Sunak’s Inflation Trap

The debate roiling Britain over whether to tax cuts or reduce inflation reflects a misunderstanding of the root cause of price increases. While Prime Minister Sunak faces pressure to cut taxes before the next general election, he avers that “the best ‘tax cut’ that I can deliver for the British people right now is to halve inflation.” This overlooks Milton Friedman’s point that “Inflation is always and everywhere a monetary phenomenon.”Mr. Sunak’s refusal to embrace a tax cut when levies are at their highest level in 70 years, according to the U.K.-based Institute for Fiscal Studies, looks not only like a political, but an economic error. By contrast, his cabinet colleague, Michael Gove, urges “wherever possible, we should cut taxes on work.” The idea, Mr. Gove says, is to “incentivize people to work harder,” and be “better rewarded for the enterprise, the effort, the endeavor that they put in.”This view is echoed by Mr. Sunak’s predecessor, Liz Truss, whose plan for a supply-side tax cut that might have sparked economic revival in Britain was thwarted, in part by an unwarranted and astonishing intervention by the International Monetary Fund. The UN agency roiled markets by opining that “we do not recommend large and untargeted fiscal packages at this juncture.” It even warned that the proposed “measures will likely increase inequality.”Ms. Truss recently lamented that she was “effectively forced into a policy reversal under the threat of a UK meltdown.” She asserted that it was inaccurate to call her tax cut proposal “unfunded.” She explained that “cutting the higher rate of income tax and the ‘tourist tax’ would have increased rather than decreased revenues within five years,” citing the Center for Economics and Business Research, and provided “increased funding for our public services.”Yet Mr. Sunak harbors the delusion that holding taxes at levels not seen since the dark days of World War II austerity is a “deeply Conservative approach.” He contends that it was “what Margaret Thatcher did.” Au contraire — as these columns have noted, the Iron Lady presided over a drop in Britain’s top marginal income tax rate to 40 percent from the 83 percent at which it stood when, to the dismay of Britain’s liberal establishment, she acceded to office.We don’t disagree with Mr. Sunak’s sentiment when he says it “is in the tradition of great Conservative governments, bringing inflation down,” calling that “the bedrock on which you build a strong economy.” Yet we fail to see how cutting taxes conflicts with this goal. Quite the contrary — cutting taxes, as our Lawrence Kudlow often explains, offers a potent tool for slashing the rate of inflation, particularly when it’s accompanied by less regulation.That’s as true for Britain as it is for America. As Mr. Kudlow puts it, “limited government would grow the economy from the supply side.” That, in turn, he teaches, “would bring down inflation — permanently — because less money chasing more goods is exactly the right policy mix.” Mr. Sunak seems to have missed the memo. Instead he’s taking advice from his Treasury Exchequer, Jeremy Hunt, who calls tax cuts “virtually impossible” at the moment.This failure of vision would have floored Friedman, who 60 years ago saw that inflation — a “steady and sustained rise in prices” — was a monetary matter. No wonder it’s a problem plaguing all fiat money nations, but especially Britain, where prices in August rose 6.2 percent over last year. Friedman saw that inflation is induced by growth in the money supply, a hallmark of fiat money regimes, in which money loses its historic convertibility into gold or silver.Mr. Sunak’s confusion may stem from the old saw about inflation being a kind of tax. Yet it was Ronald Reagan, though he called inflation an “unlegislated tax on everyone’s income,” who managed to get prices under control while slashing taxes. It’s a reminder that the way out of the inflation trap, for Britain as much as America, is to cut taxes, cut spending, cut regulation, and — the big one — restore honest money.

Sunak’s Inflation Trap

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