It's amazing what one finds in the rubbish bins behind Threadneedle Street!
Obviously the person who drafted this letter realised they didn't quite need it after all:
Dear Gordon,
As you may have noticed, inflation appears to be spiralling out of control. The consumer price index (CPI) is now at its highest since 1995, while the retail price index (RPI) is at its highest since 1991. I imagine it must be pretty embarrassing, presiding over an economic record worse than that of the Major administration, which Labour have been criticised so vocally over the past decade.
I feel duty bound to provide an explanation for this rising inflationary tide. I attribute it to a number of key factors, none of which are beyond the wit of man to cure.
1. House prices
House prices have spiralled over the past decade. This has a direct impact on RPI and has also facilitated unprecedented levels of equity withdrawal, fuelling consumer price rises.
House price rises are largely to do with property speculation. While interest rates can curb house prices to a degree, they are a blunt tool in that they also affect other lending and borrowing. High interest rates would, for example, reduce investment. One means of curbing property speculation without harming investment would be to introduce land value taxation, which economists recognise is among the least distortionary form of taxation. Sadly, the Government has shown no willingness to investigate this option.
2. Public spending
A grotesque rise in public spending over the past five years has increased inflation. A particularly egregious example has been overly-generous public sector pay rises that bear no relation to productivity gains.
3. Public borrowing
The Pre-Budget Report forecasts net debt at the end of March 2007 of £503.9 billion. This budgetary imprudence has injected massive liquidity into the public sector and the economy more widely. Effectively, more money is chasing the same number of goods.
4. Taxes
In the pre-budget report the Government added 1.5p/litre to petrol duty. This has been the major factor in the 2p rise in the cost of a litre of petrol, which in turn accounts for two-thirds of the rise in CPI last month.
5. Trade barriers
Cheap imports of goods from emerging Asian manufacturers has applied downward pressure on prices, particularly in clothing and electrical goods. Sadly, the Government and the European Commission (led by Trade Commissioner Peter Peter Mandelson) have imposed additional and ongoing quotas on Chinese textile imports. This is in breach of our commitments under the World Trade Organisation. The result is that customers have been forced to purchase more expensive European products, pushing up retail prices.
6. Immigration
The low inflation enjoyed by the UK over the past two years has been in part due to immigration. As my colleague, David, pointed out a couple of weeks ago, the availability of highly skilled Eastern European workers has kept wage demands within sensible limits. Sadly, the Government has decided not to take advantage of another wave of immigration from Romania and Bulgaria, instead imposing a daft and distortionary quota system. This has removed a further buffer against inflation.
As you will see from the above factors, there is a clear single cause of inflation. Sadly, it is beyond my authority to do anything about it. I think it’s over to you, old chap.
I remain your humble servant,
Mervyn.
Showing posts with label public spending. Show all posts
Showing posts with label public spending. Show all posts
Thursday, 18 January 2007
Wednesday, 3 January 2007
What next? The Corn Laws?
The Tories are resorting to protectionism again. No surprises there - their free trade credentials were always suspect. In his speech to the Oxford Farming Conference, David Cameron has called for a “buy British” campaign and condemned the government for not measuring how much of the money it spends on food goes towards British produce.
He says that it is "completely wrong" that food "can be imported to Britain, processed here, and subsequently labelled in a way that suggests it's genuinely British". Perhaps, but it creates more wealth to import raw materials and package them here than either to generate the raw materials here or to buy already finished goods. That “value added” is why developed economies are rich and farming societies are not.
Neither is it a "scandal" that the government does not measure how much of its £1.8bn food budget is sourced locally. The most important thing is that the food is of high quality and represents value for money – buying more expensive produce will leave less money for school books, nurses or flak jackets. It would also cost money to draw up this useless statistic.
Rather than pandering to farmers, David Cameron should be promising to dismantle trade protection both at home and in Europe so that we can half the price of the average UK shopping bill and bring wealth to third world farmers. But that would be too much to hope from a party that is more interested in protecting landed interests than boosting the welfare of all.
He says that it is "completely wrong" that food "can be imported to Britain, processed here, and subsequently labelled in a way that suggests it's genuinely British". Perhaps, but it creates more wealth to import raw materials and package them here than either to generate the raw materials here or to buy already finished goods. That “value added” is why developed economies are rich and farming societies are not.
Neither is it a "scandal" that the government does not measure how much of its £1.8bn food budget is sourced locally. The most important thing is that the food is of high quality and represents value for money – buying more expensive produce will leave less money for school books, nurses or flak jackets. It would also cost money to draw up this useless statistic.
Rather than pandering to farmers, David Cameron should be promising to dismantle trade protection both at home and in Europe so that we can half the price of the average UK shopping bill and bring wealth to third world farmers. But that would be too much to hope from a party that is more interested in protecting landed interests than boosting the welfare of all.
Tuesday, 2 January 2007
The end of the free society?
I came across some disturbing statistics over the weekend. Apparently, less than half of the eligible voters in the UK work in the private sector. The rest are either state employees or on state benefits.
This is important because a free society requires the citizens to keep their government in check. It is easy for those who do not rely on welfare and who are not paid a salary by the government to insist that their rulers take a long term view of their needs, look to the health of the economy and not just the wealth of the public finances, and rule in the interests of the nation and not simply serve a host of special interests. But a client nation where the citizens rely on receiving money from the state cannot exercise the same restraining hand.
Of the 44 million on the electoral register, only 20 million are either employed in the private sector or are self-employed. Over a third as many (7.1 million) are employed by government, and their interests lie in pushing up public sector salaries and benefits at the expense of taxpayers; we have already seen the effect of this in the government’s spineless and unprincipled decision not to properly reform the civil service pension scheme. The rest are made up of 11.8 million pensioners, 2.7 million on incapacity benefit and 3.2 million on various other benefits, many of whom pay very little direct taxes and yet all of whom have a vested interest in seeing public spending – and consequently direct taxes – rise.
Benjamin Franklin described democracy as “two wolves and a lamb voting on what to have for lunch.” In this case, the welfare dependent and those on the government payroll now outnumber those whose productivity must ultimately pay the government’s bill. Yesterday I wrote that “It may seem at present that intervention and the large state dominates, but the tide will turn. The voters, be they the over-taxed middle class or working class playthings of bureaucracy, want freedom.” However, if over half the voters are dependent on the government’s ability to squeeze money out of the remaining less-than-half, that is not the case.
Ultimately, freedom relies on autonomous individuals agreeing to pass over a proportion of their wealth to the public good. This is not the case if a predatory government can use the votes of its clients to extract ever more from a minority of independent wealth producers. The results will not only be spiralling taxes and unemployment and a generally worsening economy, which we are already seeing. It will be to draw ever more people into government control, ever expanding its power until we are all its subjects.
This is important because a free society requires the citizens to keep their government in check. It is easy for those who do not rely on welfare and who are not paid a salary by the government to insist that their rulers take a long term view of their needs, look to the health of the economy and not just the wealth of the public finances, and rule in the interests of the nation and not simply serve a host of special interests. But a client nation where the citizens rely on receiving money from the state cannot exercise the same restraining hand.
Of the 44 million on the electoral register, only 20 million are either employed in the private sector or are self-employed. Over a third as many (7.1 million) are employed by government, and their interests lie in pushing up public sector salaries and benefits at the expense of taxpayers; we have already seen the effect of this in the government’s spineless and unprincipled decision not to properly reform the civil service pension scheme. The rest are made up of 11.8 million pensioners, 2.7 million on incapacity benefit and 3.2 million on various other benefits, many of whom pay very little direct taxes and yet all of whom have a vested interest in seeing public spending – and consequently direct taxes – rise.
Benjamin Franklin described democracy as “two wolves and a lamb voting on what to have for lunch.” In this case, the welfare dependent and those on the government payroll now outnumber those whose productivity must ultimately pay the government’s bill. Yesterday I wrote that “It may seem at present that intervention and the large state dominates, but the tide will turn. The voters, be they the over-taxed middle class or working class playthings of bureaucracy, want freedom.” However, if over half the voters are dependent on the government’s ability to squeeze money out of the remaining less-than-half, that is not the case.
Ultimately, freedom relies on autonomous individuals agreeing to pass over a proportion of their wealth to the public good. This is not the case if a predatory government can use the votes of its clients to extract ever more from a minority of independent wealth producers. The results will not only be spiralling taxes and unemployment and a generally worsening economy, which we are already seeing. It will be to draw ever more people into government control, ever expanding its power until we are all its subjects.
Subscribe to:
Comments (Atom)
