That Tax Cut: Some Arithmetic

Taking our cue from the Denninger piece cited below, we can do some simple sums.

22 million or so lowish and middle-earners have just been given a tax cut – up to £ 120 per person. Recall that in recent months a number of public-sector pay rises were held back by around half a percent – for example, the police were awarded 1.9% instead of the 2.5% recommended by the review body – because to pay the full amount would be inflationary, according to Brown and Darling.

If we take £ 24 k as a representative salary for many of these workers, 0.5% x 24 k is £ 120, so the amounts are commensurate.

OK, so we know this week’s tax rebate is inflationary, and the government has acknowledged it will borrow to fund it. What impact might that have on interest rates ? Well, at very least it must make another of those quarter-percent reductions much less likely. Take a middle-income family with a mortgage of £100,000: 0.25% on an interest-only basis is £ 250 more interest to pay. Per annum.

May not be much of a bargain, this one-off tax cut.

ND