Bank of England risks putting Scotland into recession – here's why

The Bank also seems unaware that inflation caused by supply chain crises cannot be addressed by raising interest rates. It has raised them, nonetheless.

As is also becoming apparent, the Bank does not know when to stop raising rates, let alone reverse them. As a result, we have today’s decision to continue to impose misery upon the collective economies of the United Kingdom.

Finally, the Bank appears to be blissfully unaware of the fact that its mistakes can have significant consequences long after they take them.

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Of the four noted states of ignorance from which the Bank of England is suffering, it is the last that concerns me the most. We can, after all, do nothing about Covid, the war in Ukraine, or supply chain crises.

What the Bank might still do, however, is prevent the recession that is the seemingly inevitable consequence of its other mistakes.

Unfortunately, there is no sign of the Bank being aware of this. It was much the same in 2008. They were far too late then to appreciate that there was a recession coming. They then had to panic by cutting rates and introducing quantitative easing, which combination just about saved the day.

It is my suggestion that the Bank should now learn from this. After all, sometime soon it is going to become apparent that not only is inflation going to tumble, but the economy is going to fall with it, and recession is likely.

Importantly, I am not the only one saying so. Mervyn King (below), who was governor of the Bank of England in 2008, agrees with me, as does the Bank of England’s former chief economist, Andy Haldane.

The signs of what I am suggesting are there for anyone to see, if they have their eyes open.

So what is required now if the Bank of England is to avoid the consequences of its own mistakes?

Firstly, a programme of rapid reduction in interest rates is required. I would suggest this should start with a bold gesture. A cut of at least 1% in rates in September this year would indicate the future direction of travel, whilst only bringing UK interest rates into line with those now found in Europe.

More rate cuts should then follow. That is the only way to avoid recession, whilst also keeping families in their homes, rents under control and businesses in operation.

Secondly, a rate cut will not ultimately be enough to tackle the problems that the Bank of England has created. The UK economy is in the doldrums. What that means is that a fiscal stimulus is required. In plain English, that means that the government must spend more than it collects in tax revenue to give the economy the boost that it needs.

This can be funded with either a straightforward loan from the Bank of England to the government, or the government could undertake a new round of quantitative easing to fund the essential green investment that we now need. Either works.

Third, a round of tax increases on the richest and wealthiest people in the UK would also help. And before anyone protests, it is possible to promote a fiscal stimulus and propose a round of tax increases at the same time, most especially if the tax increases are designed to tackle social injustice in the UK.

And we do have major tax injustice in the UK at present. Right now, those in the UK with significant wealth pay an overall rate of tax on the increase in their annual financial well-being that is approximately half that of the tax rate paid by those on the lowest levels of income.

If we simultaneously increased the taxes due from those with the highest incomes and who have significant income from wealth whilst cutting taxes on those with the lowest income, we could not only tackle that injustice, but also boost the likelihood of any fiscal stimulus working. Those on low income spend all of their earnings and so create the largest impact on the economy of any tax stimulus available to a government.

Of course, that requires a fourth thing, which is a government that believes it has a responsibility to all people of this country. It should manage the economy in the best interests of everyone, and not just the interests of the wealthy. It is an unfortunate fact that at present the Tories do not do this and that Labour, by refusing to consider raising taxes on the wealthiest, are also indicating that they will not do so.

That might reflect the political agenda of England, but Scotland has a different political outlook.

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Scotland does not put its wealthy on pedestals. It is more egalitarian. It understands the significance of community. And, despite the predominance of the right-wing media in Scotland, I think that its politicians are more likely to stand up to those who control the messages that most of those newspapers seek to impart.

In other words, I suspect that in Scotland politicians with the courage to deliver the political programs of reform that are now required do exist, even if the SNP does give me a cause for concern on occasion when it wobbles far too close to the interests of big business.

Whether England can avoid the recessionary consequences of being governed from the Bank of England, rather than from Downing Street, is not clear. What is much more likely is that Scotland could avoid this fate if only it were independent.

Even then, that cannot be guaranteed. Neoliberal politicians beholden to the interest of wealth might govern Scotland, even after independence. But at least Scotland will have the choice. Right now, it has not. As a consequence, the havoc being created by the ignorance of the Bank of England is likely to be unleashed upon it.