Minutes from BoE Monetary Policy Committee

The minutes have been published of the BoE's Monetary Policy Committee for their meeting in the first week in June - and the shock is that for the first time in two years, one member, Andrew Sentence, has voted to raise interest rates.

He was worried about inflation, and the minutes show that other members agreed with him in discussion (though they didn't vote for a rise in interest rates). And remember this was before they BoE members knew what was in the budget.

The budget will have made him even more hawkish - as I said in my previous post on VAT, it will add to inflationary pressures that are building due to the falling pound (and sterling as been falling since the election because the markets believe that the Coalition is going to tip us back into recession).


I have some sympathy with the need to normalise interest rates. If you look at the graph left, during the global recession of 2001-3, the UK dealt with the crisis by loosening fiscal policy, and while interest rates were cut, they didn't fall too low, and the monetary stimulus was removed pretty promptly. The USA though not only loosened fiscal policy, but turned on the monetary taps too wide, causing the massive commodity speculation that did so much to hurt the world economy, plus of course a housing bubble, which led to the credit crunch.

It might be smarter for all economies to have higher interest rates and a looser fiscal policy rather than the situation we have now, where everyone in Europe is tightening fiscal policy, but money is still extremely cheap, which means we have all manner of speculation going on, from attacks on sovereign countries to an oil price that is artificially high given global economic conditions.

The nightmare scenario is if uber-loose money causes inflation, and you end up with a toxic situation of tightening monetary policy at the same time as tightening fiscal policy. The Coalition are expecting the BoE to keep monetary policy loose in response to their fiscal tightening (see the comments from the OBR), but the BoE might not be able to deliver, especially when the government recklessly puts up VAT. You'd think they would have learnt from Thatcher's experience of jacking up VAT from 8.5% to 15% in the early 80's, but no!

Like most Labour people, I hate VAT with a purple passion; it slows consumption, it's regressive, it contributes to price inflation, and worst of all, once you put it up you can't cut it without the agreement of all 27 members of the EU (and that's unlikely to happen when many EU countries have higher VAT than us).

I've no idea why Tories are so enamoured of it. I think they believe that it's a stealth tax that no one notices - but it actually causes a lot of damage to the economy, (a lot of the ills of the previous Tory govt can be laid at the door of their VAT policy). I guess we are heading back to an era of low growth under Conservatives

Tory VAT Rise was being planned as long ago as August 2009

Lots of Coalition supporters are trying to claim that this VAT rise was unplanned and merely a consequence of coalition negotiations. But actually it was planned as long ago as August 2009.

The Sunday Telegraph, which always has good contacts within the Tory party, reported on 8th August 2009 in an article titled Tories study plans for 20pc VAT that

"The proposal [to raise VAT to 20%] is being “very actively considered” at the highest level, according to senior shadow ministerial sources.
It could be introduced within weeks of a Tory victory at the next election, which must be held by June, in a package that is also likely to include severe cuts to public spending.

...A shadow ministerial source said: “Tax rises will have to be part of the equation. It will be time for some strong medicine.”
By moving quickly to increase VAT after the election, senior Conservatives believe they will be able to pin the blame for the state of the public finances on Gordon Brown and his outgoing Labour government.
They would be following in the footsteps of Margaret Thatcher, who increased VAT to 15 per cent in the 1981 Budget, also at a time when Britain was struggling to emerge from a recession.

...It would hit charities and businesses which do not levy VAT – because they would have to pay the tax on items they bought but would not be able to recoup the cost from customers."

After the Sunday Telegraph scoop, Tories took to the airwaves to deny they were raising VAT, but of course they were lying. The lies were continued by Cameron into the election debates.

My assessment of this budget is that it's pretty much exactly what the Tories were intending to do if they had got a majority of their own. There appears barely any LibDem input - in other words this is a budget that the country refused to endorse by refusing to give the Tories a majority - yet we've got it just the same.

The LibDems need to start asking questions about just what they are getting out of this - If they are rubber-stamping this just for electoral reform in return, they will find they've been had, as I am pretty sure no electoral reform will be forthcoming. It's actually quite stunning that they've allowed themselves to be made responsible for a far-right budget and without protest.

One more thing - the VAT rise will bump up inflation, which means that the BoE will have to respond with rising interest rates, especially as the falling pound (which has been dropping like a stone against the dollar every since the Coalition took office) continues to stoke inflation in oil and food. So we will have a tightening fiscal policy at the same time as a tightening monetary policy, and at the same time as our main trading partners in Europe contract demand. Watch not only for a double dip recession, but for the budget deficit to increase as a result of these hair-brained Tory policies hitting growth.

Duplicitous Dems: Nick Clegg on Expenses in the Debates

Found this classic of Nick Clegg on expenses, where he condemns CGT avoidance, and expense abuse, and then says "I have to stress that not a single LibDem MP has done any of these things".