when I say I’m paying for mine.

I would also like to point out that not all older people want to make the comparison to when we had a 15% mortgage interest rate. The argument is so tired. Think we should all just agree it was shit then and it’s shit now.