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The costs of inflation

May 31, 2011

From Inflation impoverishes the vast majority, by Michael Burke on Policy Research in Macroeconomics:

At the end of 2010 the annual level of all wage compensation in the UK economy totalled £800bn. In the February data, average weekly earnings grew by just 0.9%. If sustained the decline in real wages would therefore amount to 4.3%.

For comparison if a decline of 4.3% in real wages were directly translated into total employees’ compensation it would amount to a £34bn annual reduction in incomes. This compares to the government’s already enacted tax increases of £3.8bn and spending reductions of £5.5bn in the previous Financial Year (FY) and £20bn in taxes and £22bn in cuts in this FY.

If the real aim of policy was to reduce the budget deficit, the government approach would be utterly self-defeating. The rise in pensions and other welfare benefits… automatically triggered by higher inflation will cause significant increases in net government outlays, even while entitlements are being cut back.

Yet more evidence that the British public spending cuts are ideological, rather than about cutting the budget deficit.

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