HM Treasury series 7: Great Budgets, 2017-18

Gladstone's Free Trade Budgets

6 December 2017

Professor Martin Daunton, University of Cambridge

In 1852, Disraeli's budget failed and the government fell. Disraeli's proposals had threatened to divide classes against each other by differentiating income between earned (or ‘industrious’) and unearned income, and making concessions that were unbalanced between groups of society. In his 1853 budget, Gladstone rejected differentiation and used the fiscal system to integrate classes to create a more stable fiscal constitution. He offered a tax break to everyone who wished to purchase life insurance, thus rewarding prudential behaviour across the classes. He also aimed to show that the income tax was not a means of funding militarism and aristocratic waste. On this view, the correct approach to national finance was retrenchment that would make the income tax unnecessary, while also allowing customs and excise duties to be reduced. Gladstone therefore turned the income tax into a means of constraining the state and militarism; taxpayers were also electors with a vested interest in cheap government. If they showed restraint the income tax could be abolished. In this budget, and above all those of 1860 and 1861, Gladstone reduced customs and excise duties – both by removing differentiation between foreign and colonial goods, and by reducing the overall level of the tariff. He kept 'revenue duties' on items of universal consumption (such as tea) that did not protect domestic producers or differentiate between foreign and colonial producers. On this basis, taxation was both direct and indirect. The intention of this fiscal balance was to purge politics of corruption of special interests, and to make Palmerston's programme of fortifications redundant.

The 1909 Peoples’ Budget

24 January 2018

Professor Avner Offer, University of Oxford

The novelty of this budget comes out in comparison with current conventions. It applied three ideas from pre-neoclassical economics, namely progressive taxation, a higher tax on capital income (the ‘unearned increment’), and the taxation of economic rent in the form of land values which took the form of a rudimentary capital gains tax. It introduced the social democratic principle of insurance against life-cycle dependency by means of progressive taxation. This was justified (as during the more recent post-war decades) on grounds of national security and approaching war. None of this was entirely new, but it was perceived as a challenge to vested interests. After two general elections in quick succession resistance was overcome by means of the Parliament Act of 1911 which eliminated the House of Lords budget veto and introduced salaries for MPs. The timing of the reforms was bad, at the bottom of a deep slump in property and fixed-income asset values, of which the policy makers were not fully aware.

‘Abandoning Keynesianism?’ Budget making in the 1970s

9 March 2018

Dr Duncan Needham, University of Cambridge

In his memoirs, Denis Healey claimed to have ‘abandoned Keynesianism’ with his 1975 Budget. Having boosted the economy ahead of the second 1974 election (despite the recent oil shock), Healey acted upon the Permanent Secretary’s warning that ‘there is no longer any official support for existing policies’ and set about reducing the deficit, then estimated at 10 per cent of GDP for 1975/76. He raised income tax rates, VAT on luxury goods, and excise duties. With the cabinet reluctant to cut public spending, officials formulated a policy of ‘fiscal policy through the monetary policy backdoor’. The largest counterpart of monetary growth in the mid-1970s was the government deficit, so monetary targets were reformulated to provide a constraint on public spending.  In his 1976 Budget, Healey further restrained spending by extending ‘cash limits’ to the majority of departmental spending. The loss of Labour’s thin majority and the IMF loan agreement forced the Chancellor to walk a fiscal policy tightrope in 1977-78. Nonetheless, Healey could claim that in 1977-78 he was one of the few post-war Chancellors to preside over a growing economy, falling inflation, falling unemployment, and a balance of payments surplus.


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