Would Stubborn UK Inflation Have Anything To Do With High Taxes?

Now why would UK core inflation remain stubbornly high? Anything to do with high income taxes, high business rates and high sales tax and government and local government fees slapped at every twist and turn? Plus government consistently over-paying for staff, services and vendors. What remains amazing is how the British press, including Conservative papers, seldom make the link.

The U.K.’s Consumer Prices Index has remained at 3.1pc for the sixth month running. Obviously there is a connection with higher international commodity prices – for example, cereals have gone up because of wheat price increases partly as a result of this summer’s forest fires in Russia.

But services inflation climbed to its highest rate since February 2009. It is now well above its low of 2.3pc in November. At least the Daily Telegraph noted that there might be a link with the upcoming jump in VAT (national sales tax). It quotes a retail expert, Neil Saunders of Verdict, suggesting that shops are already beginning to increase prices ahead of next year’s VAT increase to 20 percent.

Coalition Attacks Pensioners and Savers

Steve Webb, Britain’s Pensions Minister, has told the Daily Telegraph that the Coalition is “making changes to reinvigorate a culture of saving”, all part of the government’s plan to raise the retirement age sooner than was expected. Apparently, new figures show that life expectancy in the U.K. is increasing more rapidly than was forecast even just four years ago when Labour drew up its plans to raise, more slowly than the Coalition, the retirement age.

But doesn’t there seem to be a colossal mismatch between what the Coalition has actually been doing on the savings front with all of its talk about reinvigorating a culture of saving?

Following on from Labour – and the same is happening on the other side of the Atlantic – interest rates are being kept so low that inflation is being allowed to eat away at savings.

And the Coalition has clobbered those who are trying to save for their retirements by increasing the Capital Gains Tax on the sale of second homes and shares.

As I noted in an earlier blog posting, about 250,000 British families own a second home and there are one million buy-to-let properties. Many who bought a second home are not wealthy but decided after the Brown government raided private pensions that the best way to help weather their retirements with a little bit of dignity was to invest in property. After all no one can live on the old age pensions the U.K. supplies – that is if they want to avoid penury. So Coalition is punishing the people who are trying to ensure that they are not an increasing charge on the State.

Not content with raising CGT, thousands of British holiday-home owners face losing a range of tax benefits under changes announced in the Budget. From April next year, holiday property landlords will no longer be able to write off “trading” losses from second homes against their tax bill. Capital allowances and capital gains benefits will also go. That will also disrupt the pension plans of tens of thousands of people – many of who based retirement plans on the current tax rules for holiday lets.

So much for reinvigorating a culture of saving! But it gets worse in the Coalition’s obvious undermining of savers. New so-called tax simplification rules being proposed by the Treasury are also going to hit savers and those close to retirement. As economics commentator Ian Cowie has pointed out: “Many members of final salary company or occupational pensions face big annual tax bills and other savers will be prevented from topping up their pensions in the year of their retirement, if the Treasury proceeds with its latest proposals for ‘tax simplification’.”

On top of that the increase in Value Added Tax will leave even less money available to save. When it comes to saving, Coalition deeds are totally at odds with Coalition words.

Britain Heading for a Double-Dip Recession

According to the splash in The Times today, both of Britain’s main parties — Labour and the Conservatives — are planning after the spring general election to raise sales tax from 17.5 percent to 20 percent, part of the desperate effort to start putting the country’s books in order.  And what will be the effect? Almost certainly to put the country into a double-dip recession.

Both parties are also talking about hiking income tax. January has seen a retail collapse — Britons just are not buying. And with a jump in VAT, retailers will have an even more torrid time. They are facing already in the spring a jump in business rates.

As I blogged back in September, both of the UK’s main parties seem oblivious to one of the key lessons of the Great Depression: federal and state tax hikes and currency devaluation prolonged the depression and pushed the US back into a second slump in 1937.