Please find the origional Article at this link: https://www.thetimes.co.uk/article/liam-fox-act-now-to-curb-threat-of-inflation-xhdn8dbpk
As ever, it takes a few days for the details of the Budget to sink in. We now know that the increases in national insurance and corporation tax will take UK taxes, as a share of GDP, to around 36.5%, the highest in 70 years. While public spending will fall from the very high levels induced by the pandemic of around 53.1% in 2020/21,it is planned to stabilise out at around 41.6% of GDP from 2024/25, the highest sustained level since the 1970s when we carried the burden of Cold War defence spending.
We are told that Conservative philosophy has changed. I disagree. It would be a mistake to believe that a more social democratic approach to economic management represents the centre of gravity of the Conservative party itself. The internal debate is only just starting.
Yet, it is not likely to be the Budget that will determine the government’s electoral fortunes but the response to the growing problem of inflation. Politicians tend to be too slow to react, always wanting to believe that inflationary pressures have reached their peak and that tough medicine can be avoided and many today do not remember the appalling impacts that inflation can bring or how hard it is to put the genie back in the bottle.
Inflation hits the poorest in society hardest as more of their income is taken up by non-discretionary spending, such as food and clothing. It also hits those who do not have assets such as home-ownership and will be yet another blow to young people seeking to get on the housing ladder as housing prices get further beyond their reach. High inflation ultimately means high interest rates and impacts on living standards. When I bought my first flat in 1988, the interest rate was 10.38%. By October 1989 that had risen to 14.88%, consuming almost all of my income as a young Doctor. Today, we have a population used to low prices and low interest rates. Inflation will come as a considerable shock.
Of course, the Chancellor has a difficult call given the differing opinions on the cause of the current bout of global inflation. Those who believe that it is a micro-problem as a result of short-term cost pressures in the pandemic urge him to simply allow these pressures to ease out of the system over time. Those who believe that the systematic expansion of money over the past decade was always bound to have inflationary consequences want a global response on interest rates but this would run the risk of slowing down any post-pandemic recovery. Of course, it could be a bit of both.
All these problems would be difficult enough if we didn’t have to borrow on international markets and maintain investor confidence. Waiting too long to raise interest rates risks both falling behind the curve risks even higher rates and putting pressure on our credit rating. While opinion in the Bank of England seems to be split, it seems to be moving towards an early, but small, increase in rates. This would be the correct response. An early increase of, say, 0.25% would show that there is no complacency, but neither is there any panic. This is no time to change philosophy but to learn the lessons of the past.