Thursday 15 May 2008

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

18 comments:

Anonymous said...

Very True. The Tories ran into real trouble in the 1980's.

They kept doing a 1p off income tax but inerest rates were rising ten - fifteen percent. The 1p tax cut was as nothing to a % off the rates.

Anonymous said...

thats nonsense. how can you factor against an interest rate cut that doesnt exist.
look at the MPC voting patterns, they were pretty reluctant to cut rates in the face of the credit crunch. various members have been warning about inflation for most of the year. regardless of the tax cut stunt, i dont think we'd have seen another rate cut this summer anyway

Steven_L said...

How much did you say Nick? £24k? I'm on £21k and I benefitted from the 10% scrapping. You have to be under £18k to have lost out from that I gather. Even though I won on it I still don't agree, although I'm dead against these tax credit thingys - they are the real issue that will hamper UK over the next decade.

On another note CU is as quiet as the media was about this huge RBS fall today. If you're out there CU I share your pain, I had a pocket-money size short on them last week at 366 when I heard they were printing more shares and chickened out at around 353 when it didn't look like it was going to budge as quickly as my roulette conditioned mind wanted to believe it would.

Now I'm pondering whether 275 is a good price to buy and know that if I don't and they rebound I'll be gutted all over again!

Nick Drew said...

Roy - fair enough, but I was just illustrating the 'directional' logic - and irony - of accepting Brown's dictum on suppressing public-sector wages. If he is in any way right on that, a quarter-percent is the smallest quantum to consider.

Steven - yes, where is CU when we need him?! (Relaxing, I hope) So you've added shorting to your armoury ! I seem to recall discussing that several months ago.

Good call on RBS (see my short post of Tues) but I think the big fall was just the automatic effect of the dilution when they issued the new shares (the clue is the absolutely vertical drop).

Otherwise I think Peston would have been blogging by now ! We shall ask CU whether he participated in the rights issue ...

Mark Wadsworth said...

It's great stuff for people who have sold to rent!

Nick Drew said...

PS, Roy

May 15 (Bloomberg) -- U.K. two-year government bonds dropped the most in 12 years this week as traders abandoned bets the Bank of England will cut interest rates next month ...

Nick Drew said...

boasting again, Mark !

we have all doffed our caps already at your masterly decision

Anonymous said...

I think it is quite interesting how this 10p tax vcut rate thingy has dominated the headlines. It does seem to play into Labour's hands, to be honest. The fact is that the Daily Mail is reporting REAL food inflation running at about 16%. Monthly mortgage repayments have also risen by a similar amount. That is costing the average family of four about £250 A MONTH more! So quibbling over £120 a year is laughable really. Too many people in the media and politics are earning so much money that they don't notice inflation.

Anonymous said...

Sorry, in my last post that should have been £150 a month, not £250 a month.

Letters From A Tory said...

Good spot. The teachers and police officers must be fuming about this, although they haven't been in the media talking about it. Future interest rate rises to curb inflation will wipe out this tax gain very quickly.

Bill Quango MP said...

letters:
Fisrt question to J. Smith on 5 live yesterday was about the police pay.

This from the comments:
I am amazed that a Home Secretary can claim with a straight face, that it would be wrong to backdate police pay at a cost of £200 per officer, because this would promote inflation, but its a good thing to give 21 million people £120 this year to spend to put, her word, some "Oomph" into the economy!!

She was lucky the debate moved on because the first two callers were calling her on this.

As an aside the Post Office has insisted on 2.1% for all Post Office staff IN LINE WITH INFLATION!
[perhaps they mean In Line with this MONTH's increase in inflation]

CityUnslicker said...

I bought RBS at 400, more fool me. Still you can't win 'em all!

Steven_L said...

'Armoury' Nick? You're having a laugh, I've added cfd gambling to my list of bad habits, it now takes pride of place above staggering into casinos, spontaneous bouts of binge drinking on the way home from work, smoking, biting my nails and picking my nose, not washing my clothes until there is 3 machine loads and not eating breakfast.

If I had hung onto that short I'd be back up. I lost £1,200 in the first week I started just 2 months ago and by the time I chickened out of RBS had wormed my way back to £120 down or so.

A Bad call on Sainsbury's and now it's £300 down. Still, it's taking longer to lose all my cash than it usually takes me in the casino.

The people that run the stock markets obviously didn't take ill-disciplined gamblers like me who wake up tipsy from the night before into account when they decided what time to open up shop.

I missed Carphone Warehouse too, I was thinking about shorting them for weeks, for no other reason than I don't like the buggers, which I decided wasn't a good enough reason. Next thing you knew they'd crashed too.

Nick Drew said...

staggering into casinos, spontaneous bouts of binge drinking on the way home from work, smoking, biting my nails and picking my nose, not washing my clothes until there is 3 machine loads and not eating breakfast

you are the Prime Minister and I claim my £5

(this explains those gold sales !)

Steven_L said...

If I was PM I'd break the stagnation of the left/right politcal divide by introducing a system of 'gamblism'.

A friend and I discussed this in a curry house early one Saturday morning.

FSA regulations that impede consumer choice would be abolished, a new kind of national lottery would be made compulsory (unless you want to live on the street) and the voter would have the choice, through a voucher system, whether they gambled this months credits on Texas Hold-em, fixed odds games of random chance or the financial markets.

The stock markets would become more volatile and unpredictable as purchasing power fluctated from one type of consumer to the next winner on a periodical basis.

Gamblism is the only way to revitalise our politcial system and tired economy if you ask me.

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