Vista de bienvenida.

Chancellor: Reginald Maudling; Prime Minister: Harold Macmillan (Conservative)

Context

Despite the previous Budget’s about economic prospects in 1962, exports slowed and unemployment began to rise in the second half of the year. Cairncross (1994) argues that Maudling, the new Chancellor in July 1962, had been reluctant to make policy changes too soon “anxious to avoid giving the impression of a change in policy”.263 Monetary policy had, however, been eased even prior to the 1962 Budget. Expansionary measures finally followed in the autumn and are discussed below. A cold winter was to make conditions worse and check industrial activity; as the Chancellor notes “the severe winter after Christmas led to a very large addition to the total of unemployed”.264 In February 1963 unemployment hit its highest point since the war.265

Overall Budget Objectives

From the outset the Chancellor declares “the theme of this Budget is expansion: expansion without inflation, expansion that can be sustained”.266 In summarising the economic prospects Maudling argued “On the one hand, we have spare capacity and present trends of demand do not seem strong enough to ensure of themselves a full enough employment of our resources in the coming year”.267 In judging the appropriate overall stance “the conclusion I have reached is that tax concessions in the current year of the order of about £250 million (0.8 per cent of GDP) are required to stimulate the economy if we are to realise our target of vigorous expansion without a return to inflation”.268 The target growth the Chancellor set, however, was 4 per cent — which may have been over-optimistic given that the average growth rate between 1948 and 1962

261

HC Deb 09 April 1962 vol 657 cc985-986 262

HC Deb 09 April 1962 vol 657 c992 263

Cairncross (1992), page 147. 264

HC Deb 03 April 1963 vol 675 c468 265

Cairncross (1994), page 60. 266

HC Deb 03 April 1963 vol 675 c454 267

HC Deb 03 April 1963 vol 675 cc472-3 268

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was 2.6 per cent.269 Despite this goal of raising longer-term growth, the Chancellor’s statements reveal a desire to stimulate a flagging economy – especially given the comments about spare capacity and unemployment. To that extent many of the Budget measures will be classified as endogenous, demand management. In all, taxes were cut by nearly £600 million in a full year270 (nearly 2 per cent of GDP).

Pre-Budget Tax Measures

I first deal with Maudling’s 1962 autumn stimulus. This included a repayment of post-war credits, a cut in the Purchase Tax for cars and an increase in investment allowances. Reflecting on the autumn measures in the 1963 Budget speech, Maudling explains “in the autumn and winter a number of measures were introduced both to relax restriction of credit and to stimulate the economy. Some of these measures, such as the release of post-war credits and the substantial Purchase Tax cuts, are already taking effect, as can be seen particularly in the demand for motor cars”.271 This sentiment reflects closely the statements at the time. I have already discussed why I exclude post-war credits. The investment allowance changes were to take until the 1963 Budget to arrange and are dealt with below. In relation to car manufacturing the Chancellor explained on 5th November 1962: “I am satisfied that this is a case where a stimulus to the home market by a reduction of Purchase Tax will both bring into use resources that at present are under-employed and provide the basis for an even more vigorous export drive… I propose, therefore, to make an immediate cut in the Purchase Tax on motor cars”.272 This took effect on 6th November 1962 and was endogenous, demand management.

Major 1963 Budget Tax Measures

On the 5th November 1962 it had been announced (and debated) that investment allowances would be raised in the 1963 Budget. In November the Chancellor noted “we have more slack in the economy than we calculated on, and it justifies further measures to stimulate the economy” but “we need not so much a stimulus to demand generally as special encouragement to investment and to the exporting industries, and to employment in areas where unemployment is above the national average. The unused resources are not so much in the consumer goods industries as in the heavy industries and in sections of engineering, and it is these resources, human and material, that we must seek to bring into use…. I am satisfied that, from the point of view of encouraging investment, the investment allowance is a good deal more effective than the initial allowance”.273 The measures were implemented in the 1963 Finance Act but backdated to 5th November 1962. In addition, the 1963 Budget proposed some additional changes, also backdated: “in addition to these changes, which I announced last November, I propose now to make some further improvements”.274 This seems to be a stimulus to investment demand and to be endogenous, demand management.

A few other business tax measures were introduced. Allowance of free depreciation was introduced in regions of high unemployment: “no one can doubt the intense human reasons for making further efforts to cope with the problem of regional unemployment. At the same time, however, the need for progress here should not be underestimated in the context of economic growth”.275 Dealing with the unemployment is an endogenous change and in the overall spirit of the Budget is classified as endogenous, demand management.

Finally I turn to the income tax measures. Schedule A of income tax – tax on income from land – was abolished. The reason cited was simplification: “In the various proposals I have to lay before the Committee I have borne in mind the need for tax simplification. Schedule A, I think, is a good example”.276 I therefore classify this measure as exogenous, long-run. It was abolished from 6th April 1963. However, I provide an alternative classification of endogenous, demand management given this measure’s sizable contribution to meeting the Chancellor’s £250 million current year target.

Introducing the other income tax measures the Chancellor argued: “The cost of all the tax changes I have so far announced amounts to £83 million this year. On the Budget judgment that I explained to the Committee, this clearly leaves room for a further large impetus to demand this year to take up the existing slack in the economy…. this further relief in the field of direct taxation, as this is the method best calculated

269

Office for National Statistics (2010); series ABMI: Gross Domestic Product, Chained Volume Measure. 270

The £250 million figure given earlier was a target for the current year. 271

HC Deb 03 April 1963 vol 675 c468 272

HC Deb 05 November 1962 vol 666 c629 273

HC Deb 05 November 1962 vol 666 cc623-625 274

HC Deb 03 April 1963 vol 675 c487 275

HC Deb 03 April 1963 vol 675 c479 276

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both to stimulate the economy and to encourage individual effort…. The reliefs will be concentrated on individuals”.277 The Chancellor notes here the role of incomes policies in stimulating the expansion “without inflation” and also notes that his tax remissions will be “giving particular attention to those with family responsibilities or other special claims”.278 Consequently, various allowances were raised: those relating to National Insurance contributions, single, married, child (three measures) allowances, the age exemption limit, the income limit for age relief and the income limit for small income relief (a capital income measure aimed at small investment incomes). All changes were enacted on 6th April 1963. Based on the overall statements about the stimulus, I classify these all as endogenous, demand management.

These changes account for over 90 per cent of the remissions and make up £232 million of the target £250 million.