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Could the Bank of England set tax rates as well as interest rates ?

14th Mar 2014
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Just about the only clever thing Gordon Brown (remember him ? ) did was to depoliticise interest rate setting by handing the job to the Bank of England. And it worked and nobody has squealed about it.

Could the Old Lady also set tax rates ? Just imagine having a tax rate that was free of political meddling .

Has anybody ever suggested it before ?

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By User deleted
14th Mar 2014 11:01

BOE & politics feed off each other ….

Is the bank rate and BOE really free of political influence? Surely this ignores the degree of inter-dependence, because the BOE & politics are inextricably entwined over economic growth, employment, housing and so on ….. never forgetting the howlers of ‘Teflon’ King over Lloyds/HBOS etc. that landed on the taxpayers plate to fund

For example - one of the current issues is artificially low interest rates that benefit some & penalise others. Of course leaving the bank rate low whilst fostering inflation is one way of reducing the countries debt – but many take a hit on living standards and have their pay eroded by this tactic

However, the real hurdle here is that the Government has borrowed so much over the last few years that a hike in interest rates from their current low to anything remotely reasonable (say 3%) means that the UK Government would be unable to meet the interest payments on their current debt – and with this comes the inevitable political consequences of failing to cover interest on a loan (devaluation, raising taxes …)

Yes we could go down the route of BOE & tax rates (and continue to write those absurd historic letters between King/GB explaining why things have not worked out) – but ultimately the tax take is supposed to balance the books (politically & economically); so can one really have one party deciding on the spend (politicians) and another raising the money (BOE) to fund it?

The scope for blame increases exponentially as both parties deny all responsibility

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Norman Younger
By Norman Younger
14th Mar 2014 11:58

Responsibility

There is no end to debating what the tactic is and who wins and loses but de facto the rate setting has generally been perceived as apolitical and is certainly less so than leaving it with an elected government , who had a habit of using the rate lever as a means of "buying" votes at election time

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By User deleted
15th Mar 2014 08:25

BOE & politicians - collusion ...

This interesting aspect was revealed last week by Mark Carney and the host of UNELECTED decision makers - Monetary Policy Committee

Evidently over the past 5 years the BOE has been monetising a large chunk of the national debt by 'printing money' (QE) in order to purchase £375bn worth of gilts (20%-25% of the national debt).

Of course reversing (unwinding) QE would entail selling these gilts back into the market - however, Mr Carney quote "we’re not going to sell £375bn of gilts". Therefore these gilts will stay on the BOE books and be allowed to expire naturally over time - BUT they will still have to be redeemed at par sometime in the future; therefore a large chunk of the national debt has been kicked into the long grass for future generations

So this is the collusion between the BOE & politics - politicians run up the national debt and then the BOE issues 'monopoly money' to purchase the debt. Where is the 'chinese wall' with this one?

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Norman Younger
By Norman Younger
17th Mar 2014 15:25

Collusion or conspiracy theory ?

In this case the markets can make their judgment and upon such the reputation of the governor will be at stake. so even if he was in cahoots with the government ultimately he could be rumbled by investors if they thought like you

But the funny thing about it is that the adminsitration that ran up the debt that has been redeemed by the Bank was the very administration that made the Bank indpendent

 

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By Knight Rider
18th Mar 2014 13:00

QE is mugabenomics

Perhaps one day we will have a Government that believes in sound money and balanced budgets.

Who really believes this QE will be unwound? The government has given the bank an iou to the moneyprinter who has thrown the iou away.

The BoE cannot really be independent if the Chancellor appoints the Governor. Would an independent bank allow interest rates below the level of inflation?

 

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Norman Younger
By Norman Younger
19th Mar 2014 15:03

QE and Mugabenomics

The difference is that QE has broad backing as a strategy whereas Mugabe is a pillaging thug whose policies are uber-populist and are defined by how much his ego is boosted

The markets are content with QE but they are not content with Mugabe - and it's the "markets" that are the barometer of expected success

QE is the unknown , and in my opinion that journey was better than the alternative

If the government did not appoint the governor who should ?

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By Knight Rider
20th Mar 2014 18:17

Gordon Brown

In defence of Gordon Brown he was also instrumental in keeping Britain out of the euro but I am struggling to think of any other smart moves during his term of office. For many removing the dividend tax credit and hastening the demise of final salary pension schemes will be his legacy.

Handing control of rates to the BoE was done to give NewLabour economic credibility and it was initially successful. But can bankers be trusted with rate setting? Probably more than politicians!

To return to your original question surely the role of the central bank is to provide a stable currency. Decisions on tax rates and fiscal policy are not a matter for the central bank but our elected representatives.

Of course the Government should appoint the bank governor but we should be careful when we talk about an independent central bank - it is still dependent - only less so than before!

Perhaps the best way it could show its independence would be a rate rise before the election.

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Norman Younger
By Norman Younger
21st Mar 2014 09:19

Stable currency

I never thought about that and perhaps you are correct about the Bank's remit. I assumed it was about the economy as a whole rather than simply currency, after all we hear enough from the Governor on the economy.

But even if they couldn't perhaps we should have another independent body just like the OBR .

This way we could have a delegated government and slim it down to just the PM !

 

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