Downing Street Years - Margaret Thatcher [418]
But the fact remains that Nigel’s budgets were essentially his. And just as I hold him largely responsible for the errors of policy which threw away our success on inflation, so I have no hesitation in giving him the lion’s share of the credit for the ingenious measures in his budgets.
The distinctive marks of Nigel’s budgets were clarity and cleverness. Whereas Geoffrey Howe was instinctively a Chancellor who liked well-balanced packages of measures, Nigel Lawson liked a budget with everything based on one central theme and purpose. Geoffrey was always one to go for the prudent course, even if the effect was un-dramatic, whereas Nigel’s search for the brilliant solution to a fiscal problem could lead him to risk all on a winning streak. He was, indeed, a natural gambler.
But the 1984 budget showed Nigel at his brilliant best. He abolished the Investment Income Surcharge, which was a grossly unfair charge on often elderly savers, and finally got rid of the National Insurance Surcharge, which Geoffrey had already cut. But his most important reform was the phasing out of tax reliefs for business at the same time as he cut Corporation Tax rates, so improving the direction and quality of business investment and greatly increasing incentives for business success. Nineteen eighty-five was a less remarkable budget, but like that of 1984 raised personal income tax allowances well above inflation. In 1986 he made what I considered just the right political judgement by cutting the basic rate of income tax by one penny, which was in effect a statement that we would not ignore the basic rate in future budgets when there was more fiscal leeway. He also introduced Personal Equity Plans (PEPs) to encourage personal investment in shares as a way of encouraging popular capitalism. In 1987 he cut two pence more off the basic rate, but balanced what might have seemed a pre-election ‘give away’ with the incorporation within the MTFS of the objective of a PSBR of 1 per cent of GDP, as a standard of fiscal prudence.
More controversial was Nigel’s 1988 budget. I certainly had my doubts at the time. I felt — rightly — that the overall financial conditions had become too loose. Although it is monetary not fiscal policy which has the decisive role in controlling inflation it is right to look at taxes and borrowing too. Not only does the level of government borrowing influence the level of interest rates needed to exert monetary control; there is also an argument that if the private sector is borrowing too much and saving too little — which is what happened in 1988 and 1989 as the savings ratio fell to 5.6 and 6.6 per cent — you should make up for this by raising taxes and cutting government borrowing (or increasing government debt repayment).
I began by questioning the size — though not the kind — of tax cuts Nigel now proposed, partly for these reasons and partly because I felt — again rightly — that big income tax cuts in a climate of excessive consumer and business confidence may have a psychological effect, not directly predictable by the dubious science of economics, but real nonetheless. They might fire up what already seemed to be overheating. In fact, the figures which I saw on the eve of the budget for the very large public sector debt repayment (PSDR) or budget surplus — forecast in the budget at £3 billion (though the figure was distorted by privatization proceeds) — considerably reassured me. Moreover the budget surplus out-turn for 1988–9 was some £14 billion. I therefore believe that — with one apparently technical but in fact significant qualification — Nigel’s 1988 budget was a success. The cuts in the basic rate of income tax to 25 pence and the top rates to 40 pence provided a huge boost to incentives, particularly for those talented, internationally mobile people so essential to economic success.
The technical point which had such practical consequences was a change in the system of mortgage tax relief, by which the £30,000 limit would no longer apply