2023-02-02
Inflation as a tax
Jeremy Hunt is saying that he can’t pay nurses any more money because doing so will cause inflation to go up and that inflation is a tax (with an implication that it’s an unalloyed Bad Thing).
Well, in my humble opinion, there is a lot that’s wrong with this logic. The price of goods going up makes us poorer, for sure. But the price of labour going up makes us richer. There is often a lag, but historically wages have gone up faster than retail prices, even in periods of high inflation.
The other problem is that paying nurses more doesn’t actually change inflation at all. We don’t pay anything (directly) to go to hospital, so doubling nurses’ wages would not technically increase inflation. I accept that there would be secondary effects on the labour market, but there would not be a first order effect.
The general idea that we’re made worse off by increasing public services is, also, clearly wrong. The large majority of the population pay less in taxes than they consume in public services. I would guess that only the top couple of deciles of earners actually put more into the system than they take out in the form of schools, hospitals, defence, roads, justice, policing, social care, foreign aid etc.
But that’s the point. Inflation does redistribute wealth, from creditors to debtors, at least when debts are fixed in nominal terms. When we borrow £100 to buy an asset which is worth £100 now, in a year’s time we will have benefited to the tune of the inflation in the price of the asset (less any debt service costs). Interest costs rise to offset inflation, but this leads to increased income tax paid by lenders, and reduced costs borne by borrowers.
The low and falling interest rates which we have seen from the 1980’s have resulted in a massive financialization of western economies. I’ve written about this regularly, but the best account in my view is The Great Deformation by David Stockman. If we get some spiking real interest rates, we might see some reversal of this.
Of course in the technical sense that inflation is like a tax because it reduces the (real) size of the public sector debt burden, this is quite correct. Inflation does indeed allow governments to spend without levying any actual increased taxes on the public. But I really don’t think that was what Hunt had in mind.
Refs
Inflation is a stealth tax … Telegraph Story
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