What is Jacob Rees-Mogg’s sudden interest in inflation and tax cuts all about?

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As the Guardian notes this morning:

Jacob Rees-Mogg has asked Rishi Sunak to reconsider impending tax rises as the chancellor and the prime minister came under sustained pressure from Conservative MPs to tackle rising costs of living.

They add:

Ministers are examining further targeted measures to mitigate soaring energy costs for vulnerable households including potentially extending the warm homes discount – but are set to reject a VAT cut.

Such disputes do, of course, matter because of their implications for the leadership of Boris Johnson, as well as for the aspirations of Rishi Sunak. However, there is more to this issue than mere politics on this occasion. The question that has to be asked is if the right-wing of the Conservative Party does not wish to tackle inflation through the use of fiscal policy, as this demand implies, where does it stand on inflation when we know that monetary policy is so constrained the date to cannot work?

The Tories have always made inflation one of their big issues. They are against it. It is rare that such a simplistic policy assumption is credible, but on this occasion, I think it is. The problem for them is that inflation can arise for a number of reasons and in most cases the measures available to tackle it have decidedly little impact.

It would seem that the usual Tory view is that inflation almost invariably arises from excess money creation resulting in government deficits as a consequence of excess government spending. Broadly speaking this equates to their belief in the quantity theory of money which suggests that if too much money is created it will pursue a finite supply of goods and services, inevitably increasing their prices as a result. There are, of course, numerous problems with this claim. Firstly, the deficit may arise because of insufficient taxation, and not because of excess spending. Secondly, there is no reason to think that the supply of goods and services is fixed. Whether because more money attracts more activity into the marketplace, or encourages more people to work, or incentivises increases in productivity, this claim may be false. Third, there is no reason why the excess money supply needs to come as a consequence of government activity: banks can also create money and excess private debt can have the same consequence. The theory ignores this, although eventually when full employment is reached (which is not something with which we are familiar) it is true that this theory might have some credibility. However, my caveat is appropriate: I would suggest that we really do not know what this looks like, and therefore we do not need to worry about it.

In that case other causes of inflation may well be more significant. This is the case at present. For example, it is numerous supply chain disruptions arising after a period of enforced low consumption that have given rise to many of the increases in current prices including those related to secondhand cars, some parts of construction and in consumer durables. This type of inflation is inherently short-term so long as the causes of disruption can be eliminated from the market. Active policy to constrain the impact of Covid - which the Tory Party is all too keen to object to - would in this instance be by far the most effective anti-inflation measure that could be put in place. I think we can safely say that Jacob Rees-Mogg has not noticed that this is the case.

An alternative form of inflation is cost-push inflation, where labour power, in particular, can perpetuate short-term inflationary trends by demanding compensatory pay rises that then result in a cycle of inflationary pay increases. Let me be clear, I have no problem with labour power. In fact, I would like rather more of it because the very clear evidence is that at present real wages are declining and that this trend is likely to continue, whatever the government says. We are short of labour power in the current economy, and this is most certainly not the cause of current inflationary trends and nor is it likely to perpetuate them.

Thirdly, we can simply import inflation. This happens when a price entirely beyond our control is altered and we have no choice but to continue to buy the product that has this inflationary pressure built into it. This is what is happening with gas and other fuel prices present. Worldwide pressure is increasing prices and there is literally nothing that the UK can do to prevent this happening.

Fourth, political actions can result in inflationary pressure. The obvious example is Brexit. Not only did this reduce the value of sterling, for entirely reasonable reasons, which move has inflationary consequences, but is also at present having two further consequences. The first is that it is simply increasing the cost of many goods and services because of the amount of additional bureaucracy that is required to now import and export goods from the UK, excluding Northern Ireland, to and from the EU. The second is that this does inevitably reduce the quantity of goods available for sale in the UK because the impediments to trade are so significant. As already noted, restricting the supply of goods and services is inflationary. Jacob Rees-Mogg should take note: this inflationary pressure is entirely created by the Tory party.

What Jacob Rees-Mogg wants is that the government deficit be increased to tackle current inflation. I have to admit that I can understand the opposition demanding this: I think that they appreciate that the inflationary pressure that we are facing is of the first, third and fourth alternative types that I mention. They can appreciate that the first of these alternative types is only of short-term significance, and could justify a tax cut. They can also appreciate that measures to tackle both Covid and the consequences of Brexit could also have greater impact upon inflation control than any other policy measure. What they would also understand is that taking action on these issues would compensate for any temporary tax cut by restoring longer-term prosperity, as well as confidence in the economy.

We can be equally sure that Jacob Rees-Mogg does not understand that these issues need to be addressed. So in that case what is he saying? My suggestion is that he is acting for short-term advantage by suggesting that there be a tax cut, but that there will be an iron fist within his silk glove, and that in due course he will demand two other things. One will, of course, be austerity and a balanced budget, by saying which I am suggesting that he will revert to the Tory norm of blaming excess government spending for being the cause of inflation when there is no evidence that this is the case at present. Those he seeks to compensate now he will punish hard in future as a result of this position. Secondly, he will no doubt be demanding significant increases in interest rates, which do of course suit the Tory electorate very well because they represent that part of the population with wealth. This, too, will punish ordinary families.

In other words, unless Jacob Rees-Mogg has departed from normal Tory norms (and in the current climate, anything is possible) we should not believe that he is making his demand out of the goodness of his heart. I am quite sure that he has two other agendas in play. One is to oppose Rishi Sunak in the short term. The other is to promote Liz Truss and a policy of fiscal austerity in the long-term. I could, of course, be wrong, but I think that what we are seeing here is not some very hard to explain anti-inflationary policy but that we are seeing instead is the now commonplace policy demand designed solely to pursue a Tory party agenda. And I am so bored by that.

We can beat inflation in this country. Aligning UK point of origin rules with those of the EU would help enormously. Removing all trade barriers with the EU would help as well. Resolving the Northern Ireland protocol is an essential part of that programme, as is putting in place the measures like improving filtration and ventilation in schools and elsewhere that are necessary to ensure that we can return to a more normal way of working and so manage Covid. Of course, investing in the NHS is in this sense a profoundly anti-inflationary policy as well. But what Jacob Rees-Mogg is suggesting is not an anti-inflationary policy. It is merely a short-term fix intended to suit Tory party manoeuvres. I long for the day when we might have responsible politicians with the national interest at heart. So far it is clear that we are nowhere near getting them from the current government.