In 70 years on the throne, the Queen has seen a lot of chancellors of the exchequer come and go. She is now on her 22nd. She has also seen nine Bank of England governors in post, demonstrating if nothing else that they tend to hang around longer than their counterparts at the Treasury. She has also, and this is the theme of this piece, seen many economic ups and downs, including episodes in which pride has come before a fall, as well as the falls themselves.
Before coming on to that, how many of the Queen’s chancellors would you have been able to name? Most of us would have done pretty well with the big recent names, including George Osborne, Alistair Darling, Gordon Brown, Kenneth Clarke. Nigel Lawson, Geoffrey Howe and Denis Healey.
Some might have struggled with John Major, better known for a rocky ride as prime minister than his year as chancellor, or Iain Macleod, in the job for only a few weeks in 1970 before his untimely death. He was succeeded by Anthony Barber who, like Lawson, had ‘boom’ subsequently attached to his name.
In the 1950s and 1960s, being chancellor was less of a career than a two-year stint, meaning occupants of the post barely had time to find their way around the Treasury building. These quickfire chancellors, all Tories, were Reginald Maudling, Selwyn Lloyd, Derick Heathcoat-Amory, Peter Thorneycroft and Harold Macmillan. The Wilson government of 1964-70 went one better, with two men sharing the job; James Callaghan, who was moved after the 1967 sterling devaluation, and Roy Jenkins.
Some recent names probably will not trouble future historians much. They include Philip Hammond, chancellor under Theresa May, and Sajid Javid, who resigned before even presenting a Budget. We will see how long Rishi Sunak lasts, but as chancellor during the pandemic, he will always be figure of note. So will Norman Lamont, in office at the time of sterling’s embarrassing exit from the European exchange rate mechanism (ERM) in 1992. I have only missed out one, the Queen’s first chancellor, RA Butler, who held the post from 1951 to 1955.
The names are important because they help identify some of the significant economic episodes of the past 70 years. Readers of this journal may be interested to know what has happened on tax. The big story, as many will be aware, is that the Queen’s reign began with a high tax burden and is marking its 70th anniversary with the burden returning to the levels of the late 1940s and early 1950s.
The tax burden, taxes as a share of gross domestic product, is returning to the 36%-plus level of the last 1940s, but in the intervening period has been as low as 28%. Its story is rather interesting. When Harold Macmillan was able to claim that most people had never had it so good at the end of the 1950s, this followed a sharp reduction in the tax burden, a combination of the unwinding of the wartime economy, and in particular defence spending, and strong economic growth.
Taxes stayed generally low in the first half of the 1960s but rose sharply after the Wilson government reluctantly agreed to the devaluation of sterling from $2.80 to $2.40 in November 1967. That devaluation, after years of pressure on the pound, led to Harold Wilson’s infamous ‘pound in your pocket’ broadcast, when he reassured people that the value of the pound in their pockets had not been reduced. It had, of course, because the devaluation meant higher prices for imports.
The devaluation also led to the departure of James Callaghan as chancellor because he had reassured people that it would not happen. His successor, Roy Jenkins, imposed austerity and tax hikes. A ‘Letter from London’ in the New Yorker magazine described the ‘unprecedented’ £900m of tax hikes in Jenkins’s spring 1968 Budget. He followed it with more a year later and was blamed by some for Labour’s unexpected defeat in the June 1970 general election, though rival explanations included England’s defeat to Germany in the World Cup in Mexico and a bad set of trade figures caused by the purchase of two US-made jumbo jets.
The folk memory of the 1970s is one of ultra-high tax rates. Denis Healey, Labour chancellor from 1974, promised to make the ‘pips squeak’, though only for property speculators, not the rich in general. There was a top rate of income tax of 83% and a top rate on earned and ‘unearned’ income together as high as 98%.
Even so, the tax burden in the 1970s never got back as high as the 1969/70 peak. Some of this was due to the strong growth of the early 1970s, that Barber boom. Some was due to high inflation, and in particular high inflation for wages and salaries, which allowed people to earn their way out of rising taxes. It was also the case that tax reliefs were generous. Everything, not quite including the kitchen sink, could be set against tax, ‘Perks’, everything from luncheon vouchers to company cars (which initially were a way of avoiding tax), were widespread. Tax avoidance became a boom industry.
The 1980s, in contrast, do fit the billing. The first tax cuts under Margaret Thatcher, implemented by Geoffrey Howe, were not net cuts at all, but a shift in the burden of taxation from direct to indirect taxes. The basic rate of income tax was cut from 33% to 30% and the top rate from 83% to 60%, but much of this was paid for by an increase in VAT. The Tories in 1979 inherited a standard rate of VAT of 8% and a higher rate, on ‘luxuries’, of 12.5%. Despite firm denials before the election that they had any intension of doing so, these were consolidated into a single new rate of 15%. VAT has been a frequent port of call for Tory chancellors.
Worse was to come. In 1981, fearful of high levels of public borrowing, Howe introduced his famous or infamous austerity Budget, the one that led to a letter of protest from 364 economists (including Mervyn King, later to become Bank of England governor). The centrepiece was a freezing of income tax allowances and thresholds at a time of high inflation, thereby increasing income tax significantly, a device that Rishi Sunak has returned to this year.
The Tory reputation for tax cuts under Thatcher came later after Howe was succeeded by Lawson in 1983. Lawson’s 1984 Budget was notable for two things. Its contents were leaked to The Guardian, which resulted in some revenue losses for the Treasury. One measure, the abolition of life assurance premium relief, would apply only to new policies, so there was a rush to take out policies in the two weeks between the leak and the Budget, so as to lock in the tax relief.
The 1984 Budget was mainly notable, however, for unveiling ‘Lawsonian’ tax reforms, reducing tax rates by abolishing tax reliefs. In this way, corporation tax would be reduced gradually from 52% to 25%. There was one exception. Nissan was at that time committing itself to investing in a new car plant in Sunderland, and it was given special dispensation to continue to benefit from the reliefs.
Lawson was to go much further, this time with personal tax cuts. His most significant reforming change, perhaps, was independent taxation of husbands and wives. Previously, married women were subject to their husband’s tax allowance, the married man’s allowance, and their earnings were subject to his marginal rate. Independent taxation was not only a big step forward for equality but it increased female labour supply.
More eye-catching at the time, perhaps, were Lawson’s income tax cuts. Until 1986, the Tories had focused on raising allowances and thresholds, thus burying the memory of the austerity Budget of 1981. In 1986, Lawson returned to cutting the rate, reducing the basic rate from 30% to 29%. His pre-election Budget of March 1987 eschewed the convention that Budgets in those circumstances should be holding operations and cut the basic rate by a further two percentage points to 27%.
More was to come. Even though the economy was by this time booming, Lawson also eschewed convention by announcing big post-election tax cuts in the spring of 1988, adding fuel to the fire. The basic rate was cut again, to 25%, and in the most Thatcherite cut of all, the top rate was reduced from 60% to 40%.
This tax-cutting chancellor was ultimately undone by tax. A clumsy reining back of mortgage tax relief, restricting it to one relief per property, resulted in a powerful final leg for the house-price boom. House-price inflation was rampant and so, soon, was general inflation. By the end of the 1980s, inflation was moving towards double figures again, requiring sky-high interest rates and, ultimately, recession. Major, who succeeded Lawson in the autumn of 1989, after a row over Thatcher’s personal economic adviser, Sir Alan Walters, used the phrase ‘if it isn’t hurting, it isn’t working’ and, indeed, it worked so well that the economy was pushed into the recession of the early 1990s.
The Thatcher era did, however, see a sharp fall in the tax burden, from just over 34% of GDP to just over 30% by the time she left office, and a modern low of about 28.5% during the recession of the early 1990s.
That was the low point in the modern era. After the humiliation of sterling’s exit from the European exchange rate mechanism (ERM) in September 1992, the need to rebuild the public finances and Britain’s credibility resulted in two Budgets in 1993. One, from Norman Lamont, was in the spring, the second was from Kenneth Clarke in the autumn. Together they raised taxes significantly. The measures included imposing VAT on domestic fuel, freezing income tax allowances and thresholds, cutting mortgage tax relief, and new taxes on insurance premiums and air travel. Lamont had earlier increased the main rate of VAT from 15% to 17.5%.
Taxes were to rise further under Brown’s chancellorship, from 1997. His hikes included the notorious ‘tax raid on pensions’ by abolishing dividend tax relief, one of the aims of which was to encourage businesses to invest more and distribute to shareholders rather less. As a strategy, it raised revenue but had no discernible impact on business investment. Brown also raised national insurance (NI) to help pay for increases in NHS funding and pioneered the use of ‘stealth’ taxes.
The tax burden dipped a little during the 2008-09 global financial crisis, partly because Alistair Darling enacted a temporary cut in VAT, but picked up when George Osborne announced an increase in VAT from 17.5% to 20% in his ‘emergency’ budget in June 2010, to take effect in 2011. The burden then stayed in the 33% to 34% range for the 2010s. This was because, in those austerity years, the government chose to repair the public finances by cutting public spending rather than by increasing tax. Corporation tax was cut aggressively and the personal allowance was ‘over-indexed’ to £12,500, to raise the starting point at which people pay income tax beyond inflation.
It is interesting to debate what might have happened to the tax burden had not the pandemic struck in 2020. Before it, Boris Johnson’s government had scrapped plans to reduce corporation tax further, to 17%. The period of raising the personal allowance by more than inflation was declared over.
The March 2020 Budget, which should have been delivered by Sajid Javid, until his surprise resignation a month before it, ended up being partly about how to respond to the pandemic, though most of the action on that came later. The centrepiece, even with the pandemic, was a big increase in infrastructure spending, which Javid had argued strongly for on the grounds that it would be crazy not to do it at a time when the cost of government borrowing was so low. That big increase in infrastructure spending, which was put at £600bn spread over five years, would have required extra taxes even in the absence of the pandemic.
As it is, and as we approached the Queen’s 70th year as monarch, a feat that will surely never be repeated, 2021 saw a succession of post-dated tax hikes, some of the biggest in history (only 1993 comes close). Those increases, announced by Sunak, were unusual. Normally chancellors wait to see how a tax hike goes down before announcing further big increases.
The 2021 announcements broke that pattern, the tax increases including a freeze on personal allowances and thresholds (a Tory favourite) from 2022 to 2026, a 1.25 percentage point increase in both employer and employee NI and, perhaps most dramatically of all, an increase in corporation tax from 19% to 25% in April 2023.
Some of those increases have been subsequently softened, including by raising the NI allowance to bring it into line with the income tax threshold, though both will then be frozen. But they still mean, according to the Office for Budget Responsibility (OBR), that the burden is on course to rise to 36.2% of GDP. That will be, not only the highest since the late 1940s when the Attlee government was in power, but the highest in the Queen’s reign.
One lesson of the tax story of the past 70 years is that the basic rate of income tax is a terrible guide to the overall tax picture. Sunak has said that he will cut the rate to 19% in 2024, which will be not much more than half the 35% rate of the mid-1970s. But, as we have seen, there are plenty of other ways of raising tax and the tax burden.
The other theme of the past 70 years is that few politicians, or political parties, commit themselves to being a high-tax government. Perhaps that would have been tested if Jeremy Corbyn had led Labour to victory in 2017 or 2019, though that did not happen.
Politicians, even those who purport to know how these things work, have a blind spot when it comes to spending and taxation. Most think that they can increase the size of the state without increasing the tax burden to pay for it. They resort to the ‘proceeds of growth’ to square the circle, but it rarely does.
Sunak has at least done a service by patiently explaining to members of his own party that tax cuts do not pay for themselves. Many MPs, particularly Tories, inhabit a Laffer curve fantasy universe in which every tax cut is self-financing. Well done to the chancellor for pointing out that this is not the case.
The other big theme is that, as the former chancellor Harold Macmillan once observed, ‘events’ can disrupt the best-laid economic and tax plans of governments. There have been five big recessions during the Queen’s reign, in 1973-75, 1980-81, 1990-92, 2008-09 and 2020-21. There were recessions before the 1970s, but they were smaller in scale.
Each of those big recessions has created a fiscal hangover, including the 1976 International Monetary Fund UK bailout, the austerity Budget of 1981, the tax hikes of 1993, the austerity of the 2010s and now the cost-of-living crisis and a record tax burden. These events, sadly to relate at this time of celebration, are only to be expected. We live and learn.
In 70 years on the throne, the Queen has seen a lot of chancellors of the exchequer come and go. She is now on her 22nd. She has also seen nine Bank of England governors in post, demonstrating if nothing else that they tend to hang around longer than their counterparts at the Treasury. She has also, and this is the theme of this piece, seen many economic ups and downs, including episodes in which pride has come before a fall, as well as the falls themselves.
Before coming on to that, how many of the Queen’s chancellors would you have been able to name? Most of us would have done pretty well with the big recent names, including George Osborne, Alistair Darling, Gordon Brown, Kenneth Clarke. Nigel Lawson, Geoffrey Howe and Denis Healey.
Some might have struggled with John Major, better known for a rocky ride as prime minister than his year as chancellor, or Iain Macleod, in the job for only a few weeks in 1970 before his untimely death. He was succeeded by Anthony Barber who, like Lawson, had ‘boom’ subsequently attached to his name.
In the 1950s and 1960s, being chancellor was less of a career than a two-year stint, meaning occupants of the post barely had time to find their way around the Treasury building. These quickfire chancellors, all Tories, were Reginald Maudling, Selwyn Lloyd, Derick Heathcoat-Amory, Peter Thorneycroft and Harold Macmillan. The Wilson government of 1964-70 went one better, with two men sharing the job; James Callaghan, who was moved after the 1967 sterling devaluation, and Roy Jenkins.
Some recent names probably will not trouble future historians much. They include Philip Hammond, chancellor under Theresa May, and Sajid Javid, who resigned before even presenting a Budget. We will see how long Rishi Sunak lasts, but as chancellor during the pandemic, he will always be figure of note. So will Norman Lamont, in office at the time of sterling’s embarrassing exit from the European exchange rate mechanism (ERM) in 1992. I have only missed out one, the Queen’s first chancellor, RA Butler, who held the post from 1951 to 1955.
The names are important because they help identify some of the significant economic episodes of the past 70 years. Readers of this journal may be interested to know what has happened on tax. The big story, as many will be aware, is that the Queen’s reign began with a high tax burden and is marking its 70th anniversary with the burden returning to the levels of the late 1940s and early 1950s.
The tax burden, taxes as a share of gross domestic product, is returning to the 36%-plus level of the last 1940s, but in the intervening period has been as low as 28%. Its story is rather interesting. When Harold Macmillan was able to claim that most people had never had it so good at the end of the 1950s, this followed a sharp reduction in the tax burden, a combination of the unwinding of the wartime economy, and in particular defence spending, and strong economic growth.
Taxes stayed generally low in the first half of the 1960s but rose sharply after the Wilson government reluctantly agreed to the devaluation of sterling from $2.80 to $2.40 in November 1967. That devaluation, after years of pressure on the pound, led to Harold Wilson’s infamous ‘pound in your pocket’ broadcast, when he reassured people that the value of the pound in their pockets had not been reduced. It had, of course, because the devaluation meant higher prices for imports.
The devaluation also led to the departure of James Callaghan as chancellor because he had reassured people that it would not happen. His successor, Roy Jenkins, imposed austerity and tax hikes. A ‘Letter from London’ in the New Yorker magazine described the ‘unprecedented’ £900m of tax hikes in Jenkins’s spring 1968 Budget. He followed it with more a year later and was blamed by some for Labour’s unexpected defeat in the June 1970 general election, though rival explanations included England’s defeat to Germany in the World Cup in Mexico and a bad set of trade figures caused by the purchase of two US-made jumbo jets.
The folk memory of the 1970s is one of ultra-high tax rates. Denis Healey, Labour chancellor from 1974, promised to make the ‘pips squeak’, though only for property speculators, not the rich in general. There was a top rate of income tax of 83% and a top rate on earned and ‘unearned’ income together as high as 98%.
Even so, the tax burden in the 1970s never got back as high as the 1969/70 peak. Some of this was due to the strong growth of the early 1970s, that Barber boom. Some was due to high inflation, and in particular high inflation for wages and salaries, which allowed people to earn their way out of rising taxes. It was also the case that tax reliefs were generous. Everything, not quite including the kitchen sink, could be set against tax, ‘Perks’, everything from luncheon vouchers to company cars (which initially were a way of avoiding tax), were widespread. Tax avoidance became a boom industry.
The 1980s, in contrast, do fit the billing. The first tax cuts under Margaret Thatcher, implemented by Geoffrey Howe, were not net cuts at all, but a shift in the burden of taxation from direct to indirect taxes. The basic rate of income tax was cut from 33% to 30% and the top rate from 83% to 60%, but much of this was paid for by an increase in VAT. The Tories in 1979 inherited a standard rate of VAT of 8% and a higher rate, on ‘luxuries’, of 12.5%. Despite firm denials before the election that they had any intension of doing so, these were consolidated into a single new rate of 15%. VAT has been a frequent port of call for Tory chancellors.
Worse was to come. In 1981, fearful of high levels of public borrowing, Howe introduced his famous or infamous austerity Budget, the one that led to a letter of protest from 364 economists (including Mervyn King, later to become Bank of England governor). The centrepiece was a freezing of income tax allowances and thresholds at a time of high inflation, thereby increasing income tax significantly, a device that Rishi Sunak has returned to this year.
The Tory reputation for tax cuts under Thatcher came later after Howe was succeeded by Lawson in 1983. Lawson’s 1984 Budget was notable for two things. Its contents were leaked to The Guardian, which resulted in some revenue losses for the Treasury. One measure, the abolition of life assurance premium relief, would apply only to new policies, so there was a rush to take out policies in the two weeks between the leak and the Budget, so as to lock in the tax relief.
The 1984 Budget was mainly notable, however, for unveiling ‘Lawsonian’ tax reforms, reducing tax rates by abolishing tax reliefs. In this way, corporation tax would be reduced gradually from 52% to 25%. There was one exception. Nissan was at that time committing itself to investing in a new car plant in Sunderland, and it was given special dispensation to continue to benefit from the reliefs.
Lawson was to go much further, this time with personal tax cuts. His most significant reforming change, perhaps, was independent taxation of husbands and wives. Previously, married women were subject to their husband’s tax allowance, the married man’s allowance, and their earnings were subject to his marginal rate. Independent taxation was not only a big step forward for equality but it increased female labour supply.
More eye-catching at the time, perhaps, were Lawson’s income tax cuts. Until 1986, the Tories had focused on raising allowances and thresholds, thus burying the memory of the austerity Budget of 1981. In 1986, Lawson returned to cutting the rate, reducing the basic rate from 30% to 29%. His pre-election Budget of March 1987 eschewed the convention that Budgets in those circumstances should be holding operations and cut the basic rate by a further two percentage points to 27%.
More was to come. Even though the economy was by this time booming, Lawson also eschewed convention by announcing big post-election tax cuts in the spring of 1988, adding fuel to the fire. The basic rate was cut again, to 25%, and in the most Thatcherite cut of all, the top rate was reduced from 60% to 40%.
This tax-cutting chancellor was ultimately undone by tax. A clumsy reining back of mortgage tax relief, restricting it to one relief per property, resulted in a powerful final leg for the house-price boom. House-price inflation was rampant and so, soon, was general inflation. By the end of the 1980s, inflation was moving towards double figures again, requiring sky-high interest rates and, ultimately, recession. Major, who succeeded Lawson in the autumn of 1989, after a row over Thatcher’s personal economic adviser, Sir Alan Walters, used the phrase ‘if it isn’t hurting, it isn’t working’ and, indeed, it worked so well that the economy was pushed into the recession of the early 1990s.
The Thatcher era did, however, see a sharp fall in the tax burden, from just over 34% of GDP to just over 30% by the time she left office, and a modern low of about 28.5% during the recession of the early 1990s.
That was the low point in the modern era. After the humiliation of sterling’s exit from the European exchange rate mechanism (ERM) in September 1992, the need to rebuild the public finances and Britain’s credibility resulted in two Budgets in 1993. One, from Norman Lamont, was in the spring, the second was from Kenneth Clarke in the autumn. Together they raised taxes significantly. The measures included imposing VAT on domestic fuel, freezing income tax allowances and thresholds, cutting mortgage tax relief, and new taxes on insurance premiums and air travel. Lamont had earlier increased the main rate of VAT from 15% to 17.5%.
Taxes were to rise further under Brown’s chancellorship, from 1997. His hikes included the notorious ‘tax raid on pensions’ by abolishing dividend tax relief, one of the aims of which was to encourage businesses to invest more and distribute to shareholders rather less. As a strategy, it raised revenue but had no discernible impact on business investment. Brown also raised national insurance (NI) to help pay for increases in NHS funding and pioneered the use of ‘stealth’ taxes.
The tax burden dipped a little during the 2008-09 global financial crisis, partly because Alistair Darling enacted a temporary cut in VAT, but picked up when George Osborne announced an increase in VAT from 17.5% to 20% in his ‘emergency’ budget in June 2010, to take effect in 2011. The burden then stayed in the 33% to 34% range for the 2010s. This was because, in those austerity years, the government chose to repair the public finances by cutting public spending rather than by increasing tax. Corporation tax was cut aggressively and the personal allowance was ‘over-indexed’ to £12,500, to raise the starting point at which people pay income tax beyond inflation.
It is interesting to debate what might have happened to the tax burden had not the pandemic struck in 2020. Before it, Boris Johnson’s government had scrapped plans to reduce corporation tax further, to 17%. The period of raising the personal allowance by more than inflation was declared over.
The March 2020 Budget, which should have been delivered by Sajid Javid, until his surprise resignation a month before it, ended up being partly about how to respond to the pandemic, though most of the action on that came later. The centrepiece, even with the pandemic, was a big increase in infrastructure spending, which Javid had argued strongly for on the grounds that it would be crazy not to do it at a time when the cost of government borrowing was so low. That big increase in infrastructure spending, which was put at £600bn spread over five years, would have required extra taxes even in the absence of the pandemic.
As it is, and as we approached the Queen’s 70th year as monarch, a feat that will surely never be repeated, 2021 saw a succession of post-dated tax hikes, some of the biggest in history (only 1993 comes close). Those increases, announced by Sunak, were unusual. Normally chancellors wait to see how a tax hike goes down before announcing further big increases.
The 2021 announcements broke that pattern, the tax increases including a freeze on personal allowances and thresholds (a Tory favourite) from 2022 to 2026, a 1.25 percentage point increase in both employer and employee NI and, perhaps most dramatically of all, an increase in corporation tax from 19% to 25% in April 2023.
Some of those increases have been subsequently softened, including by raising the NI allowance to bring it into line with the income tax threshold, though both will then be frozen. But they still mean, according to the Office for Budget Responsibility (OBR), that the burden is on course to rise to 36.2% of GDP. That will be, not only the highest since the late 1940s when the Attlee government was in power, but the highest in the Queen’s reign.
One lesson of the tax story of the past 70 years is that the basic rate of income tax is a terrible guide to the overall tax picture. Sunak has said that he will cut the rate to 19% in 2024, which will be not much more than half the 35% rate of the mid-1970s. But, as we have seen, there are plenty of other ways of raising tax and the tax burden.
The other theme of the past 70 years is that few politicians, or political parties, commit themselves to being a high-tax government. Perhaps that would have been tested if Jeremy Corbyn had led Labour to victory in 2017 or 2019, though that did not happen.
Politicians, even those who purport to know how these things work, have a blind spot when it comes to spending and taxation. Most think that they can increase the size of the state without increasing the tax burden to pay for it. They resort to the ‘proceeds of growth’ to square the circle, but it rarely does.
Sunak has at least done a service by patiently explaining to members of his own party that tax cuts do not pay for themselves. Many MPs, particularly Tories, inhabit a Laffer curve fantasy universe in which every tax cut is self-financing. Well done to the chancellor for pointing out that this is not the case.
The other big theme is that, as the former chancellor Harold Macmillan once observed, ‘events’ can disrupt the best-laid economic and tax plans of governments. There have been five big recessions during the Queen’s reign, in 1973-75, 1980-81, 1990-92, 2008-09 and 2020-21. There were recessions before the 1970s, but they were smaller in scale.
Each of those big recessions has created a fiscal hangover, including the 1976 International Monetary Fund UK bailout, the austerity Budget of 1981, the tax hikes of 1993, the austerity of the 2010s and now the cost-of-living crisis and a record tax burden. These events, sadly to relate at this time of celebration, are only to be expected. We live and learn.
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