Frequency Shift Keying (FSK)

Chancellor: John Major; Prime Minister: Margaret Thatcher (Conservative)

Context

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In 1989 inflation had hit 7.8 per cent. Real GDP growth also slowed to 2.3 per cent in 1989, although unemployment continued to fall up to March 1990. The figures suggested that the economy was turning down, although growth did not start falling until autumn 1990. Throughout 1989 interest rates were raised, reaching nearly 15 per cent by October 1989 and Lawson rejected early entry into the European Exchange Rate Mechanism (E.R.M.) as an alternative to high interest rates. The E.R.M. debate had its cost: Nigel Lawson resigned in October following considerable disagreements with Prime Minister Thatcher over her economic adviser Sir Alan Walters, who was publicly critical of Lawson’s policies.

Overall Budget Objectives

The Government’s first objective was “to bring inflation down again… this Budget will take no risks with inflation. It will maintain a strong fiscal surplus”.721 In addition the Budget was described as a Budget for savers: “It will provide a range of incentives to save and a novel incentive to give”.722 On tax reform: “It will introduce important new measures for business and keep up the pace of supply-side reform. It will remove an old grievance from the tax system and make the social security system fairer, and it will abolish two taxes”.723 In many ways Major’s first Budget followed similar themes to Lawson’s. On the slowdown, Major argued “No one likes to see the economy slow, but it is inevitable if we are to push inflation downwards”.724 In terms of the overall fiscal stance “a tight fiscal policy is also essential. It cannot do the work of monetary policy, but it can and must support it… fiscal policy is not, in my view, a flexible instrument which should be altered to meet short-term contingencies”.725 The motivations were therefore multiple and so we must turn to the individual measures to unpick the motivations.

Major Budget Tax Measures

Income tax allowances and thresholds were raised by statutory indexation with the exception of the basic rate limit. Failing to implement indexation in full is effectively a tax rise (and is a discretionary change given statutory indexation). No specific justification is given, although earlier comments about the need to fortify the surplus imply that the Chancellor did not believe he could afford all the statutory increases in allowances and limits. I therefore classify this change as endogenous, deficit reduction (or more precisely surplus fortification). Based on Major’s comments about not using fiscal policy as a short term instrument, I opt not to classify this as demand management. However, the tight fiscal stance is clearly motivated by current inflationary problems.

The scales for tax treatment of private use of company cars were again, as in previous years, increased from 6th April 1990 as “the tax treatment of this benefit remains generous”.726 As in previous years, little further is said about this. I now choose to classify this as endogenous, deficit reduction as it raises a sizable amount of revenue given the Budget’s overall objectives.

The composite rate was abolished from 6th April 1991 as “independent taxation has thrown into sharp relief another aspect of the tax system that affects all savers, and which no longer deserves to survive… This change will significantly reduce the amount of tax paid by millions of married women, pensioners, children and others with small savings, and by removing the penalty of composite rate tax, it will play an important part in encouraging the savings habit”.727 I classify this as exogenous, ideological.

There were some changes to the taxation of life insurance originally announced on 20th December 1989 and which took effect from 1st January 1990. These “put the taxation of life assurance companies' unit trust holdings on a sounder footing, and make a number of technical improvements”.728 Given that these were announced as part of a reform package months earlier, and on the strength of this statement, I classify this as exogenous, ideological in keeping with the life insurance reforms in the 1989 Budget.

Tax relief for doubtful sovereign debt was removed from 20th March 1990. This measure is first justified to “clarify the tax regime for banks”729 but problems with the current arrangements are said to be an

721

HC Deb 20 March 1990 vol 169 c1011 722

Ibid. 723

Ibid. 724

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“extremely unsatisfactory position for the banks, for the Inland Revenue, and for the taxpayer”.730 Little other direct justification is given, although it raises a considerable sum. I therefore classify this as endogenous, deficit reduction in line with the overall strategy of the Budget.

On consumption taxes: “Given the need to keep a tight fiscal position, I have decided that the excise duties, taken as a whole, must rise broadly in line with inflation”.731 But within this total there were some changes. Vehicle Excise Duty (V.E.D.) changes “will greatly simplify the system”732 and took effect from 21st March and 1st October 1990. In addition, some V.E.D. rates were again held fixed. To fund these “I will recoup the cost of this by increasing petrol and derv duties by rather more than strict revalorisation would justify”.733 This rise therefore serves two purposes, to prevent a lower budget surplus from the V.E.D. changes and to fortify the surplus anyway. Alcohol and tobacco duties also increased. I therefore classify these duty changes as a package and as endogenous, deficit reduction. These increases took effect from 20th March 1990 (except rebated oils, from 1st July 1990).

There were three other sizable remissions. Firstly, Stamp Duty on share transactions was abolished from 1st January 1992. This decision was taken in the light of a new, forthcoming stock exchange share- dealing system known as TAURUS. “As we approach 1992, we can expect even sharper international competition in financial services, much of it from other European centres. Competitive and practical arguments point in the same direction”.734 I classify this change as exogenous, long-run.

Secondly, there were a few changes to simplify V.A.T. registration requirements from 20th March 1990 and revised bad debt relief provisions from 6th April 1991. The justification for these changes stemmed from the observation that “cash flow is particularly important to new and growing companies of this size. I have two measures that should help to improve it”.735 I therefore classify these changes as exogenous, long- run.

Finally, tax exempt special savings accounts (TESSAs) were introduced from 1st January 1991 as “I wish to do more to encourage the saving habit among taxpayers — all of them”.736 I therefore classify this as exogenous, ideological.

Given the overall objectives and the desire to fortify the surplus to fight inflation, it is possible that the seemingly exogenous changes are in fact then offset by higher increases in the endogenous, revenue raisers. In addition to the specific motivations given below, I also provide an alternative classification for the exogenous measures of endogenous, deficit reduction – classifying the whole budget package together.

These changes made up over 90 per cent of the remissions and 98 per cent of the tax rises.