Is the Bank of England punishing the prudent?

Voltaire (1694 -1779) was a mere glint in his Father's eye when the Bank of England set base rates at 2 percent

The Bank of England has never had a lower base rate of interest. Not once, in over 300 years, has the Bank offered money more cheaply.

For an institution that predates the birth of Voltaire, the Bank’s decision to shave another 1 percent off base rates is historic. The last time interest rates were this low, Winston Churchill was still prime minister.

What does this mean for you? That depends on who you are.

If you have a tracker mortgage (that moves with the BoE’s base rate), then you’ll have more money in your paycheck at the end of the month. You’ll get additional breathing space to go with that being prepared by the government should things turn out poorly.

(That said, many tracker mortgage providers have ‘floors’ that are activated if the base rate falls through it. Which it has. For example, Nationwide’s tracker floor is at 2.75%, so many customers wont see too much of a pass on.)

If you want a new mortgage, it might take a little longer for banks to start offering money at previous levels. But a little creepiness from Mandy should sort that.

If, however, you’re one of those increasingly rare breed – known as ‘savers’ – this rate cut is most unwelcome. People who have worked hard and put money aside for this torrentially rainy day will have found their income cut by more than half over the past month.

There are questions that need answering. How does the government hope to wean us off debt culture when the central bank is ramming virtually free money into our hands? Why should people who took out mortgages they knew were too expensive profit when prudent savers are set to lose out?

The City has welcomed the Bank’s decision. The government will now position itself as the party of financial fairness by pushing banks to keep lending. And we will probably now spend slightly more over Christmas than we had planned.

Was it Voltaire who said,

Everything’s fine today, that is our illusion?

What won’t happen in the Pre-Budget Report

Tomorrow Alistair Darling will announce his pre-budget report – hailed by many as the most important in a generation. It will certainly be the most significant of his career.

It’s not the best kept secret that Mr. Darling will move to temporarily cut VAT to 15% as part of the Government’s £25bn tax relief plan. We can expect radical action from Labour and all-round head shaking from the newly-nasty Tories.

There are calls for one-off tax credits for the poorest off, a reduction in corporation tax and greater stick type incentives for the long-term unemployed.

Apart from that, the content of the announcement is pretty much  any one’s guess. Here’s what won’t happen:

• Alistair Darling and Gordon Brown read out a joint statement sincerely apologising for the way they have destroyed the economy. “We got us into this mess with an unsustainable culture of easy debt and endless borrowing. But, trust us, more of the same is just what we need to fix it.” To reiterate his sincerity, Brown attaches a lie-detector machine to his temples, which immediately explodes.
• After stunned silence reverberates through the chamber, David Cameron leads the clapping which slowly turns into rapturous, adoring applause.
• Mr. Darling holds up his red briefcase for the cameras which falls open, exposing its contents as no more than an apple core and a Mr. Men book.
• Cameron and Brown agree to ‘forget our differences’ before embracing in compassionate man hug, sobbing.
• Mr. Darling criticises the EU directive keeping VAT at a minimum of 15%, calling EU commissioners “garlic-munching spoil sports”.
• Nick Clegg puts forward an authoritative and exhaustively researched financial rescue plan that will allow Britain to avoid recession and reduce taxes whilst increasing public spending and employment levels. The plan is universally acclaimed.
• George Osbourne sings the MPs out with a rendition of Chas and Dave’s “Ain’t No Pleasing You”.

U-turn if you want to

David Cameron has risked derision by abandoning plans to match Labour spending until 2010. The Tories’ argument centres around a public spending framework rooted in financial responsibility.

Bloggers have been quick to draw blood, but if the Saviour of Capitalism can change his mind, why can’t Mr Cameron?

Cameron is now on more traditionally Conservative ground, in spite of a new found aversion to tax cutting. Unsurprisingly, this has received widespread support among Tories. But is there anything in it? How can all nations of the world (apparently) support uniform tax cuts and Her Majesty’s Opposition not?

The arguement that short-term tax cuts, coupled with increased public spending will eventually lead to equal tax rises – possibly when Mr Osbourne has wrestled the keys to the treasury from Mr Darling’s cold, tenacious fingers – is a sound one. Sort of.

A tax cut of, say £20bn now will not necessary lead to an increased treasury debt of £20bn. With more money in their pockets, people will spend more and potentially generate more jobs. Jobs mean tax so the Government could potentially end up more people paying tax (albeit a little less). Just the shot in the arm the economy needs.

If this is the case – and Labour are clearly hoping it is – then why haven’t this Government been one of low taxes since the start?

It’s amazing to see the two main parties posturing for position, and how they’ve changed tunes with the times.

Cameron knows his ‘it’s going to hurt, but eventually you’ll thank us’ will prove unpopular compared to internationalista Santa Brown. He’s banking on the next general election being in 2009 and, given how desperate Brown has been to get into Blair’s slippers, it’s unlikely to be any sooner.

By then the public may come round to Dave’s hastily scribbled way of thinking. Of course, if superGord saves the world, the Tories could end up ruing such vacillating.

The dead cat bounce

People really are gullible. The Times has just broke the story that Labour have pulled back five points on the Tories, according to the latest Populus poll.

Brown is seen “by voters as best able to handle the recession.” Presumably they have been taken in by Brown’s self-casting as a new FDR, as a saviour of the global economy. He is not.

Labour’s proposals of tax cuts are likely to be followed by other political parties. They are a good idea; giving people back some of their hard-earned cash might encourage them to spend more or it.

But – and this is key – with Britian already carrying the greatest debt percentage of any developed country, neither the Conservatives or the Liberal Democrats propose to cut tax by increasing Government borrowing. Sound like a good idea?

Brown is playing the ‘I was there when we got into this mess, so I’ll be here to get us out’ card. It is a rather limp bluff. Brown has no experience of power during a recession, just experience of deregulating the Bank of England and, by extension, facilitating wild lending and unsustainable growth.

People will eventually see through Brown, sinister smile or not. While not the sole contributor to our financial woes, he was certainly implicit in the “age of recklessness”.

Shadow Chancellor George Osbourne, in today’s Financial Times, argues that were we increase public debt for short term tax relief, “Britain’s international credibility will be further imperiled, future generations will be burdened with even more debt and a recovery would be threatened by the prospect of large tax rises. We would be sowing the seeds of the next crisis.“

The argument of incumbency or precedent should not be an acceptable one. If it held any sway, Barack Obama would still be an unknown Illinois senator. Alistair Darling would still be in charge of our roads. And, to misquote Mr Cameron, “Gordon Brown would be Prime Minister forever.” Shiver.