Expert View: We've had no boom, Gordon, but we could have bust

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The Independent Online

The UK retail sales figures for August provoked the predictable round of calls last week for the Bank of England to raise interest rates further. The question needs to be asked, why? To stop inflation?

The UK retail sales figures for August provoked the predictable round of calls last week for the Bank of England to raise interest rates further. The question needs to be asked, why? To stop inflation?

If we examine the figures, we find that the value of retail sales grew by 5 per cent, while the volume grew by 6.5 per cent. Think about that: in order to shift more volume, the retail sector has been cutting prices.

Hardly a surprise to people in the real world. This is deflation, not inflation. If we look at the retail sales deflator, we see it has been negative for over two years.

The so-called economic miracle in the UK is nothing of the sort. The British consumer is weak, and getting weaker, caught between poor income growth and a wide range of rising taxes and pseudo taxes.

In a recent column, I wrote about the distorted nature of the UK unemployment statistics. I argued that if we were to include some of the extraordinary number of "long- term sick" as unemployed, then UK unemployment would be nearer the French and German 9 to 10 per cent than the much-trumpeted 2.9 per cent. After this, I received a large number of emails from readers suggesting that the inflation numbers were even more distorted. Mostly, they argued that inflation was actually much higher.

Well, yes and no. Inflation isn't higher, but the cost of living is. This is not mere semantics; it is important to distinguish between the various measures in terms of the use to which they are put. Excluding the cost of housing or train fares or council tax might seem ridiculous to the hard-pressed householder, but it is the more sensible measure to be monitored by the Bank of England, whose job is to assess the extent to which price inflation is the result of excess demand relative to supply. There is also the circular issue of including mortgage rates in a targeted inflation measure. If you raise rates to head off inflation, you raise inflation. So do you increase rates further?

The wider measure is the cost of living and should be used to hold those in the public sector accountable for their use and abuse of their monopoly power to raise prices. Council tax, regulated utility prices, rail and tube fares and mortgage rates are all taxes on the consumer. The consumer can do little other than spend less on non-essential items.

This is becoming more important since the relentless increase in these taxes appears, to many of those proposing them, to be at little or no cost. The reality is that the drop in interest rates from 7.5 per cent in 1998 to 3.5 per cent last year has acted as a significant "tax cut" for British households, more than offsetting the tax increases elsewhere.

No longer.

In previous columns I have discussed how the ridiculous nature of our mortgage finance system means that monetary policy in the UK acts as an arm of fiscal policy. With £1 trillion of household debt, every one-point move in interest rates adds or withdraws £10bn of spending power - equivalent to 3p on or off the basic rate of income tax. The Bank has increased these monetary taxes five times since last year, but there has been no reduction elsewhere.

Gordon Brown regularly claims to have ended boom and bust. By raising taxes into an upswing and continuing to raise them while the Bank cut its own "taxes", he ensured no boom. But with the Bank now raising rates and councils, utilities and transport all still raising their "taxes", it is difficult to see how he can avoid the bust. No wonder he wants to move next door.

Mark Tinker is a director of Execution Stockbrokers. Mark.Tinker@executionlimited.com

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