How to save hundreds of billions of pounds

To control inflation, central banks raise interest rates.  The 5% increase since November 2021 has seen UK debtors pay a ballpark £450 billion in higher interest payments, worth about 20% of annual GDP.  The banks keep a chunk and the rest goes to their clients, with taxes collected along the way.  The average UK saver is getting a few hundred pounds in higher interest payments each year but the vast majority of that £450 billion (and rising) is going to the already rich. 

This is incredibly regressive.  It is also highly inefficient and cruelly arbitrary.

Arbitrary because those who fixed their mortgages in 2021 have been spared most of the pain in our current fight with inflation.  Those who had to renew during the Liz Truss fiasco will pay for her venal incompetence for years to come.

It is inefficient because over half of UK owner-occupation is outright ownership.  Their savings grow from any interest rate increase intended to curb inflation by making us poorer.  The pain inflicted on mortgage holders and other debtors including government is all the greater to compensate for the extra purchasing power going to the already rich.

There is a better way.  Inflation management requires pain, but if we inflict it through higher taxes instead of higher interest rates we can use the money to pay off the national debt and restore public finances. 

£450,000,000,000 exaggerates the savings we’ve missed over the last three years if less pain is needed because tax changes are more immediate and better targeted, but less pain is its own reward. Paying off the national debt locks the money away, instead of redistributing it to the already rich, which is both counter-productive and highly regressive.   

Later in the cycle, as tax rates are cut to stimulate the economy, tax revenues would still accrue relative to the position pre-tightening, only more slowly.  Interests rates would remain the backstop against inflation, deflation, and government profligacy.  Good fiscal governance could see the interest rate unchanged throughout the economic cycle, increasing stability, reducing costs and stimulating investment. 

This is Keynesian demand management, but without the commitment to full employment.  (Always having a job to go to proved hugely inflationary.  Had we gone Neo-Keynesian in the 1970s, public finances would be immeasurably stronger and we could have avoided the whole neo-liberal cul-de-sac.  Thatcher’s failed experiment with monetarism lasted much longer than a lettuce and did far more damage.  Despite the two oil crises suffered under Heath and Callaghan and the benefit of North Sea oil under thatcher, growth slowed marginally in the 1980s.  NSO data show that the heady days of 1970s growth have never since been seen.)

Instead, we can use demand management as the first line of defence against inflation, leaving monetary policy as the backstop.  A double lock on inflation will reduce interest rates, cutting mortgages and other debt servicing while also stimulating investment and growth.  Above all, it will bail out heavily indebted governments. 

Neo-Keynesianism requires less pain, which could be borne on the broadest shoulders should a government so choose.

It is our money.  Why give it to the banks and their clients when we can keep it for ourselves?