CONSIDER the great inflation of the 1970s. It’s pretty obvious who lost: those who were prudent with cash savings, or those who bought Government bonds. Other losers were the young as rampant inflation caused asset prices, notably property, to rise, making it harder (though nothing like as hard as it is today) to get on the property ladder. But perhaps the most significant losers were those on fixed incomes, particularly the elderly, who experienced appreciable hardship.
The other side of the coin were those who owned assets, particularly those whose assets were saddled with debt. Without having to lift a finger, inflation eroded that debt and enriched them.
Inflation thus is harmful to society: it rewards and confiscates in each measure irrespective of productive gain.
The biggest winner of all in the 1970s was HM Government. Government has a natural inflation hedge, to a point, because primarily its tax receipts rise during periods of inflation as salaries also generally rise while the capital value of the national debt is inflated away. Indeed, as can be seen from the chart below, while the absolute level of public debt increased greatly in the 1970s, relatively it fell significantly from 62 per cent GDP to 38 per cent by 1983. This was despite all the economic trauma of that period.
With resurgent inflation today, the winner-loser equation is likely to be very similar to the 1970s.
The last twenty years has been calamitous in terms of escalating public debt for the UK and, in fairness, most western countries. At the dawn of the 21st century the UK national debt stood at £484billion. Within a decade, by 2010, largely due to the global financial crisis but also to substantially increased public spending by the Blair-Brown Government, public debt had increased two and half times to £1,253billion. The £2,000billion threshold was breached a decade later in 2021, largely due to the calamitous impact of lockdown on the public finances. If the public debt is less than £3000billion by the late 2020s I shall be astonished. As a proportion of GDP, debt has almost tripled to around 95 per cent GDP currently and substantially worse than the mere 38 per cent in 1983.
This massive debt explosion is in spite of the highest tax rate relative to GDP for over 70 years as is outlined in the chart below. The problem is thus not a lack of tax receipts. Quite the contrary. It is grossly extravagant public spending and its scope and reach.
To put this in context, when John Major assumed power in 1990, taxes as a proportion of GDP had reduced to just 30.4 per cent; contrast that with the OBR’s forecast of 36.3 per cent by next year.
As a reaction to the failed tax and spend policies of the 1970s, during the 1980s public spending was well controlled, not through spending cuts, but by growing the economy, which increased the cake.
So much so that despite increasing spending every year by 1990 the size of the state had fallen to 34.8 per cent GDP, the lowest level since the war.
Today the state accounts for a staggering 51.9 per cent of the economy, and while this may be partially caused by the effect of the lockdown, the harsh reality is the private sector has been crushed to fund the most significant expansion of the state in living memory. Worse, much of the excess state spending is embedded and this Government sees no issue as too small to micromanage and control. The result in a stifling of the economy and a genuine question as to whether we any longer live in a free society at all.
Here’s the rub, however: with interest rates at 0.75 per cent, 10-year public bonds yielding 1.87 per cent and inflation at 7 per cent and very likely to breach 10 per cent and more by the year end, public debt is, despite profligacy, being eroded, not by government prudence but by the sheer incompetence of politicians, central bankers and civil servants over a decade or more, resulting in significant inflationary pressure.
Don’t be fooled: while the war in Ukraine has not helped, this inflation is primarily down to policy error, not just in the UK but across the West generally.
Error One: The central bank had plenty of time, more than a decade, to normalise monetary policy. Instead it chose to go for the short-term fix and run the economy on hot assuming its own omnipotence in terms of micromanaging the next crisis. This was at best naïve.
Error Two: The near £500billion largely wasted as a result of lockdown.
Error Three: To virtue-signal Net Zero when the UK was blessed with substantial carbon assets in our home waters. We could have been self-sufficient in power and thus partially insulated from external war shocks, but no, an uncosted, unreliable and intermittent ‘green’ source was preferred.
Government interference all the way – but instead of apologising and trying to learn from a series of very damaging policy errors, who is the biggest beneficiary of this failure? Government, of course.
Just as in the 1970s Government benefited from inflation so it will again today. Government benefits from rising tax receipts which remain broadly an inflation hedge while the taxpayer is penalised from the static income tax, pension, IHT and other allowances which Rishi Sunak chose to freeze in his Budget until 2025/6.
My formal forecast is for inflation of 10 per cent in 2022, followed by 8 per cent and a 5-7 per cent range in 2024. I suspect this forecast, despite being more aggressive than consensus, is too low. This contrasts sharply with the Office of Budgetary Responsibility’s (OBR) somewhat eccentric current forecast of 7.4 per cent, 4 per cent and under the 2 per cent mandate by 2024.
Thus to take a very simple example of an employee earning £50,000 today, if we assume my inflation forecast as the base and similar wage rises by 2024, our employee’s pay would have increased to £62,964. As a direct result of freezing the tax allowances HMG will pocket an additional £5,186 in income tax alone. Unless this policy is reversed the impact will be devastating.
The Chancellor’s stealth tax raid will result in the greatest tax hike of all time. Forget Harold Wilson, Denis Healey, Sunny Jim Callaghan, Gordon Brown or even Jeremy Corbyn’s absurd proposals, the prize, if that’s the word, goes to Rishi Sunak for the most monstrous stealth tax to fund abject failure after abject failure.
This appeared in Brexit Watch on May 2, 2022, and is republished by kind permission.