How High Inflation Affects Government Revenue (VAT, Pensions & Debt)

In the UK there is currently a contest for leadership of the Tory party, and because they’re the party in power, by extension the country. Naturally, many candidates are promising tax cuts that no one bothered to think how they’d be funded. So that’s why it was fun to see this headline:

Next Tory leader has room to make £60bn in tax cuts, say economists

in the Telegraph. The article itself is behind a paywall, but nevermind because let’s look directly at what the “economists” said. Here are a few things they mention—and it’s useful to consider a bit what inflation means apart from veggies costing more.

• higher prices for things also mean higher tax revenue for the government, either directly via VAT or from company revenues
• government costs can be coupled to inflation (like state pensions)
• but income can be as well! (like car tax)
• some government debts are index-linked, and hence those payments will have to increase
• in total, the current spike in inflation will mean the government will come out on top by about 60B GBP -> the next prime minister has some leeway for tax cats

Of course, Cebr is analyzing the situation in the UK, but the principles of inflation-linked expenditures and incomes should hold true for most countries.

All that means: no need to be gloomy—inflation can be good news! True, true, not for you and me. But! If we’re pausing a moment to not only think of ourselves and our increasing energy and food bills, then we can be happy for the government and how inflation is giving our politicians extra money to spend on election* promises. Heart-warming, isn’t it?

* In this case, if you’re a Conservatives party member.