Fuel Taxes Do Not Fuel Inflation
2024 10 18
I see that the UK is no freer from economic nonsense about inflation than the US. Just as “supply chain shocks” and “deficits” not cause inflation, increases in excise taxes do not cause inflation, either. Inflation (and deflation, and employment, and unemployment) is a macroeconomic phenomenon and, as Milton Friedman tried unsuccessfully to explain, is caused only by monetary policy. “Motoring groups are wrong. It is not the case that “A rise in fuel duty would rekindle inflation and be “catastrophic” for British businesses.”
Now it _is_ the case that a supply chain shock or tax or expenditure change producing a deficit, or an excise tax could be large enough that a prudent central bank in an economy in which some prices are downwardly sticky would decide to increase inflation (the rate of change of the average price level) above target in order to facilitate changes in the relative prices of sectors affected by the supply chain shock or deficit, or excise tax so as to preserve market clearing and not allow the shock to diminish growth. But that is still the central bank causing the inflation, not the shock. If a driver swerves to avoid a pothole, it is the driver that caused the vehicle’s motion (which could be excessive or insuffinet), not the pothole.
But since Reeves DOES need to raise revenue to decrease the deficit – how fortunate the UK, unlike the US, is to have a government that at least recognizes the problem – and gasoline prices in UK as in the US are highly salient, I would suggest raising the revenue with an excise on all CO2 emitting fuels in proportion to the CO2 their combustion causes. This would spread the increase in the prices of final goods widely and therefore be felt less on vehicle fuel prices. And by being less concentrated, it would cause less change in relative prices that the BOE would feel compelled to facilitate with over-target inflation. And of course, it would also reduce CO2 emissions more than taxing one CO2 emitting fuel.
Image prompt: A bewigged Chancellor of the Exchequer holding a gasoline despiser by an automobile looking pensive ad if to fuel or not to fuel the vehicle. [Bing has a sense of humour, I see.]
[Standard bleg: Although my style is know-it-all-ism, I do sometime entertain the thought that, here and there, I might be mistaken on some minor detail. I would welcome comments on these views.]
Maybe I'm confused here but doesn't increasing government revenue kinda increase inflation -- at least if you assume the government is relatively less efficient than the market?
Like if the UK just increasd taxes and then paid a bunch of people to do no work surely that would be inflationary since -- absent changes to monetary policy -- you now have the same amount of money chasing less goods.
So if the question is whether the UK should cut expenses or raise revenue can't you honestly say the later choice is at least a bit inflationary -- at least on the assumption the government is relatively less efficient at providing goods?
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But yes that is at best 2nd order so kinda misleading.
Outside the narrow circle of people who seriously study economics, complaints about "inflation" virtually always are actually complaints about the price level. When people insist that "inflation is still high" and that they "want inflation to go down", 90+% of them mean that prices are higher now than they were in 2019, and they want prices to go down (which as the economically-literate know, would be _deflation_, and an environment with general deflation is almost always catastrophic).
You are of course correct that a one-time change in the level of a tax would not raise inflation. It would, however, mean a one-off increase in the price of that particular good. As you say, the question of whether that would be compensated by falls in the prices of other goods as people shuffle their budgets, or the overall price level goes up, would depend mainly on monetary policy. But to the average person, "a highly salient price went up" _is_ inflation. Alas.