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Thatcher's Economic Policy

Tax and the Public Finances

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.

Step 1 of 6

The question

Under Margaret Thatcher, the top rate of income tax, paid on the highest incomes, fell from 83 per cent to 40. Yet tax took a bigger share of everything Britain earned when she left office than when she came in.

The tax cuts are the well-known part. The top rate of income tax fell from 83 per cent to 40. The basic rate, the one most people pay, fell too.

What you'll be able to answer

  1. How did the first Budget of 1979 change the kind of tax Britain paid?
  2. Did the overall tax burden fall under Margaret Thatcher?
  3. How did the government go from borrowing to surplus?
  4. Who gained most from the decade's tax and benefit changes?
Where this sits in the series

Thatcher's Economic Policy · this module is lit

  1. Jan 1979Public service strikes: the winter of discontent
  2. May 1979Margaret Thatcher's government takes office
  3. Oct 1979Exchange controls scrapped
  4. 1980Council tenants given the Right to Buy
  5. Mar 1981A Budget raises taxes in the recession
  6. Mar 1984The miners' strike begins
  7. Nov 1984British Telecom shares go on sale
  8. Oct 1986The Big Bang in the City of London
  9. Oct 1989Nigel Lawson resigns as Chancellor
  10. Apr 1990The poll tax reaches England and Wales
Why it matters and what it covers

The first Budget of 1979 cut income tax and nearly doubled VAT, the tax on most things people buy. All taxes added together took a bigger share of the country's income at the end of the decade than at the start. Over the decade, the government changed taxes and benefits, the payments it makes to people. Those changes cost the government money, and nearly half of that money went to one group of households.

The six steps cover the 1979 move from income tax to VAT, total tax, borrowing in the 1970s, the surplus, the 1988 Budget, and who gained.

Step 1 · 12 June 1979

You are the new Chancellor

Once a year the Chancellor announces the tax plans for the year ahead, in a speech to Parliament.

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

Your government was elected promising to cut and to bring down at the same time. Cutting the top rate from 83 per cent means less tax comes in. You have to find that money somewhere else.

All taxes together take 33.8 per cent of national income, everything the country earns in a year. Britain charges , a tax on most things people buy, at two rates: 8 per cent and 12.5 per cent.

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. It is the main moment at which a government can change tax. Who delivers it differs by country: in Britain the Chancellor, in Germany the finance minister.
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, and has to fund from somewhere other than tax. 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 incomeAdd up every tax paid in the year before you took office. That total was 33.8 per cent of everything the country earned that year.
Government borrowingpromised to come downYour government promised to borrow less than the last government did. Whatever you choose must not push borrowing up.
Income tax rates83% at the top, 33% basicThe top rate is paid on the highest earnings. The basic rate is the one most people pay. Both are about to fall, and the tax they no longer raise has to be replaced.
Income inequalitynot counted in 1979Nobody has yet measured how much a change like this gains or costs 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 1979A decile is one tenth of households, ranked by income. How fast does each tenth's income grow? Nobody can measure that yet, because those years have not happened.

You are Geoffrey Howe. Income tax has to fall. Borrowing has to fall at the same time. Where do you find the money?

Step 2 · 1979 to 1991

Tax as a whole

Take a guess

Tax took 33.8 per cent of national income in 1978-79. By 1990-91, Margaret Thatcher's last year as Prime Minister, was the share higher or lower?

vs

A tie counts as correct either way.

The tax burden is all taxes added together, as a share of the country's . 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. VAT and other taxes rose while it fell.

The tax burden counts every tax: income tax, VAT, the taxes companies pay, and the rest. It is measured every 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.

For scaleThe tax burden was highest in 1981-82, at 39.2 per cent. The tax burden hit that peak after a Budget that raised taxes while the economy was shrinking.

Step 3 · the 1970s

Britain's borrowing in the 1970s

In 1976, three years before Margaret Thatcher became Prime Minister, the government spent more than it collected in tax. Lenders would not lend it enough to cover the difference.

The government asked the for a loan instead. The loan was agreed in January 1977.

Margaret Thatcher's government took office in 1979 promising to bring borrowing down. The crisis that had sent Britain to the International Monetary Fund was only three years old.

International Monetary Fund
A body funded by its member governments that lends to countries which cannot borrow enough elsewhere.

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

For scaleIn 1978-79 tax took 33.8 per cent of national income. Even with tax at that level, the government spent more than it collected.

Step 4 · 1984-85 to 1989-90

From borrowing to surplus

Take a guess

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?

In 1988-89 the government had a surplus: it collected more in tax than it spent. It was the first 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 used the surplus to repay debt, the total it owed from past borrowing. That total had been 38.7 per cent of national income in 1984-85.

When a government has a surplus, its debt stops growing. Before 1988-89, Britain's government had needed to borrow every year for almost twenty years.

Government debt, 1978 to 1991Public sector net debt (what the state owes, minus its cash) at the end of March each year, % of GDP (national income)
2025303540451978198019821984198619881990First surplus year

Source: ONS, public sector net debt excluding public sector banks, % of GDP (HF6X)

For scaleIn 1976 the government had needed a loan from the International Monetary Fund. In 1988 it was repaying debt.

Step 5 · 15 March 1988

Two income tax rates where there were six

Take a guess

The 1988 Budget cut both income tax rates that were left. Who gained most from the cuts?

The Budget of 15 March 1988 changed income tax again. Income tax had six rates, and each rate applied to a higher part of a person's income. The Chancellor, Nigel Lawson, abolished every rate above 40 per cent, leaving two: the basic rate and a top rate of 40 per cent.

The top rate fell from 60 per cent to 40. Since 1979 the basic rate, the one most people paid, had come down from 30 per cent to 27. Lawson cut the basic rate again.

Members of Parliament shouted Lawson down as he announced the cuts. The House of Commons, the part of Parliament that voters elect, had to stop its meeting.

For scaleThe Deputy Speaker suspended the House of Commons from 5.01 to 5.11 pm while order was restored.

Step 6 · 1979 to 1990

Who gained from the changes

Over the decade, income tax rates fell. In 1979 the lower VAT rate nearly doubled, from 8 per cent to 15, and VAT stayed at 15 per cent.

Income tax cuts give most to the people who pay the most income tax. 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.

Researchers have added up eleven years of tax and benefit changes. They sorted households into ten equal groups by income and worked out how much each group gained.

Income tax came down, but VAT and other taxes went up by more. So the tax burden ended the decade higher.

Nearly half of the total cost of the decade's tax and benefit changes went to one group. Which group?

For scaleBy 1989 households near the top of the income range had 4.1 times the income of households near the bottom. The gap grew sharply through the decade.

What happened next Next module Next: The Welfare State and the Poll TaxLearn what happened to welfare spending under Thatcher, and how the poll tax ended her premiership.

Thatcher's Economic Policy

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The key questions

Can you answer each one now? Tap to check.

How did the first Budget of 1979 change the kind of tax Britain paid?

RevealIt cut income tax and replaced the two VAT rates with one higher rate. Tax moved from what people earned to what they spent.

Did the overall tax burden fall under Margaret Thatcher?

RevealNo. Income tax rates fell, but VAT and other taxes rose, and tax took a larger share of national income at the end of her time than at the start.

How did the government go from borrowing to surplus?

RevealFast growth late in the decade meant the same tax rates collected more money. For the first time in almost twenty years the government collected more than it spent, and it used the surplus to repay debt.

Who gained most from the decade's tax and benefit changes?

RevealThe richest tenth of households received nearly half the value of all the changes. Income tax cuts gave most to those who paid the most income tax, and a higher VAT took a bigger share from those who spent all they earned.

The numbers

Can you remember each figure? Tap to check.

Howe moves tax from earning to spending, June 1979

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

The tax burden, 1978-79 and 1990-91

Reveal33.8%, then 36.6% of national income; the peak 39.2%

The loan

Revealagreed January 1977

Government debt, 1984-85 to 1989-90

Reveal38.7% to 23.1% of national income

The 1988

Revealtwo rates: 25 and 40

Who gained, 1979 to 1990

Revealnearly half the gain to the richest tenth; by 1989, incomes near the top 4.1 times those near the bottom

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. It is the main moment at which a government can change tax. Who delivers it differs by country: in Britain the Chancellor, in Germany the finance minister.
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, and has to fund from somewhere other than tax. 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.

Income tax fell, but the tax burden ended higher. Nearly half the money spent on the decade's changes 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.
[9] The episode chart: ONS series HF6X, public sector net debt excluding public sector banks, as a % of GDP, value at the end of March. Open Government Licence v3.0. Retrieved 30 September 2026. Each point is the first-quarter value, which is the end of the financial year.

Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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