RACHEL RICKARD STRAUS: Will Kwasi Kwarteng’s tax cuts work?

What would you do with a pay rise? It’s a question that many of us certainly daydream about.

No doubt some of it would go on to pay off debt or bills, but maybe there would be enough for a splurge as well. A vacation? Eating out? Redecorate?

But on Friday, the answer to what we would do with extra money became less the stuff of vain musings — and suddenly absolutely central to economic policy. Chancellor Kwasi Kwarteng’s budget statement made it clear that getting more money in our pockets is key to his plan to stimulate the economy.

He said lowering taxes – and thus raising paychecks – “is key to solving the riddle of growth.”

He thinks that if we pay less taxes, we’ll spend more, leaving more wealth lying around in the economy and thus putting more into the tax coffers than just taxing more.

Conversely, if we pay too much tax, we lose the motivation to try and earn more, he thinks.

It is largely on these grounds that he announced a reduction in the base tax rate to 19 percent starting in April; scrapped the extra rate for high earners altogether; once again abolish the National Insurance; and lowered some corporate rates.

To make its plan work, the government needs our money. Money burning a hole in your pocket doesn’t create growth; it must circulate, be spent or invested in the economy.

At the same time, the Bank of England is probably hoping for just the opposite.

Its mandate is not to create economic growth, but to tame inflation.

The Bank of England’s job is to keep inflation around 2 percent – currently at 9.9 percent, it hasn’t been very successful of late. We’ll have to see if last week’s latest rate hike helps much.

Spending is the enemy of inflation. If we spend a lot, we increase demand and run the risk of pushing prices up even further.

I think it’s fair to say we’re pretty much in between.

But what’s interesting – and terrifying – is that there’s no real way to say what will happen. In recent days, economists, politicians and commentators have argued over whether cutting taxes will boost growth. They refer to economic models or political ideologies, or seek examples of past tax cuts.

But in the end it’s up to us. And we are an unpredictable bunch. We don’t stick to models. We do weird things like putting money in a savings account when we’re in debt, buying things we know we can’t afford, helping others financially when we’re struggling ourselves, and suddenly driving ourselves crazy over things like Beanie Babies or Shonky cryptocurrencies.

The mood we all find ourselves in can also make a huge difference. A tax cut in one economic environment can have a very different effect than the same tax cut in another.

Of course, the financial markets are not entirely convinced that Kwarteng’s plan will work. The pound has fallen, the London stock market has fallen, government borrowing costs have risen.

But I’m not convinced that investors are better equipped to know what we’re going to do than politicians and economists.

The pay increases will vary wildly. The lowest paid get the least – any increase in income is likely to be quickly met by rising bills. The highest earners get thousands or even tens of thousands more.

It’s a risky strategy. Besides being unfair and threatening to fuel inequality, it relies on people who already have a lot to spend, even more – and there are only so many vacations, delicious meals and periods of redecorating that one person can handle.

What are we going to do with our pay increases?

Terrible Confession

I have a confession to make. A terrible one for a financial journalist. I haven’t moved my savings in years.

They’ve been sitting on a bill earning a little squat all the while I’m going on about the importance of switching to get a better deal.

But the thing is so long, the difference between the best and worst savings accounts was a few pence. And switching is a piece of cake.

But now, thanks to the latest rate hikes, there are bills paying four percent. That got me interested now. I switch.