Introduction LO:
Lowering the Value-Added Tax (in Dutch: BTW) indeed seems a much better way to combat inflation than raising interest levels. Some countries have already lowered their VAT (eg, on energy).
Some companies are now increasing the wages for their lowest-paid employees (only) because they are hurt most by high inflation (eg, Investopedia, NOS, SHRM).
The next obvious step might be lowering income taxes for individuals up to a certain taxable income, and increasing the income taxes for companies that are profiting from the current economic climate (eg, windfall profit tax).
Such steps would offer tangible relief during high inflation, while raising interest rates is meaningless to low-income families because they are typically also without capital.
Fiscal Policy Is Way to Deal With Divergence, ECB’s De Cos Says (Bloomberg)
By: Alessandra Migliaccio
Date: 14 May 2022
“[Summary of key bullet points:]
- Central bank’s mandate is euro area inflation as a whole
- Intervention only for monetary policy transmission snags
It’s not up to the European Central Bank to tackle diverging inflation rates, Governing Council member Pablo Hernandez de Cos said.
“It’s up to fiscal policy” to take care of each nation’s specific problems, he said in Frankfurt on Saturday. De Cos said the central bank’s mandate is to “exclusively focus on inflation in the euro area as a whole.”
The ECB has signaled its asset purchases will likely end in July. That has traders betting on a swift series of interest-rate hikes that could tighten financial conditions prematurely for some of the region’s weakest economies, feeding concerns that fragmentation could return to the 19-nation euro zone.
Inflation Watch
Consumer price growth is diverging across the euro area
“To the extend that we see there are problems with monetary policy transmission then of course that is also taken into account in monetary policy decisions,” said de Cos, who heads Spain’s central bank.
The premium investors demand to hold riskier Italian debt over safe German bonds rose to over two percentage points on earlier this month for the first time since May 2020. As recently as September, it was less than one percentage point.”
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