Economic history · Thatcher's Economic Policy

Tax and the Public Finances

←Thatcher's Economic Policymodule 10 of 13

Six steps, about nine minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.

She cut the top rate of income tax from 83 per cent to 40. The average pound earned in Britain was taxed more heavily when she left office than when she entered.

The tax cuts are the famous story: the top rate of income tax fell from 83 per cent to 40, and the basic rate came down with it.

The numbers tell a second story. The first Budget of 1979 paid for its income tax cuts by nearly doubling VAT, the tax on most things people buy. Taxes as a whole took a larger share of the country's income at the end of the decade than at the start. And nearly half of the money the decade's tax and benefit changes handed out went to a single group of households.

Six steps cover the 1979 switch, the whole tax bill, the borrowing Britain left behind, the surplus, the 1988 Budget, and who gained.

What this module covers

The 1979 Budget: income tax down, VAT nearly doubled
The tax burden, and what happened to it
The 1976 International Monetary Fund loan the decade was determined to escape
The swing from heavy borrowing to surplus
The 1988 Budget: two rates where there were six
Who gained: the decade's changes added up

Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.

[1] Hansard, HC Deb 12 June 1979, Budget Statement: Howe's first Budget, in his words. Cols 258-9: 'The top rate on earned income will be cut from the present 83 per cent. to 60 per cent.' Col 261: 'reducing the rate from 33 per cent. to 30 per cent.'; 'I propose, therefore, that as from next Monday VAT should be charged at a new unified rate of 15 per cent.' Col 263: the yield of the increase estimated at £2,035 million in 1979-80. Zero rates kept on food, children's clothes, heating, public transport and housing. Open the source
[2] House of Commons Library, The Burden of Taxation, Research Paper 99/67: The whole tax bill, year by year. Table 1, taxes as a per cent of GDP: 33.8% in 1978/79, 39.2% at the 1981/82 peak, 36.6% in 1990/91. On 1988: the basic rate reduced to 25% from 27%, and higher rates of income tax above 40% abolished. Open the source
[3] House of Lords Library, The UK economy in the 1970s: The 1976 crisis and the IMF. The fiscal situation and the IMF bailout: by 1976 the government could not fund itself and borrowed from the IMF, which attached limits on public spending to the loan, agreed in January 1977. Open the source
[4] House of Lords Library, The UK economy in the 1980s: The decade in outline. Section 3, fiscal restraint: a public finance surplus in 1988/89 for the first time in almost 20 years; the debt ratio fell from 38.7% of GDP in 1984/85 to 23.1% in 1989/90. Section 4: the 90:10 income ratio rose sharply to 4.1 by 1989. Open the source
[5] Nigel Lawson, Budget speech, 15 March 1988, Thatcher Foundation document 111449: The 1988 Budget speech. 'The final outturn for 1987-88 will be a budget surplus of £3 billion.' The measures cost £4.5 billion in 1988-89 over and above statutory indexation. Open the source
[6] Hansard, HC Deb 15 March 1988, Budget Statement: The Commons suspended. Col 1012: 'I propose to abolish all the higher rates of tax above 40 per cent.' Col 1013: 'a basic rate of 25 per cent. and a single higher rate of 40 per cent.'; then 'Grave disorder having arisen in the House, MR. DEPUTY SPEAKER... suspended the sitting' (5.01 to 5.11 pm). Open the source
[7] Resolution Foundation, The Thatcher legacy: The decade's tax record, judged. The 1979 VAT rise was the largest instantaneous increase in indirect tax rates in UK history. Fiscal policy was tightened in a deep recession. Section 4.4: nearly a half of all the money spent on changes to the tax and benefit system accrued to the richest 10 per cent, and incomes near the top of the distribution rose far faster over the decade than incomes near the bottom. (The decile figures themselves belong to module 12, which owns them.) Open the source
[8] Institute for Fiscal Studies, Ten years of Mrs Thatcher: the distributional consequences: Who gained and who did not. The IFS's contemporary accounting of the decade's tax and benefit changes by income group, the companion record to the Resolution Foundation's later figures. Open the source

Step 1 of 6

Step 1 · 12 June 1979

You are the new Chancellor

A Chancellor gets one morning a year when the whole country listens, and this was his first.

It is 12 June 1979 and you are Geoffrey Howe, the minister in charge of tax and spending, about to give your first .

Your government was elected promising to cut and to bring down at the same time. A top rate cut from 83 per cent collects less money, so the difference has to come from somewhere else.

Tax takes 33.8 per cent of national income, and Britain charges at two rates, 8 per cent and 12.5.

Budget: The annual statement in which a government sets tax rates and spending plans for the year ahead and reports how the last year turned out. In Britain the Chancellor delivers it, and it is the main moment at which a government can change tax.
income tax: A tax on what people earn. Each person has an allowance they can earn before paying any, and the rate rises in steps on earnings above it.
government borrowing: What the state spends in a year beyond what it raises in tax, made up by selling bonds. It rises on its own in a downturn, because tax receipts fall as incomes fall and benefit payments rise as people lose work.
VAT: A tax added to the price of most things people buy, collected by the shop and passed to the government. Because it sits inside the price on the shelf, raising it raises the cost of living straight away.
public spending: Everything the state pays for: health, schools, defence, benefits, pensions and the interest on what it has already borrowed.

Tax burden33.8% of national incomeEvery tax added together, in the year before you took office, set against everything the country earns in a year.

Government borrowingpromised to come downYour government promised to borrow less than the last one did, so whatever you choose has to leave borrowing lower rather than higher.

Income tax rates83% at the top, 33% basicThe top rate on earned income and the rate most people pay. Both are about to come down, and that is what has to be paid for.

Income inequalitynot counted in 1979No count exists yet of what a change like this is worth to households at the top and at the bottom. What is known is that a tax on spending takes a bigger share of a small income.

Income growth by decilenot counted in 1979The same question again with households sorted into ten equal groups by income: how fast each group's pay grows. It has not been measured for the years ahead.

Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.

You are Geoffrey Howe. Income tax has to come down and borrowing has to come down with it. Where do you find the money?

Step 2 · 1979 to 1991

The whole tax bill

The tax burden is the share of the country's taken in tax, all taxes together. In 1978-79, the year before Margaret Thatcher became Prime Minister, it stood at 33.8 per cent.

Income tax fell through the decade, and the cuts were famous. But income tax is only one tax among many, and VAT and other taxes rose while it fell.

Every tax is counted in that share: income tax, VAT, the taxes companies pay, and the rest, year by year from before the decade to after it.

national income: The total value of everything a country produces in a year. Government figures are usually given as a share of it, because that is what makes a sum comparable between one decade and another.

Tax took 33.8 per cent of national income in 1978-79. By 1990-91, her last year, was the share higher or lower?

A tie counts as correct either way.

For scale. The burden peaked at 39.2 per cent in 1981-82, after a Budget that raised taxes while the economy was shrinking.

Step 3 · the decade before

The borrower Britain had been

In 1976, three years before Margaret Thatcher became Prime Minister, the taxes the government collected did not cover its spending, and it could not borrow the difference.

It turned to the for the money, and the loan was agreed in January 1977.

Margaret Thatcher's government took office in 1979 promising to bring borrowing down, three years after the crisis that had sent the country to the Fund.

International Monetary Fund: A body funded by its member governments that lends to countries which cannot borrow enough elsewhere. It attaches conditions to what it lends, usually about what the borrowing government may spend.

The International Monetary Fund agreed the loan. What did it require in return?

For scale. Tax took 33.8 per cent of national income in 1978-79, and it still did not cover what the government spent.

Step 4 · 1984-85 to 1989-90

From borrower to surplus

The government collected more in tax than it spent in 1988-89, its first year of surplus in almost twenty years.

The economy was growing fast in the late 1980s. When pay, profits and spending all rise, the same tax rates collect more money.

The government put the surplus into repaying debt, and that debt had stood at 38.7 per cent of national income in 1984-85.

A government in surplus is not adding to what it owes, and this was the first year that had been true in almost twenty years.

Government debt, the total the state owes from all its past borrowing, had been 38.7 per cent of national income in 1984-85. How much of national income did it equal by 1989-90?

Give it in per cent of national income.

For scale. In 1976 the government had needed the International Monetary Fund; in 1988 it was repaying debt.

Step 5 · 15 March 1988

Two rates where there were six

Income tax was changed again in the Budget of 15 March 1988. The Chancellor, Nigel Lawson, abolished every income tax rate above 40 per cent, leaving two rates where there had been six.

The top rate fell from 60 per cent to 40. The basic rate, the one most people paid, was 27 per cent going into the Budget, and Lawson cut that too.

Members of Parliament shouted Lawson down as he announced the cuts. The House of Commons, the elected half of Parliament, stopped its sitting, its working meeting.

The basic rate of income tax stood at 27 per cent. How low did the 1988 Budget take it?

Give it in per cent.

For scale. The sitting was suspended from 5.01 to 5.11 pm while order was restored.

Step 6 · 1979 to 1990

Where the money went

The decade's tax and benefit changes cut one tax and raised another: income tax rates fell, while VAT nearly doubled in 1979 and stayed at the higher rate.

Income tax cuts give most to the people who pay the most income tax, and the top rate had fallen from 83 per cent to 40 by 1988. A rise in VAT takes a bigger share from people who spend everything they earn.

The eleven years of tax and benefit changes have been added up and split by household income, one tenth of households at a time.

Income tax came down and the tax burden ended higher, because what was taken off one tax was put on another.

Nearly half of all the money the decade's changes handed out went to one group. Which group?

For scale. Incomes near the top of the scale ran to 4.1 times those near the bottom by 1989, and the gap grew sharply through the decade.

What happened next Next module → Next: The Welfare State and the Poll Tax1979 to 1990. Social security spending at a post-war record, the pension cut loose from earnings, and a flat tax on every adult that ended the premiership.

Module 10 of 13 in Thatcher's Economic Policy

Your score

0 points

Your score will appear here.

Next module →

←Previous module All 13 modules

What this module covered

Howe moves tax from earning to spending, June 1979

basic rate 33% to 30%, top 83% to 60%; VAT to 15%

The tax burden, 1978-79 and 1990-91

33.8%, then 36.6%; the peak 39.2%

The loan

agreed January 1977

Government debt, 1984-85 to 1989-90

38.7% to 23.1% of national income

The 1988

two rates: 25 and 40

Who gained, 1979 to 1990

nearly half the value of the changes to the richest tenth; top incomes 4.1 times the bottom by 1989

You met six terms in this module

, , , , ,

Budget: The annual statement in which a government sets tax rates and spending plans for the year ahead and reports how the last year turned out. In Britain the Chancellor delivers it, and it is the main moment at which a government can change tax.
income tax: A tax on what people earn. Each person has an allowance they can earn before paying any, and the rate rises in steps on earnings above it.
government borrowing: What the state spends in a year beyond what it raises in tax, made up by selling bonds. It rises on its own in a downturn, because tax receipts fall as incomes fall and benefit payments rise as people lose work.
VAT: A tax added to the price of most things people buy, collected by the shop and passed to the government. Because it sits inside the price on the shelf, raising it raises the cost of living straight away.
national income: The total value of everything a country produces in a year. Government figures are usually given as a share of it, because that is what makes a sum comparable between one decade and another.
International Monetary Fund: A body funded by its member governments that lends to countries which cannot borrow enough elsewhere. It attaches conditions to what it lends, usually about what the borrowing government may spend.

Income tax fell, but the tax burden ended higher. Nearly half of what the decade's changes handed out went to the richest tenth.

Take it further

🏥Next: the welfare state she meant to shrink, and the tax that ended her→ 🇬🇧United Kingdom: the numbers today→ 🎯Guess the Value, which trains you to estimate numbers like the ones these questions asked for→

Where every figure came from

[1] Howe's first Budget, in his words: Hansard, HC Deb 12 June 1979, Budget Statement. Cols 258-9: 'The top rate on earned income will be cut from the present 83 per cent. to 60 per cent.' Col 261: 'reducing the rate from 33 per cent. to 30 per cent.'; 'I propose, therefore, that as from next Monday VAT should be charged at a new unified rate of 15 per cent.' Col 263: the yield of the increase estimated at £2,035 million in 1979-80. Zero rates kept on food, children's clothes, heating, public transport and housing.
[2] The whole tax bill, year by year: House of Commons Library, The Burden of Taxation, Research Paper 99/67. Table 1, taxes as a per cent of GDP: 33.8% in 1978/79, 39.2% at the 1981/82 peak, 36.6% in 1990/91. On 1988: the basic rate reduced to 25% from 27%, and higher rates of income tax above 40% abolished.
[3] The 1976 crisis and the IMF: House of Lords Library, The UK economy in the 1970s. The fiscal situation and the IMF bailout: by 1976 the government could not fund itself and borrowed from the IMF, which attached limits on public spending to the loan, agreed in January 1977.
[4] The decade in outline: House of Lords Library, The UK economy in the 1980s. Section 3, fiscal restraint: a public finance surplus in 1988/89 for the first time in almost 20 years; the debt ratio fell from 38.7% of GDP in 1984/85 to 23.1% in 1989/90. Section 4: the 90:10 income ratio rose sharply to 4.1 by 1989.
[5] The 1988 Budget speech: Nigel Lawson, Budget speech, 15 March 1988, Thatcher Foundation document 111449. 'The final outturn for 1987-88 will be a budget surplus of £3 billion.' The measures cost £4.5 billion in 1988-89 over and above statutory indexation.
[6] The Commons suspended: Hansard, HC Deb 15 March 1988, Budget Statement. Col 1012: 'I propose to abolish all the higher rates of tax above 40 per cent.' Col 1013: 'a basic rate of 25 per cent. and a single higher rate of 40 per cent.'; then 'Grave disorder having arisen in the House, MR. DEPUTY SPEAKER... suspended the sitting' (5.01 to 5.11 pm).
[7] The decade's tax record, judged: Resolution Foundation, The Thatcher legacy. The 1979 VAT rise was the largest instantaneous increase in indirect tax rates in UK history. Fiscal policy was tightened in a deep recession. Section 4.4: nearly a half of all the money spent on changes to the tax and benefit system accrued to the richest 10 per cent, and incomes near the top of the distribution rose far faster over the decade than incomes near the bottom. (The decile figures themselves belong to module 12, which owns them.)
[8] Who gained and who did not: Institute for Fiscal Studies, Ten years of Mrs Thatcher: the distributional consequences. The IFS's contemporary accounting of the decade's tax and benefit changes by income group, the companion record to the Resolution Foundation's later figures.

Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
Games · Learn · Atlas · Privacy