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Tax Rises and Inflation : Economics (not Politics)

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Tax Rises and Inflation : Economics (not Politics)

#440533

Postby AWOL » September 8th, 2021, 9:28 am

Hi,

I was a scientist and not an economist so please excuse my economic illiteracy. Would the tax increases announced yesterday dampen demand, money supply. and spending sufficiently to offset the inflationary pressures that we are seeing in the UK economy? Traditionally the UK has been subject to higher inflation than the US but I am wondering if this is likely to dampen the domestic recovery and if there is a way of expressing this in terms of an effect on inflation.

Regards,
AWOL

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Re: Tax Rises and Inflation : Economics (not Politics)

#440534

Postby pje16 » September 8th, 2021, 9:33 am

I find prices going up more because of Covid, or at least that's the excuse being given
Try a Staycation and you'll see what I mean
My brother lets a property out through Hoseasons, they wanted him to put his prices up by 30% this summer
He told them where to go as he doesn't belive in ripping off his returning clients

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Re: Tax Rises and Inflation : Economics (not Politics)

#440538

Postby AWOL » September 8th, 2021, 9:47 am

pje16 wrote:I find prices going up more because of Covid, or at least that's the excuse being given
Try a Staycation and you'll see what I mean
My brother lets a property out through Hoseasons, they wanted him to put his prices up by 30% this summer
He told them where to go as he doesn't belive in ripping off his returning clients


Demand is outstripping supply in many areas with COVID and BREXIT effects, plus restarting from a low base, and in many areas the need to restock (that wont apply to holiday lets, I don't imagine). However if the supply of money is reduced by taxation that should have a contrary effect.

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Re: Tax Rises and Inflation : Economics (not Politics)

#440549

Postby ursaminortaur » September 8th, 2021, 10:10 am

AWOL wrote:
pje16 wrote:I find prices going up more because of Covid, or at least that's the excuse being given
Try a Staycation and you'll see what I mean
My brother lets a property out through Hoseasons, they wanted him to put his prices up by 30% this summer
He told them where to go as he doesn't belive in ripping off his returning clients


Demand is outstripping supply in many areas with COVID and BREXIT effects, plus restarting from a low base, and in many areas the need to restock (that wont apply to holiday lets, I don't imagine). However if the supply of money is reduced by taxation that should have a contrary effect.


Shortages of workers in various areas - lorry drivers, care home workers etc etc will likely see wage inflation in those areas which will then be reflected in higher prices charged to customers. The National Insurance rises themselves may exacerbate this as such workers seek even larger wage increases to compensate.

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Re: Tax Rises and Inflation : Economics (not Politics)

#440557

Postby odysseus2000 » September 8th, 2021, 10:30 am

AWOL wrote:
pje16 wrote:I find prices going up more because of Covid, or at least that's the excuse being given
Try a Staycation and you'll see what I mean
My brother lets a property out through Hoseasons, they wanted him to put his prices up by 30% this summer
He told them where to go as he doesn't belive in ripping off his returning clients


Demand is outstripping supply in many areas with COVID and BREXIT effects, plus restarting from a low base, and in many areas the need to restock (that wont apply to holiday lets, I don't imagine). However if the supply of money is reduced by taxation that should have a contrary effect.


To me the big question is how long can these price hikes hold? In the 1970's the last time when we had high inflation, there was a significant component coming from the rise in the price of oil, something that had a direct impact on most aspects of the economy as there was no easy low cost alternative. With things like rental properties there are many alternatives and as Covid becomes downgraded from Pandemic to Endemic the overseas travel market will likely grow back towards what it was suggesting potential decline in UK lets etc.

Referring to the tax hikes, I doubt at +2.5% (personal and National Insurance) it will make that much practical difference although it goes against the present administration's election manifesto, but the opposition seem incapable of exploiting anything to their own advantage. Additionally everyone has been troubled by Covid, so the idea that the government needs more money to recover from Covid as a natural resonance with the economy and it is unclear if the opposition can or will promise to cut taxes. There is also the opportunity for the present administration to cut rates just before the next election, citing how their stewardship of the economy has made this possible etc.

On a more general point I do not buy the inflation argument and find the doomsayers who relentless tell us what happened in previous inflationary periods iccluding the South Sea bubbles etc etc are not allowing for the huge changes in the economy. Once the UK and much of the world had a big manufacturing sector, but the output was much smaller than what is possible now with computers and all manner of machine tools. Now the UK economy is 80% service and there shortages are more difficult as the barriers to entry are much smaller than building a new factory or capex for a new machine, all that is needed is a bit of retraining and suddenly there are more folk able to do the service job and prices fall.

After QE etc pf 2008 we had little inflation, if not then, why now?

As an aside, it Interesting that the term Staycation was coined to describe folk staying where they live, as happened during the second war due to travel restrictions, and this now seems to have been extended to include staying in ones country.

Regards,

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Re: Tax Rises and Inflation : Economics (not Politics)

#440577

Postby dealtn » September 8th, 2021, 11:33 am

AWOL wrote:Hi,

I was a scientist and not an economist so please excuse my economic illiteracy. Would the tax increases announced yesterday dampen demand, money supply. and spending sufficiently to offset the inflationary pressures that we are seeing in the UK economy? Traditionally the UK has been subject to higher inflation than the US but I am wondering if this is likely to dampen the domestic recovery and if there is a way of expressing this in terms of an effect on inflation.

Regards,
AWOL


Generally speaking Tax increases dampen aggregate demand, especially when the funds raised aren't (incrementally) being spent by the government. They are essentially being used to fund already committed expenditure, not new.

Depending on your economic theory, or which church you worship at, you will either believe there is a multiplier effect of government spending (as the recipients of that spending themselves in turn spend that increased income, and so on). Or there is an offsetting negative multiplier where private sector spending reduces as recognition that current government expenditure needs to be funded over the longer term by increased taxation, or higher interest rates, so those future outcomes are "saved" for in advance.

You would also need to consider increased taxation from the supply side of the economy, where again generally speaking, increased marginal costs of supplying labour, and employing staff, has a depressing marginal effect on the economy, and can be a drain on productivity. Regardless of "funding" the economy, economic growth only comes about from increased availability of the inputs of "creation" (broadly capital or labour), or the more efficient use of it (better workers, education, experience, training, copying best practice from elsewhere etc.). Any marginal increase in supply-side rigidities harms growth. With growth seen as a good thing, a means to pay off debt, reduce tax, increase wealth etc. this is an economic negative.

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Re: Tax Rises and Inflation : Economics (not Politics)

#440768

Postby tjh290633 » September 8th, 2021, 7:48 pm

The place where I notice the effects most are in the hospitality area. My favourite pub has been looking for staff for quite a long time, and they are still shortstaffed. They may need to increase wages, to attract more people, but there may be more attractive alternatives out there. Meal prices and the price of alcoholic drinks in pubs are rising, some due to price increases by suppliers. These increases will lead to increases in VAT, and higher wages will lead to higher returns from Income Tax and NICs, assuming that people are not working part time to stay below thresholds.

Maybe Laffer was right?

TJH

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Re: Tax Rises and Inflation : Economics (not Politics)

#440770

Postby Lootman » September 8th, 2021, 7:51 pm

AWOL wrote:Demand is outstripping supply in many areas with COVID and BREXIT effects

The exact same thing is happening in the US which is immune from Brexit. So it is safe to say that the over-riding factor is Covid.

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Re: Tax Rises and Inflation : Economics (not Politics)

#440790

Postby odysseus2000 » September 8th, 2021, 9:17 pm

TJH
They may need to increase wages, to attract more people, but there may be more attractive alternatives out there.


Yes, I think lock down and Zoom calls have shown people that there are other alternatives to long hours and poor wages in the service industry. We keep hearing about massive numbers of folk arriving from France and traditionally they would do the service jobs, but they seem to be going else where and/or staying in government provide accommodation.

I am not sure that labour shortages will end anytime soon and perhaps we will see robots and synthetics being used extensively in the service sector. The videos showing how some Amazon warehouses operate with out staff is a clear sign that robots can do the find and move job as well or better than humans and the economics of having a robot rather than transitory staff is likely attractive to employers, especially if it can do the cleaning, ordering etc...

Regards,

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Re: Tax Rises and Inflation : Economics (not Politics)

#440791

Postby odysseus2000 » September 8th, 2021, 9:23 pm

Lootman wrote:
AWOL wrote:Demand is outstripping supply in many areas with COVID and BREXIT effects

The exact same thing is happening in the US which is immune from Brexit. So it is safe to say that the over-riding factor is Covid.


It is all bizarre to me. We are hopefully well past peak covid and yet now in the UK we are seeing shortages of everything. My Gp's surgery had run out of sample bags, the local hospital has run out of blood containers and is doing only emergency blood work. The local supermarket has empty shelves for some products and very few carrier bags for ages.

One argument is that there are not enough HGV drivers which seems strange unless they have been pinged into isolation, but if so that does not last long, about 14 days as I understand it.

So why is this all happening now?

Regards,

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Re: Tax Rises and Inflation : Economics (not Politics)

#440793

Postby Midsmartin » September 8th, 2021, 9:38 pm

There was an item about hgv drivers on the radio 4 program More or Less. I didn't take notes so take the details with a pinch of salt. An industry body says we are short of 100000 drivers. About half of this is hand waving that they kind of made up, from pre covid surveys about recruitment problems, advertised vacancies, the number of idle vehicles etc. Of the remainder, part is due to European drivers going home, and part is due to covid related cancellation of driving years and instruction.

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Re: Tax Rises and Inflation : Economics (not Politics)

#440795

Postby JohnB » September 8th, 2021, 9:51 pm

To address the OP, isn't tax raised and then spent on public services fairly neutral for overall inflation? Yes it means non-NHS workers have less money, but there will be more NHS workers with more money to counter-balance that, and the effect ripples through all suppliers into the general economy.

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Re: Tax Rises and Inflation : Economics (not Politics)

#440796

Postby Lootman » September 8th, 2021, 9:54 pm

JohnB wrote:To address the OP, isn't tax raised and then spent on public services fairly neutral for overall inflation? Yes it means non-NHS workers have less money, but there will be more NHS workers with more money to counter-balance that, and the effect ripples through all suppliers into the general economy.

Unless of course those NHS workers spend all their new-found wealth in Benidorm and Magaluf.

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Re: Tax Rises and Inflation : Economics (not Politics)

#440823

Postby gryffron » September 8th, 2021, 11:39 pm

JohnB wrote:To address the OP, isn't tax raised and then spent on public services fairly neutral for overall inflation? Yes it means non-NHS workers have less money, but there will be more NHS workers with more money to counter-balance that, and the effect ripples through all suppliers into the general economy.

Although many politicians of many colours are fond of pushing both sides of this argument, I agree with your point. What difference does it make whether taxpayers spend their own money, or whether the govt spends it for them? The effect of either is the same.

The only things that make a big difference are:
Running up debt, regardless of whether private or state, should be good for the economy as it increases the money in circulation.
Paying down debt or saving, regardless of whether private or state, should be bad for the economy as it decreases the money in circulation.

However, even that doesn’t work very well in practice as so much of our spending is international. Spending money on imports or foreign services does not boost OUR economy.

Gryff

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Re: Tax Rises and Inflation : Economics (not Politics)

#440829

Postby ursaminortaur » September 9th, 2021, 12:10 am

odysseus2000 wrote:
TJH
They may need to increase wages, to attract more people, but there may be more attractive alternatives out there.


Yes, I think lock down and Zoom calls have shown people that there are other alternatives to long hours and poor wages in the service industry. We keep hearing about massive numbers of folk arriving from France and traditionally they would do the service jobs, but they seem to be going else where and/or staying in government provide accommodation.


If by that you mean the asylum seekers coming across the channel in boats then whilst their cases are heard they are forbidden from working. And since Priti Patel has frozen the assessment process for six months whilst she tries to find some way of returning them to France it is going to be even longer than usual before any are granted refigee status and allowed to then work. Before the UK left the EU the largest two groups of foreign care workers came from Romania and Poland using the EU's Freedom of Movement provisions rather than being asylum seekers.

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Re: Tax Rises and Inflation : Economics (not Politics)

#440837

Postby AWOL » September 9th, 2021, 5:51 am

Midsmartin wrote:There was an item about hgv drivers on the radio 4 program More or Less. I didn't take notes so take the details with a pinch of salt. An industry body says we are short of 100000 drivers. About half of this is hand waving that they kind of made up, from pre covid surveys about recruitment problems, advertised vacancies, the number of idle vehicles etc. Of the remainder, part is due to European drivers going home, and part is due to covid related cancellation of driving years and instruction.


Ironically the European workers supposedly want to come back to their jobs here but are reportedly stuck in a never-ending approval process.

JohnB wrote:To address the OP, isn't tax raised and then spent on public services fairly neutral for overall inflation? Yes it means non-NHS workers have less money, but there will be more NHS workers with more money to counter-balance that, and the effect ripples through all suppliers into the general economy.


You are probably right in principle. Actually delivering more people in practice...

Although the majority of "front line" NHS jobs, Pharmacists, Doctors, Nurses etc. all require degrees and professional qualifications which are in short supply and have long training periods so it will take a long time to recruit especially with sub-inflationary pay rises off-set by increasing taxation.

I think the care sector may be different as one can be a care assistant although I heard an industry representative on Radio 4 arguing it's time they got "equivalent pay" which whilst I think they should get more pay I am not sure is realistic. Personally I think that a relatively modest pay increase could make a big difference to the lives of care workers and their staffing levels. The biggest problem is that the industry has thin margins and, in my limited experience doing business with them, is ran to be ruthlessly efficient at the coal face (but I have seen very nice head offices with unusually high levels of staff conveniences). I suspect smaller operators may be radically different.

The care sector although probably easier to see fast results will come second as the NHS backlog is visible to more voters and a massive issue that will effect life expectancy despite the best efforts of staff.

gryffron wrote:Although many politicians of many colours are fond of pushing both sides of this argument, I agree with your point. What difference does it make whether taxpayers spend their own money, or whether the govt spends it for them? The effect of either is the same.

The only things that make a big difference are:
Running up debt, regardless of whether private or state, should be good for the economy as it increases the money in circulation.
Paying down debt or saving, regardless of whether private or state, should be bad for the economy as it decreases the money in circulation.

However, even that doesn’t work very well in practice as so much of our spending is international. Spending money on imports or foreign services does not boost OUR economy.

Gryff



However isn't to some extent public borrowing offset by private saving? It must be more complex though, I personally think there is a question of the relative value of different kinds of spending (and to some extent this relates to the difference from a pound from a high earner and a pound from a low earner). Also it raises the question of whether the borrowing is from the domestic or international public. I am also wondering to what degree taxation and borrowing are the same and to what degree they differ. I suspect borrowing is that it brings forward the "taxation" and brings a net present value/IRR consideration. Sorry this is the way my mind works. I am doubtless demonstrating my complete economic ignorance as I have multiplying thoughts on the nature of government funding but like a monkey with a dart board there may be something in some of these musings.


Lootman wrote:Unless of course those NHS workers spend all their new-found wealth in Benidorm and Magaluf.


I see no sign of individual NHS workers getting more pay on the back of this. Did I miss something? More pay won't improve the backlog although adequate staffing would probably do more for the happiness of NHS workers than the more pay my wife wants :)

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Re: Tax Rises and Inflation : Economics (not Politics)

#440845

Postby Itsallaguess » September 9th, 2021, 6:54 am

Midsmartin wrote:
There was an item about hgv drivers on the radio 4 program More or Less. I didn't take notes so take the details with a pinch of salt.

An industry body says we are short of 100000 drivers. About half of this is hand waving that they kind of made up, from pre covid surveys about recruitment problems, advertised vacancies, the number of idle vehicles etc.

Of the remainder, part is due to European drivers going home, and part is due to covid related cancellation of driving years and instruction.


If a big part of the UK haulage problem is due to European drivers 'going home', then we might reasonably expect mainland Europe to have an abundance of drivers themselves, but the reality is that mainland Europe are actually seeing the same driver-related issues as the UK -

Driver shortage is pan-European (24th Aug 2021) -

In the UK there is a shortfall of at least 76,000 drivers. Across Europe the total reaches 400,000 drivers, according to research by Transport Intelligence.

Ti’s latest research paper on European Driver Shortages assesses the scale of the crisis, country by country.

  • Poland - According to Ti estimates, the shortage in Poland in 2020 is around 124,000 drivers. According to IRU, Poland is one of the most heavily impacted European countries and driver shortage in 2020 stands at around 37%.
  • UK - The shortfall of truck drivers in 2020 is estimated at 60,000-76,000. The RHA estimates that there is currently a shortfall of about 60,000 hauliers in the UK. According to data from the Q2 Labour Force Survey for 2020, the calculated shortfall is even higher than RHA estimates and stands at around 76,000.
  • Germany - Between 45,000 and 60,000 truck drivers are ‘missing’ in 2020 in the German market alone, according to the DSLV and BGL, and this number is only increasing. The IRU predicts a gap of 185,000 drivers by 2027 in Germany.
  • France - In 2019 it has been reported by several news outlets that France is experiencing a shortage of approximately 43,000 drivers.
  • Spain - According to Ti estimates, the shortfall of truck drivers in Spain was 15,340 in 2020.
  • Italy - The shortfall in Italy in 2019 was estimated at around 15,000 drivers according to various sources including National newspaper Corriere della Sera. 4 European Driver Shortages

The driver shortages have been affecting the global road freight market for around 15 years. The issue comes as the pool of truck drivers is contracting but demand for transport is rising. The COVID-19 pandemic has further exacerbated the already alarming issue of driver shortages as new drivers have been unable to train and take their tests and Covid restrictions make the job even less attractive.

Even before the pandemic a serious cause for concern in the industry, the lack of drivers in the road transport industry was at an all-time high, with many of its underlying issues being long-term challenges. Factors such as an aging workforce and insufficient numbers of new recruits, due to working conditions and image issues of the profession, have been plaguing the industry for many years.


https://www.globalcoldchainnews.com/driver-shortage-is-pan-european/

Given the above haulage-industry report, and in terms of the reporting of this problem in the UK media, those who may be looking to highlight this as a UK-only issue would seem to have ulterior motives for doing so...

Cheers,

Itsallaguess

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Re: Tax Rises and Inflation : Economics (not Politics)

#440885

Postby PeterGray » September 9th, 2021, 10:17 am

It's undoubtedly the case that there is a global, and pan European issue with HGV drivers. However, looking at the Eurpopean situation it's perfectly clear that the UK has make things more difficult for itself. Many European drivers moved and worked here as they could be better paid than in their, mainly Eastern European, homes. That has changed, the shortage means they can get better wages and jobs nearer home. Combine that with a clear message many of them picked up that they were not welcome, and that the route to permanent residence was not as easy as promised it's no surpise many left. Covid has exacerbated that, many more, who may be eligible for residence will have moved home, and are now less likely to come back.

Purely anecdotally, the only Polish UK based HGV driver I knew was about to buy a flat in the UK, until the result of the Referendum came out. He heard the message clearly and they decided to move back to Poland, where he now says he has a better standard of living, bought a better house than he could here and better work conditions. No surprise if our HGV shortge is worse than most other part of Europe.

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Re: Tax Rises and Inflation : Economics (not Politics)

#441037

Postby Itsallaguess » September 9th, 2021, 6:05 pm

PeterGray wrote:
No surprise if our HGV shortage is worse than most other part of Europe.


Hang on though - if all ours have gone back to Europe, then if Europe are seeing large numbers missing as well, then that means not only have they lost their own - they seem to have lost ours too!

:O)

Cheers,

Itsallaguess

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Re: Tax Rises and Inflation : Economics (not Politics)

#441045

Postby tjh290633 » September 9th, 2021, 6:13 pm

There is a theory that they have gone to Tesco or other companies, where driving a delivery van is much more congenial than driving an HGV. Maybe some have become white van men driving for Amazon and the like.

TJH


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