Mark Wadsworth

This is a spare 'blog in case my main 'blog at markwadsworth.blogspot.com isn't working

Negative interest rates = privately collected wealth tax

From yesterday’s City AM:

IF you owe a lot of money to your bank, it’s time to rejoice. There is now almost no chance of interest rates going up this year. The Bank of England’s monetary policy committee voted 7-2 to keep rates on hold; and given the arguments and worries about growth expressed by the majority of the members it would be foolish to bet on a rate rise any time soon…

It is fair to assume that prices will rise by 5-6 per cent this year: for someone with a £200,000 mortgage, that is equivalent to a gift of £10,000-£12,000… People with big mortgages and low interest rates are gaining immensely, at least if they are prepared to weather the downturn in house prices; people facing ever-higher rents are being hammered.

Savers are even bigger losers and are directly paying for the gains being made by those with large debts. Interest rates on savings products are miserably small and capital is being depleted. As ever, inflation is transferring wealth from those with savings to those with debt. The poor and those on fixed incomes are being hit the hardest and retail sales are under intense pressure.

The UK government is doing its best to fulfil its core rôle, which is to keep house prices as high as possible, which they achieve in collusion with the banks by having interest rates lower than the rate of inflation, so borrowers (primarily home-owners or landlords) are getting richer at the expense of savers (as well as at the expense of first time buyers and tenants).

The government could make this transfer explicit by allowing interest rates to rise, levying a five per cent annual tax on deposits and then paying the money over to homeowners or landlords (or cutting out the middleman and using the wealth tax to finance scrapping Council Tax and Stamp Duty Land Tax), but they don’t want to do this as it would tend to give the game away – so they do it by the back door.

But the economic effect is exactly the same – negative interest rates (i.e. when inflation is 5% but a saver only earns 1% interest) are a wealth tax on deposits and a cash subsidy to home owners and landlords.

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