Maggie's Bold New Budget

The Tories cut income taxes--and risk inflation

Campaigner Margaret Thatcher promised to cut taxes and reduce government spending. Prime Minister Thatcher last week began to live up to those promises. As Labor M.P.s in the House of Commons jeered, Thatcher's Chancellor of the Exchequer, Sir Geoffrey Howe, presented a tough new budget that was designed, he said, "to restore incentives and make it more worthwhile to work."

The budget reduces the highest income tax rates (for those earning a net income of more than $50,000) from 83% to 60%; the standard rate will drop from 33% to 30%. Personal exemptions will be raised, effectively severing 1.3 million more Britons from the tax rolls. To replace the estimated $9.5 billion in lost revenues from the reduced income tax, the budget calls for an increase in the value-added tax (VAT), a national sales levy that is applied to all but essential goods and services. VAT rates, which vary from 8% to 12.5%, will move up to 15%. That bad news triggered a rush to shops and department stores, as customers hurried to make purchases before the new rate goes into effect this week.

The Tories will trim $3 billion from the Labor government's last budget, including aid to local governments for public housing and other programs. But Thatcher's Social Services Secretary, Patrick Jenkin, later offered a supplement to the budget that provided unexpectedly large increases in such personal benefits as old age pensions and maternity allowances. That calculated benevolence may not be of much help to many Britons as they try to cope with a new round of inflation.

Jenkin candidly admitted that the new budget will result in an increase of the annual rate from 10.3% to 17.5% by next November. Thus many who will benefit from the changed tax structure may find their gains eroded by higher inflation.

Labor politicians and their allies in the trades unions were appalled by the budget. Former Prime Minister James Callaghan called it "unfair, unjust, inflationary--a reckless gamble." Shadow Chancellor of the Exchequer Denis Healey, anticipating a bitter round of contract negotiations and possible strikes at the end of the year, warned that "Britain faces a winter of discontent that would dwarf in its intensity anything we have known in the past."

Indeed, the threat of trouble from the unions put a damper even on businessmen's enthusiasm for the budget. One wealthy corporate executive called home to tell his wife to lay in an ample supply of gas for their camping stove, lest there be no fuel next winter in their Kensington flat. And in the two days after Howe delivered his budget message to Commons, the Financial Times stock index dropped 27 points. The Tories stoutly defended their drastic action. "This is a severe package," conceded John Biffen, Chief Secretary to the Treasury. "But the severity is made necessary by the situation we inherited." -

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