Mr. Sebastian Barnes:

People often forget that there is a sort of upside to revenue that comes from higher inflation as well. Obviously, there is a downside from lower activity but there is an upside from higher inflation. This is one of the things that compensates it. Some of those effects would wash out naturally, which means it would increase in line with the economy. In a sense, therefore, there is not a huge gain there. A big issue would be the indexation of the income tax system. We have discussed this before. The income tax system bands are set in cash terms. If one keeps the bands fixed and there is inflation, or wage inflation, then more income is going to move into the higher bands and will be taxed more heavily. Those effects are going to be bigger if wage inflation is higher. There is a potential upside of something that would raise the average tax rate if those nominal bands were kept in the same place. The programme for Government commits to indexation in some form. The Government has factored into its plans a degree of partial indexation, but if one kept that currently planned degree of partial indexation it would not be enough to compensate for the wage inflation that is now expected. As a consequence of that, one would now expect the average tax rate to increase if those amounts that are currently planned are kept there. That would tend to improve the public finances as a whole and improve the budget balance, but the Government spending rule does not take revenue into account so it would not have any counterpart on the other side. This is something we discussed in another box in the report. I believe there is scope for widening the design of that rule, which would actually improve its performance in situations like this.