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Work and prosperity
21 August 2013

Soak the savers, we’ve got a national debt to pay off

These days almost anything can be described as a tax. The leftwing campaign against the ‘Bedroom Tax’ – actually a reduction in benefits – is a prime example. From the other end of the political spectrum, the Daily Mail pulls a similar rhetorical trick, portraying the Government’s policy of low interest rates and above-target inflation as a tax on savers.

Nevertheless, there is much to pay attention to in James Coney’s report:

  • “A stealth raid by the Bank of England has stripped savers of more than £170billion, a Money Mail investigation can reveal.
  • “By slashing the base rate to a record low of 0.5 per cent and allowing the cost of living to soar for more than four years, the Bank has whittled away the value of cash sitting in High Street accounts through a ‘secret tax’...
  • “A saver who has kept £10,000 in the best easy-access account has seen the value plunge by £1,243.”

The purpose of this raid is to help the country pay off its debts. Both high inflation and low interest rates help debtors – therefore when this combination forms the basis of government policy, it can certainly be seen as a form of redistribution:

  • “Renowned economists have also noted the sneaky way in which governments use inflation as a form of secret taxation. Milton Friedman, for example, observed that ‘inflation is the one form of taxation that can be imposed without legislation’.
  • “And John Maynard Keynes said: ‘By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.’”

It’s worth noting that the state is not the sole beneficiary of this redistribution. Private sector debtors also benefit – as do the banks:

  • “[Losses to savers] have been compounded by the introduction of the Government’s Funding For Lending scheme, which has given the banks a cheap source of cash. They no longer need to pay interest to attract savers’ money and so have been cutting rates.
  • “There is currently £1.2trillion sitting in High Street accounts and it’s earning an average interest of 1.66 per cent. With banks and building societies now slashing the payouts on closed deals and reducing what they pay on best buys, this average is likely to plunge further. In total, since 2009 the inflation raid has cost savers £170 billion.”

One could argue that given the vast overhang of public and private sector debt the Government has no choice but to keep interest rates artificially low. If that is the case, then we should turn our anger on the policies that allowed our debts to mount up to such a level in the first place.

One can – and should – blame the last Labour Government for inflating the biggest credit bubble in British history. But Britain was hardly the only advanced economy to go for broke. Rightwing governments, as well as those of the left, used debt – both directly and indirectly – to fund their tax cuts and spending rises.

Conservatives should, of course, favour expenditure savings and/or measures to boost genuine growth as the main tools for managing the public finances. But to the extent that such measures fall short, taxation should be preferred over borrowing – because while the former is unpleasant, it is at least transparent: a proper account is made of the winners and losers. Borrowing, by contrast, is a great political deceiver – not only deferring the cost of government policy, but also exacting it with the minimum of honesty.


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