Tax under Labour

Date : 07 April 2002

To : The Editor, The Business

From : Nagindas Khajuria

Subject : Tax under Labour

Tax under Labour

Sir - Your article on the MPC's dilemma was very interesting. The 2.5% per annum inflation target was set in 1997, when interest rates were generally higher than now. I believe the MPC should now urgently seek new guidelines from the chancellor in his next budget, for several reasons.

Firstly, UK GDP is only about 5% of the world's GDP. Germany's is 10%, Japan's is 20% and the USA's is 30%. Historically, all these countries have lower interest rates than the UK. To compete, we also need to keep interest rates low.

Secondly, there are signs of unease in the public sector, and wage demands are now surfacing more regularly. Increasing interest rates will only fuel cost-push, rather than demand-pull, inflation.

Thirdly, your article suggest that mortgage borrowing is rising at the rate of 10% per annum. But so are house prices - at a similar rate. The increased borrowing may be partly for luxury goods and construction and the improvement of properties, and so it is good for the economy.

Fourthly, UK competitiveness in manufacturing has risen very slowly compared with the rest of the world. If we take relative export prices as 100 in 1990, the 1998 prices were 117.2. By contrast, the relative import prices in 1998 were 108.6.

Fifthly, if sterling has risen against the euro since the euro's inception, it will rise more if interest rates increase, and our competitiveness will be even worse hit. One idea could be to "aim" for 0% inflation in five years time by reducing the inflation target of 2.5% by 0.5% each year so that we reach the goal by year five.

For all these reasons, I believe interest rates should remain consistently low for at least the next five years.