Think Tanks

Centre for Policy Studies

1 Feb 2012 14:53:44

Tim Knox: A substantial Corporation Tax cut would send a bold pro-growth, pro-enterprise message

Tim Knox is Director of the Centre for Policy Studies which today publishes How to cut Corporation Tax (pdf) by David Martin.

We have heard rather a lot recently about how we must not tolerate “high rewards for failure”. But there is a logical corollary to that particular line: that we should be equally vehement about not imposing high penalties on success. And that is what the tax system does, not just on those individuals who pay higher rate taxes but also on business. For Corporation Tax – a tax on business profits – is effectively a tax that is only paid by successful businesses. It is money taken by the state from highly productive enterprises, money that could otherwise have been reinvested in new ventures. And it is money that is then consumed by the state, notorious for its low level of productivity.

In this way, the state penalises the only organisations which can get us out of the hole that we are in. For growth will only come from business: the state and the consumer are both far too indebted. That is why, as leading tax expert David Martin argues in his Centre for Policy Studies paper published today, George Osborne should announce in his March Budget an immediate cut in the main rate of Corporation Tax from its current level of 26% to 20%. At the same time, he could also announce his intention to reduce it even further – to 15% or even 10% once the appropriate anti-avoidance measures are in place.

Such a move would have numerous benefits:

  • It would boost business confidence, encourage new investment by businesses (as it would improve net returns) and would send a strong signal that the Coalition is taking the bold supply-side measures necessary to restore growth.
  • It would immediately fulfil the Coalition pledge to “create the most competitive corporate tax regime in the G20”. Until 2005, UK rates of Corporation Tax were lower than the OECD average. Since then—despite the Coalition’s efforts so far – the UK has fallen behind.
  • It would present an opportunity for a major simplification of the tax system. If the tax base was defined as business profits, then we could sweep away the separate rules and calculations for different sources of income, and for capital gains, and for capital allowances; and abolish all the complex rules for aggregating the results of these calculations, and for how profits and losses can be offset.
  • It could have a significant “wealth effect”. One of the key measures of assessing the value of a company is the P/E multiple (the price earnings multiple). If earnings per share are enhanced because of a lower tax charge, the value of equities will tend to rise over time (assuming an unchanged P/E multiple). Higher share prices benefit most corporate pension funds (particularly through reducing the actuarial deficit), life assurance companies, other institutional investors and unit and investment trusts which harness the savings of millions of people. Private individuals thereby achieve a higher valuation of their equity investments through rising share prices which potentially enhance consumer confidence. That in turn adds to the buoyancy of the economy.
  • It could also heighten the impact of any further Quantitative Easing – or possibly even reduce the need for more QE. The use of QE by both the Bank of England and the Fed has tended to result in higher equity prices, thereby enhancing consumer confidence through this “wealth effect”, a consequence that has been publicly welcomed by both central banks. A reduction in Corporation Tax should achieve precisely the same effect. Moreover, that effect might well be leveraged by an announcement of an intention to reduce the rate further as it would result in an upward re-rating of P/E multiples caused by greater investor confidence in the regime of lower Corporate Tax rates.

Continue reading "Tim Knox: A substantial Corporation Tax cut would send a bold pro-growth, pro-enterprise message" »

11 Jan 2012 08:27:06

Tony Lodge: How the Coalition is gambling with Britain’s energy policy

Tony Lodge is a Research Fellow at the Centre for Policy StudiesHis new pamhplet,The Atomic Clock: How the Coalition is gambling with Britain’s energy policy is published by the CPS and available to download here.

Screen shot 2012-01-10 at 11.31.28Over twenty years since Cecil Parkinson laid the groundwork for electricity privatisation and delivered the most liberalised electricity market in the world the Coalition is now planning to artificially fix the price of electricity in an effort to support more wind energy and desperately kick-start the building of new nuclear power stations.

The "market" for electricity, established 20 years ago after privatisation, is now largely undermined because there is no way it can deliver the expensive decarbonisation the Coalition wants.  Today, investment instead is driven by central planning and subsidies, which will be set to meet the wishes of the developers, particularly the "Big Six" energy companies. The monopolisation of the power market must urgently be re-addressed.

This oligopoly, in which four large continental companies are dominant, is set to enjoy an "arm lock" on this and future governments.  Prices will rise and economic growth will be held back in the attempt to meet the EU’s most ambitious green energy targets. 

Continue reading "Tony Lodge: How the Coalition is gambling with Britain’s energy policy" »

23 Dec 2011 08:29:14

In new year policy blitz, Centre for Policy Studies suggests cutting public sector pay and cutting taxes for the low-paid

By Tim Montgomerie
Follow Tim on Twitter

Screen shot 2011-12-23 at 08.26.20

Over this Christmas period the Centre for Policy Studies is publishing a series of policy resolutions for 2012...

Howard Flight has argued that it's vital that Britain remains ahead of the international pack in 2012 in its determination to be a world leader in deficit reduction. He suggests there's more scope for deeper spending cuts and he focuses on public sector pay:

"The “hosing” of money at the public sector by Gordon Brown, combined with agreeing very generous pay deals with the public sector Unions have led to a position where public sector pay, level by level, is around 10% above private sector pay, without allowing for the value of public sector pensions.  Moreover, many in the private sector are facing being obliged to agree pay reductions if they are to keep their jobs.  A significant proportion of total public spending is represented by pay and this, therefore, an area where a 5% pay reduction, across the board, would achieve substantial savings."

If Howard Flight is busy saving money Tim Morgan of Tullett Prebon spends it in the second CPS resolution:

"Government should seek to reward work, and to offset pressures on low- and middle-income working people, by raising the thresholds for income tax and National Insurance to £12,000, to be funded by additional cuts in public expenditures."

Mr Morgan also recommends deregulation and greater restriction of entitlements in order to boost growth.

Deregulation to help small businesses, in particular, is the focus of the third resolution - written by Dom Raab MP.

You can follow these resolutions via this page at the new CPS website. There'll be fifteen in total.

26 Jul 2011 08:53:53

Here you go George; A Growth Manifesto from London's think tanks

By Tim Montgomerie
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TTGM

On our Comment pages today Mark Field MP sets out the two great truths of the economic debate:

One: We must carry on with the Osborne deficit reduction programme. When you are in a worldwide debt crisis you have to get your debts under control.

Two: The Coalition hasn't got an adequate growth agenda.

Read Mark's piece.

So what can the Coalition do to achieve growth? I asked some of London's top think tanks to recommend some ideas. The list below is far from exhaustive. Missing, for example, are ideas to modernise trade union laws and the Civitas think tank's thinking on better procurement. I also dismiss the idea that a growth agenda cannot have immediate effects. While it's true that many supply side measures can take years to yield benefits (this is certainly true of the Coalition's excellent welfare and school reforms) some - such as tax reforms and deregulation - can produce immediate benefits. There is also the impact on confidence. If the government looks serious about long-term competitiveness then overseas and domestic investors are more likely to stay and expand in Britain.

TPA
"If the Government keeps living beyond the means of British taxpayers and businesses, then growth will continue to be limited.  By reducing the incentive to work and invest, high taxes diminish economic growth.  For some tax cuts, the economic effect is dramatic enough they can increase revenue.  That is the case with a lower corporate tax rate, the Government could cut a lot further and faster than they are, and abolishing the 50p rate of income tax.  But there are other tax cuts that would boost growth as well, such as a cut in National Insurance.  And more broadly the relationship between spending and growth shows that imposing too great a burden on taxpayers depresses growth.  European Central Bank estimates imply Brown’s increase in spending as a share of national income left GDP over £100 billion lower by 2010-11." - Matt Sinclair of The TaxPayers' Alliance

More: The TaxPayers' Alliance's Tax Reform Commission.

GWPF
"In the current circumstances it is clear that the UK cannot afford, above all unilaterally, to move to a low carbon, let alone a zero carbon, economy. A low carbon economy means a high energy cost economy. At the very least, the Government should phase out all energy subsidies of all kinds, and suspend unilateral targets until such time as all other major nations have signed up to the same course. For the UK to go it alone is not merely suicidal but pointless. Decarbonisation requires growing subsidies from the taxpayer and sharply increased energy bills for business, industry, and households. At a time when painful cuts are unavoidable, it makes no sense to make British industry – and manufacturing in particular - uncompetitive, or to drive it overseas, and thus greatly weaken our economy, by ratuitously driving up energy costs." - Benny Peiser of the Global Warming Policy Forum

IEA
"The coalition needs to create an environment much more conducive to enterprise. A systematic programme of deregulation should be at the heart of this. The government should start by dismantling employment regulation. Legislation that makes it more expensive to hire workers, such as anti-discrimination legislation, should be repealed. The minimum wage should be regionalised. If the government has not got the courage for radical reform, wide-ranging exemptions for small firms would be a start." - Mark Littlewood of the Institute of Economic Affairs

More: Deregulating the labour market; deregulating energy and transport; deregulating financial sector; deregulating business; and deregulating business.

Reform
"Coherent reform of public services is a necessary part of the recovery. It will enable public spending to be restrained while meeting the demands for improved services and it will increase the productivity of the economy, raising living standards for everyone. Poor performing education, health and welfare systems already impose significant costs on the wider economy.  Demographic changes mean that the costs facing government in areas like pensions and healthcare are accelerating rapidly.  The Treasury has made the right call on the big question of deficit reduction, but has undermined the Government's commitment to value for money by ring-fencing certain public sector budgets.  The commitment to the National Curriculum is just one example of the fact that neither Health nor Education have dismantled central regulation and made services accountable to their users." - Andrew Haldenby of Reform

More: Reform's "It Can Be Done" report on public service reform.

IoD
“Any growth strategy has to deal with the problem of excessive employment law. According to the World Bank, UK labour market flexibility has slipped down the international league table – from 17th in 2007, to 21st in 2008, to 28th in 2009 and then to 35th in 2010. What was once a source of strength for the UK has become a source of weakness. A moratorium on new laws combined with some deregulation would boost business performance, job creation and restore the UK’s labour market competitiveness. For example, we need to deal with the fact that too many employers are being held to ransom in employment tribunals by vexatious employees and their ‘no win no fee’ lawyers.” - Alistair Tebbit of the Institute of Directors

CPS
"There are two fundamental requirements of competitive markets: first, the possibility of 'free entry' for new players and 'free exit' for those that fail; second, that cartels do not dominate a market. British banks fail on both points. That is why they are still not lending enough to small businesses. Why they are still paying senior staff huge bonuses (on top of salaries that were increased to make up for supposed cuts in bonuses). And how the top five banks control 80% of the market (a percentage that is climbing higher and higher). Deep seated banking reform must break up this cosy cartel. We need a new Financial Competition Commission to carry out investigations of individual firms or of product areas, with the power to make recommendations to the Bank of England to promote competition between banks; to remove barriers to entry (and promote new competition); to take steps to permit the orderly exit of failed institutions (break up institutions that are ‘too big to fail’); and to do more to ensure products and services offered are themselves subject to competition. Finally, state-owned banks must be returned to the private sector as soon as they are strong enough; and at the best possible price and greatest reward for the taxpayer (who took on all the risk when the shares were nationalised)." - Tim Knox of the Centre for Policy Studies

More: Niall Ferguson's Too Big To Live; Andrea Leadsom MP's Boost Bank Competition; and James Conway's Give Us our Fair Shares.

ASI
"Domestic competition is seen as good because it keeps producers sharp. So why resist it from abroad? Yet we slap import duties on shoes, cereals, electronics – there’s even a tariff of up to 48.5% on Chinese bicycles. Such protectionism allows our producers to coast along instead of becoming world class. It means less choice and value for consumers. And if we are buying less from abroad, people in other countries will have fewer pounds in their pockets to spend back here, so other UK exporters suffer. Let’s not wait for world agreement, but push for bilateral free trade treaties with any country we can – particularly the poorest, who have most to gain." - Eamonn Butler of the Adam Smith Institute

PX
"Welfare reform should not go faster nor deeper than an £18 billion cut. It should, however, move beyond ‘making work pay’. This would mean: Increasing conditionality by asking more of individuals who spend as little as eight minutes a day looking for work; introducing welfare accounts that re-instate the link between what people contribute through national insurance and what they can get out; and privatising some functions of Jobcentre Plus and re-negotiating parts of Work Programme contracts to allow some claimants to get personalised support from day one of their claim. These reforms would provide a critical boost to growth: they would make the welfare system effective in matching claimants to jobs and make the best of the talent of the UK population." - Matt Oakley for Policy Exchange

CSJ
"In terms of short term hindrances to growth, the total annual cost of family breakdown is £41.74 billion or £1,364 for every taxpayer. Reducing these direct costs would plug a big hole in national and local finances but there are other harder-to-measure indirect costs which hamper our long term economic prospects. The fallout from broken family relationships can hinder children’s educational achievement, dampen their self esteem and affect their physical and mental health - ultimately threatening their creativity, well-being and future productivity. We need to make sure the next spending review includes specific investment in universal credit to eliminate the couple penalty; local councils should collect data on relationship statuses and be set delivery outcomes by national government so they can demonstrate how their policies  are providing relationship support and stabilising relationships in their area; other initiatives that help families (such as Family Nurse Partnerships and Family Intervention Projects) should specifically include couple support - often most effectively delivered by the voluntary sector." - Samantha Callan of the Centre for Social Justice

More: Action on the family.

OE
"The Government needs to push for a long-term solution to the eurozone debt crisis – bailouts aren’t working, debt restructuring will be needed. The longer the crisis goes on, the worse the prospects for eurozone growth and stability look and, as our biggest trading partner, this will have an impact on the UK economy. In the medium-term the UK needs to seek allies in pushing for a better-functioning single market, including deregulation, removing cross-border barriers to services and digital industries, and protecting the interests of the City of London from the EU’s new financial supervisory architecture. This includes securing the flexibility to apply capital requirements for banks as the UK sees fit. In the longer term, the UK should look to diversify its trade away from the eurozone, tapping into the growth potential of emerging markets, which will be necessary in any case but also provides a Plan B if the eurozone fails to get its act together. The UK also needs to continue to push for a reduction in EU external trade barriers and encourage the expansion of free trade agreements with other economies/trading blocs." - Stephen Booth of Open Europe

More from the Open Europe blog: Liberalising the Single Market, Greek debt restructuring, Financial regulation and Trade.

SMF
“The Competition Commission needs to be reformed so that it rewards, rather than punishes, firms who share their knowledge on product development and innovation with other UK firms. At present, the UK’s institutional approach encourages firms to compete with each other at every stage, rather than cooperate. Vital information for businesses tends to remain in a particular sector instead of spreading around the whole economy. This puts UK firms at a disadvantage compared to many of their international competitors. Through better knowledge transfer, they can share their ideas on the best strategies to increase revenues and, hence, economic growth.” - Ian Mulheirn of the Social Market Foundation

Civitas
"Our Government should start by not making matters worse, which means cutting the 50p tax rate, reducing costly regulation, and reversing climate-change policies that are adding so much to the cost of electricity that our key industries will be forced overseas. It should also pursue our enlightened national interest through industrial policy. It should encourage local enterprise banks to restore the initiative to localities. People in the North East, for example, would rally to a local enterprise bank that provided a safe home for their savings and invested them in providing solid, sustainable jobs in the North East." - Dr David Green of Civitas

Read more about Civitas' ideas for a new industrial policy.

Legatum
"The discussions about boosting the economic performance of UK economy lack clarity and focus. Everyone understands that entrepreneurship and innovation are important for growth, and also that the government has a formidable aptitude to discourage both by ill-advised tax and regulatory policies. We need to move beyond these truisms towards more specific proposals. While we subscribe to many of the views expressed by our colleagues from other London-based think tanks, we believe that any credible pro-growth policy needs to reflect the following two insights, which are conspicuously missing from our present-day discussions.

  • Incentives for private-sector employment for high-productivity individuals. In present times, highly skilled individuals are often likely to end up in professions with low social rate of return and in rent-seeking occupations, instead of going into the private sector and contributing to higher rates of innovation and entrepreneurship. Those occupations might include lobbying, tax advisory services, certain elements of legal counselling, and also the work for the underperforming branches of the public sector. Very often, government jobs bid away labour away from marginal private sector jobs. This is especially worrying in situations when the private sector jobs involve significant positive externalities, which are not reflected in employees' paycheck - such as jobs in private R&D. Tax changes, and removing many of the advantages of public-sector employment, as well as employment in some of the rent-seeking professions, could partly correct for this distortion. Also, a flat subsidy could be given to individuals who migrate into private occupations that can reasonably be seen as productive.
  • Restoring the approbation associated with entrepreneurship and innovation. This might just require a simple change of rhetoric on the part of the coalition. The government should be more vocal in praising succesful entrepreneurs and innovators as the true heros of our societies, instead of lambasting them for not paying their "fair share" in taxes."

- Dalibor Rohac of Legatum

7 Jul 2011 07:46:32

Ryan Bourne: We need to look back from the future to assess what government policies are needed to boost productivity

BourneRyan2 Ryan Bourne is the Economic and Statistical Researcher at the Centre for Policy Studies

In a CPS paper released today (pdf), Norman Blackwell argues that far from simply recovering or getting ‘back on track’ post-recession, the UK’s economy requires fundamental clear-sighted reforms to improve our long-term productivity. He outlines three key challenges that the country will have to face up to (rise of BRICs, ageing population and increased global demand for energy) and five areas in which evidence suggests more rigorous government policies are required to boost long-term productivity. It is essential, he argues, that we attempt to look back from the future. Below, we set out his main conclusions:

RESTRUCTURING PUBLIC SERVICES: verdict on coalition – beginning to target

The productivity deficit of the public sector has been well documented. To overcome this will require a fundamental opening up of public services, and frameworks set in place to enable provision of services by not-for-profit, charitable and fully commercial organisations.  The government must overcome political resistance to fully embrace school and NHS reform, as without the competitive elements, the aims will not be achieved.

RAISING THE UK SAVINGS LEVEL: verdict on coalition – not going far enough

International evidence suggests high rates of productivity growth and economic growth is associated with high savings ratios. The Coalition has taken some steps to boost corporate saving and move closer to a net government surplus. But it should boost household savings by simplifying the tax incentives for retirement savings by merging pensions and ISAs. Allowing higher earners to use an ISA for their full annual retirement savings could save the Treasury a substantial part of the roughly £30 billion annual cost it currently incurs in upfront pension tax.

Continue reading "Ryan Bourne: We need to look back from the future to assess what government policies are needed to boost productivity" »

4 Jul 2011 15:45:40

Tom Burkard: Diamonds into glass: why the Coalition proposals for universities risk destroying great English institutions

CPS

Tom Burkard undertakes Education research for the Centre for Policy Studies and is a member of the NAS/UWT and a Visiting Fellow at the University of Buckingham. He is currently working to start a free special school staffed exclusively by teachers with experience in the armed forces.

The new Higher Education White Paper is not without merit—no doubt it cost David Willetts a few bruised shins to convince his mandarins that good universities should be allowed to expand.  Likewise, one suspects that the proposal to allow private universities to compete on an equal footing was stoutly resisted by the statist mentality that prevails in Whitehall. 

Alas, all these benefits cannot possibly compensate for the Philistine message conveyed by the proposal to name and shame the 'dead-end courses' that don't lead to good jobs.  No doubt many of the offerings Willetts has in mind are pretty dreadful, but his announcement betrays some very fundamental—and destructive—misconceptions about higher education that have taken hold in the political nation.

A generation or two ago, it was assumed that learning was a good thing for its own sake.  There was a general understanding that the health of any civilisation depended upon the wisdom of its leaders, and that universities existed to preserve and nurture the cultural and intellectual life of the nation.  The excellence of our universities was assumed: academic freedom was taken for granted, and government regulation was unthinkable. 

Now, parents and students view higher education as a credentialing system—a passport to a professional salary. Vice-chancellors tell us that we need a highly-trained workforce to meet the challenges of the 21st century economy. Politicians from all parties view it as an instrument for social engineering.

Continue reading "Tom Burkard: Diamonds into glass: why the Coalition proposals for universities risk destroying great English institutions" »

23 Jun 2011 11:03:27

Nick Clegg recommends the Centre for Policy Studies plan for bank re-privatisation

By Matthew Barrett
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6a00d83451b31c69e2013485ff12b5970c-150wiAs the BBC reports today, the Deputy Prime Minister, Nick Clegg, has written to George Osborne to ask him to consider the plan for re-privatising the public holding of shares in Lloyds and RBS by distributing shares to all British taxpayers - a policy created by the Centre for Policy Studies in their report "Give Us Our Fair Shares"

The advantage of the plan is that long-term public ownership of the banks is undesirable, and by distributing shares to taxpayers, the Treasury would receive full value from their shares that would not otherwise be realised if shares were sold in a conventional privatisation. The plan would give all taxpayers a windfall estimated at between £500 and £1000 each. 

When individuals sell their shares or some of their shares, a fixed amount (the "floor price”) will be payable to HM Treasury. The floor would be deducted upon sale. The report explains the floor price:

"For illustrative purposes only, let us assume that the price of the share is 1000p on the day of distribution with the floor set at 850p. When an investor sells, Treasury receives the first 850p and also CGT on the difference between the floor and the sale price. The investor receives the balance. In our example, if the investor were to sell immediately at 1000p she would receive 123p with Treasury receiving 877p. However if the investor waited and sold at 1500p his return would rise to 533p per share, with Treasury receiving 967p."

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19 Jun 2011 07:00:00

Huseyin Djemil of the Centre for Policy Studies: The state must stop dealing drugs and start doing rehab

Huseyin Djemil has worked in the drug and alcohol field for 18 years, having previously been a Class A drug user who went into residential rehabilitation. He is now Director of Green Apple Consulting, a specialist substance misuse consultancy he founded in 2009. As a member of the Centre for Policy Studies' Prisons and Addictions Forum, here he previews Breaking the habit: why the state should stop dealing drugs and start doing rehab by Kathy Gyngell, which is published today by the CPS.

In 1986 I needed help. I was smoking about £150 to £180 of heroin and freebase cocaine a day and had been for approx 7-years.

But I got into a rehab called Yeldall Manor, ran by a Yeldall Christian Centres, which despite my nominal Muslim background at the time, was as happy to have me, as I was to get in.  Back then, the process for getting help was straightforward; I rang the rehab, arranged an interview/assessment date, attended the interview and was shown around the house and grounds.

Following the interview I was given an admission date which helped me to focus on getting off the drugs I was using so that the proper work of rehabilitation could begin.  I toughed out my ‘detox’ at my sister’s flat and was admitted six weeks later.  Two years later, I emerged from Yeldall Manor a different person.

The system for getting into rehab was simpler then, though there was far less money in the treatment system, no 'commissioning' but a national budget, administered by the DHSS (Dept for Health and Social Security) and accessed via a few simple forms at the rehab as part of the induction process. I would have preferred never to have been addicted at all, but given the state of access to rehabilitation today I am glad I am not seeking residential rehabilitation today.

Continue reading "Huseyin Djemil of the Centre for Policy Studies: The state must stop dealing drugs and start doing rehab" »

6 Jun 2011 12:28:27

Ryan Bourne: Britain has been falling down the international competitiveness league tables and the Coalition must learn some urgent lessons if it is to reverse that decline

Picture 2Ryan Bourne is the Economic and Statistical Researcher at the Centre for Policy Studies and co-author of How to reverse the UK’s declining competitiveness, which is published today by the CPS.

On the day the IMF delivers its verdict on the UK economy, the words on everyone’s lips appear to be ‘economic growth’. Or rather, ‘lack of economic growth’. Many so-called economists are loudly voicing the opinion that current slow growth is due to government spending cuts. The cuts are, of course, likely to slow growth in the short-term, but an economic strategy based on more and more state spending is unsustainable. Let’s not forget that this year the state will still spend £122 billion more than it takes in tax revenue, with overall nominal spending increasing to £697 billion by the end of the Parliament.

But to state the bleedingly obvious, if we want sustainable growth then the UK must offer a competitive economic environment. Here at the Centre for Policy Studies, we have spent some time examining the three main competitiveness league tables: the World Economic Forum’s Global Competitiveness Report, the IMD’s World Competitiveness Yearbook, and the Index of World Economic Freedom by the Heritage Foundation, and seen that there has been a clear decline in the competitive position of the UK since 1997. The detailed sub-indices for each of these reports provide a good starting point for development of policies to stimulate growth, through attracting inward investment and allowing our businesses to flourish.

Continue reading "Ryan Bourne: Britain has been falling down the international competitiveness league tables and the Coalition must learn some urgent lessons if it is to reverse that decline" »

31 May 2011 07:00:00

Ryan Bourne: The Bank of England's inflation forecasts are getting increasingly inaccurate

Picture 2Ryan Bourne is the Economic and Statistical Researcher at the Centre for Policy Studies.

Last week, I wrote an article for ConHome explaining how Budget forecasts had tended to be over-optimistic on future growth prospects for the UK economy. Today, I turn my attention to the Bank of England’s Monetary Policy Committee, whose remit is to keep inflation within a percentage point of the 2% target.

The UK CPI inflation rate is currently running at 4.5%. That’s a whole 2.5% above the target which the MPC is supposed to be hitting. But interest rates still aren’t being hiked. The Monetary Policy Committee is forecasting that deflationary pressures are such that inflation will fall in time, without the need for increased rates now. Current inflation, they argue, is largely imported – and besides, there is a large excess capacity in the economy.

Whilst the excess capacity of an economy is highly difficult to measure, there are reasons to suspect that in time inflationary pressures will subside: the impact of the VAT rise is temporary; commodity price jumps might begin to dampen, and the slow nature of the recovery coupled with government spending restraint will restrict aggregate demand. So rather than responding to short-term inflationary pressures, the MPC claim it is targeting longer-term inflation as justification for not raising rates today.

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