Scrap BoE’s two per cent inflation target, says think tank
The Bank of England’s (BoE) two per cent inflation target should be scrapped and replaced with a four per cent nominal GDP target, a think tank has said.
A Policy Exchange paper published tomorrow urges the government to consider temporary tax cuts to boost the economy after the pandemic.
Some of the measures proposed include a reduction in the rate of VAT to stimulate demand and in stamp duty on house purchases to aid the housing sector.
The report’s authors include Boris Johnson’s former chief economist adviser during his London mayoralty, Dr Gerard Lyons, who is a senior fellow at the think tank.
Lyons says cutting the BoE’s inflation target and replacing it with a four per cent nominal GDP target “would help protect against higher inflation in an upturn, and guard against weaker demand in a downturn.”
The paper – “A pro-growth Economic Strategy” – backs higher levels of borrowing, rather than austerity or tax increases which make little sense in the current environment, to fund infrastructure and investment. The Policy Exchange argues that despite public concern about increased debt, the government should take advantage of low inflation, rates and yields to borrow, particularly through longer-term gilts.
Polling by the think tank shows that just 16 per cent support spending reductions that would impact public services, but three quarters of the public are worried about the increasing levels of borrowing and public debt. While the authors of the report also strongly oppose a new phase of austerity, they argue the government should aim to reduce the debt to GDP ratio gradually.
The polling also indicates that 49 per cent of the public say tax rises should be limited while the government deals with the fallout from the pandemic. Additionally just under half worry more about paying higher taxes, trumping concerns about inflation, cuts to public services or the impact of debt on future generations.
Warwick Lightfoot, head of economics at Policy Exchange, said: “The combination of very low inflation and a surplus of international savings has resulted in extraordinarily low interest rates and long-term government bond yields. This is not the time to hold back on borrowing.”