Personal Finance: Budget on a rates rise

Freshly armed with a five-year mandate as the Inflation-Finder General, Eddie George can now afford to make long-term decisions on interest rates. But he is unlikely to want to change interest rates until he and his colleagues on the monetary committee have seen what the Chancellor does with the tax weapon in the Budget.

Interest rates and tax rates are two blades of the scissors the authorities traditionally use to trim the economy. Higher taxes and higher interest rates both slow the economy down while tax cuts and interest-rate cuts will speed it up, but tax changes and interest-rate changes work in slightly different ways because higher interest rates reward savers as well as penalising borrowers, while higher taxes reduce spending power across the whole economy and also reduce the government's budget deficit.

On past experience, tax changes affect spending and investment within a year whereas the Bank of England argues that changing interest rates can take up to two years to work through the system. Interest rates seem to have more impact on inflation and exchange rates, but if there is a right time to raise taxes it is in the early years of a government when the next election is far away.

Some members of the Bank of England's monetary committee think another rise in interest rates is needed to discourage borrowing and consumer spending and to puncture the inflationary boom in house prices.

But a rise in interest rates would make sterling even stronger and hurt exporters as well as reducing growth in the next two years and widening the gap between the UK and Europe at a time when pro-Europeans want it to narrow.

(How much better, dear reader, if the incoming Government had done what this column argued last summer and raised interest rates sharply to show it meant to control inflation and, at the same time, outflank the currency speculators at a stroke, because by now we could be reducing rates again to soften the downturn rather than risking making it worse.)

Either way the next move is up to the Chancellor. The business community would like to see (personal) taxation rise so that interest rates and sterling could come down faster, but the record surge in tax receipts last month has brought the prospect of a budget surplus in 1999-2000 and there seems to be no need for a general rise in taxation next month.

Increases in tax on petrol and tobacco are certain, reforms to National Insurance, capital gains tax and inheritance tax are likely, tax relief on mortgage interest might well be phased out, and the married couples' allowance replaced by a restored child tax allowance. More tinkering with the taxation of pensions and savings, including firm plans for Individual Savings Accounts, seems certain and there could even be tax cuts on booze plus a long-promised 10p rate of tax.

But the fine-tuning of policy will be left to left to the Bank of England and its interest-rate committee.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
The Banksy image in Folkestone before it was vandalised
people
Life and Style
tech

Sales of the tablet are set to fall again, say analysts

Sport
Louis van Gaal at the Hawthorns prior to Manchester United's game against West Brom
football

Follow the latest updates from the Monday night Premier League fixture

News
i100
PROMOTED VIDEO
News
Brian Harvey turned up at Downing Street today demanding to speak to the Prime Minister
news

Met Police confirm there was a 'minor disturbance' and no-one was arrested

Arts and Entertainment
George Lucas poses with a group of Star Wars-inspired Disney characters at Disney's Hollywood Studios in 2010
films

George Lucas criticises the major Hollywood film studios

Voices
Chris Grayling, Justice Secretary: 'There are pressures which we are facing but there is not a crisis'
voices

Does Chris Grayling realise what a vague concept he is dealing with?

Life and Style
A street vendor in Mexico City sells Dorilocos, which are topped with carrot, jimaca, cucumber, peanuts, pork rinds, spices and hot sauce
food + drink

Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets

News
Blackpool is expected to become one of the first places to introduce the Government’s controversial new Public Space Protection Orders (PSPOs)
news

Concerns raised phenomenon is threatening resort's image as a family destination

Life and Style
gaming

I Am Bread could actually be a challenging and nuanced title

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Customer Service Executive / Inbound Customer Service Agent

    £18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

    ASP.NET Web Developer / .NET Developer

    £60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

    Operational Risk Manager - Asset Management

    £60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

    Project Coordinator - 12 month contract

    £27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

    Day In a Page

    Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

    'They poured water on, then electrified me...'

    If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
    James Wharton: The former Guard now fighting discrimination against gay soldiers

    The former Guard now fighting discrimination against gay soldiers

    Life after the Army has brought new battles for the LGBT activist James Wharton
    Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

    Panic over Ebola threatens to infect the midterms

    Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
    Premier League coaches join the RSC to swap the tricks of their trades

    Darling, you were fabulous! But offside...

    Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
    How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

    How to dress with authority

    Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
    New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

    New book on Ian Curtis sheds fresh light on the life of the late singer

    'Joy Division were making art... Ian was for real' says author Jon Savage
    Sean Harris: A rare interview with British acting's secret weapon

    Sean Harris: A rare interview with British acting's secret weapon

    The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
    Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

    Tim Minchin interview

    For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
    Boris Johnson's boozing won't win the puritan vote

    Boris's boozing won't win the puritan vote

    Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
    Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

    Tim Wheeler: Alzheimer's, memories and my dad

    Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
    Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

    How We Met: Hugh Bonneville & Peter James

    'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
    Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

    Bill Granger's heavenly crab recipes

    Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
    Radamel Falcao: How faith and love drive the Colombian to glory

    Radamel Falcao: How faith and love drive the Colombian to glory

    After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
    Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

    Terry Venables column

    Premier League managers must not be allowed to dictate who plays and who does not play for England
    The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

    Michael Calvin's Inside Word

    Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past