No, Tories, no no NO! This is so basic. You don’t cut taxes when you’re fighting inflation!

by Martin Odoni

Choose between the same

I did indicate only at the weekend that even the best candidates to replace Boris Johnson as Prime Minister are less the cream rising to the top of the coffee, and more the scum rising to the surface of a muddy pond. They are people of incredibly small ability, enormous egos, and appetites beyond any natural degree of need.

Their early campaigns do little to inspire. Most disturbing is that near enough all of them are offering as a signature policy… oh go on, figure it out for yourself.

You got it. An across-the-board tax cut. A shameless, unrestrained, united appeal to the greed of the greediest i.e. their own party membership – an offer so stereotypically Tory, it is almost offensive.

Blind tax cuts in an inflation crisis?

I cannot help but hold my head as I hear the candidates queuing up to offer the same policy (why? How does it help anyone with a vote to distinguish between you if you all say the same thing?) especially at a time like this. We are in the midst of an inflation problem unseen in the United Kingdom since at least the end of the 1980s, and potentially as bad as it got in the 1970s. Blindly cutting taxes at a time like this would be insanity.

The main point of taxation is not, despite the common belief, to fund Government spending, but to give value to the currency i.e. if everyone knows they have to send pounds to the Government every week or month, it incentivises them to do all their financial business in sterling. Taxes can also be increased to help keep the currency’s value from ebbing.

Inflation essentially means prices persistently rising. That in itself means currencies are ebbing in value, as less can be bought with the same amount of money as time passes. A rise in taxes can help combat this though. It will take money out of circulation, and reduce the overall spending power across society. Therefore people must buy less, and demand is reduced, exerting a downward pressure on prices.

Petrol on the fire

But what all Tory leadership contestants propose is like trying to put a fire out by throwing petrol on it. We are going through what is called an ‘Oil Shock’; fuel is scarce due to supply disruption, partly because of the war in Ukraine. The disruption is driving prices up at petrol pumps, and on petrol-based products, including plastics.

What a silly demand! They always do.

Reducing taxes will increase the amount of money in circulation, increasing the amount of overall spending power. That will up demand when it already exceeds supply. Even if there is a cut in Government spending, inflation is bound to accelerate. Such promises before the crisis has abated are completely irresponsible.

A tax cut aimed exclusively at low earners would be a good idea to help them deal with the cost-of-living crisis that the inflation has inevitably caused. But what must happen either way is a large tax-rise for higher earners, and for corporations, to take a big, big chunk of money out of circulation.

Company profits, not wages, are causing inflation

This is only fair. Due to (correct) Government intervention during the Covid-19 pandemic, profits across wide stretches of the private sector were enormous, and without many of the overheads (expenses) of normal function. The furlough scheme, while necessary, did much-enlarge the overall money supply. This grotesque excess profit is estimated to be causing around sixty per cent of current inflation, while increased labour costs account for less then ten percent of it. (The old saying that “Company profits are unpaid employee wages,” while not completely fair, is broadly true.)

The common notion that wage increases are what causes inflation is only partly true at most; it can mean that some firms must increase prices to cover the cost of wage-rises, and the extra buying power of the employees can also cause an increase in demand. But Tories like to present that as the only way it happens, which is patently untrue. The current inflation crisis started while wages for those at the bottom have remained extremely low and stagnant; allowing for inflation they have in fact declined by nearly one percent. With this raw profit created in the pandemic though, wages can be increased simply by drawing on these profits. If companies will not do that, the Government should tax them away and get the excess sterling out of circulation altogether.

Companies are not entitled to this money, it was doled out to them, and it is time to repay it. But as usual, the Conservative Party does not want the burden to fall on the broadest shoulders. No matter who leads them, they will always want the poor to pay for the nation’s problems, and to let the rich bask in the fruits of its successes (such as they are). They are happy for profits to keep going up, but not wages, even though both can cause inflation. Keir Starmer’s Labour Party, in opposing the recent RMT Union strike, have shown they agree. The gun-fodder in the battle against inflation must be the poor, who must become even poorer.

Why do you think that is?