How to save hundreds of billions of pounds

As things stand, central banks use interest rates to control inflation, while governments use tax and spend mostly to bride us at election time or save up to bribe us at future elections. We should leave monetary policy unchanged with independent central banks committed to a low inflation target.   

The problem is that interest rates have become increasingly blunt and overly painful.  Households and companies have much less floating-rate debt, so they feel the effect more slowly.  

Moreover, 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 already rich tend to save more of their income, but this only adds to the £100bn of inheritances each year, adding to inflationary pressures.   

The pain inflicted on mortgage holders and other debtors has to be all the greater to compensate for this benefit to wealthier homeowners.   

There is a better way.  Instead of letting governments bribe us with our own money, taxes should be raised or lowered to address any inflation threat, with monetary policy as the backstop rather than first response.   

The choice of what taxes to raise or cut will reflect political priorities, but using fiscal policy to control inflation is much more effective because tax changes affect consumers and businesses far more quickly. This reduces the current risk of recession or inflation from over- or under-shooting on interest rates.  

Controlling inflation inevitably requires pain. What makes using taxes a no-brainer is that the pain inflicted by higher interest rates goes to the banks and their clients; higher taxes are similarly painful but the money comes back to us all, reducing government borrowing and paying back our debts.   

Since UK interest rates started rising in November 2021, a ballpark £450bn has been paid by households, governments and corporations in higher debt-servicing costs.

Had the same pain been inflicted through higher taxes, it could have reduced the national debt by almost a fifth, equivalent to 18% of annual GDP.   

These savings exaggerate the benefits 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 wealthy, 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 and reducing costs.   

What I am proposing is Keynesian demand management, but without the commitment to full employment. Sadly, always having a job to go to proved hugely inflationary.  

Instead, a double lock on inflation, both fiscal and monetary, will lower interest rates, reduce mortgage and credit card payments, stimulate investment, increase growth and bail out heavily indebted governments.