Taxbriefs Chancellors 3 – Nigel Lawson Part 2: 1987-89

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Nigel Lawson’s last three Budgets heralded what became known as the ‘Lawson boom’. The effects were short-lived, leading again to inflationary pressures and high unemployment.

The 1987 pre-election Budget saw another 2% cut from basic rate tax and the introduction of personal pension scheme legislation, to take effect from 1988. It also marked the first ever freeze in Child Benefit.

  • The 1988 Budget was probably Lawson’s most memorable, despite the gathering inflation and trade deficit clouds:
    • Basic rate income tax was cut to 25% and the top rate of income tax was cut from 60% to 40%, leaving just two tax rates;
    • Independent taxation of married couples was announced, to take effect from 1990/91;
    • A new restriction on mortgage interest relief for jointly owned property was introduced. The start date was deferred until 1 August 1988, prompting a last minute joint-buying frenzy;
    • Tax relief for non-charitable covenants was withdrawn and for maintenance payments reduced to the difference between the married couple’s allowance and the single personal allowance;
    • The Business Expansion Scheme was expanded to include property let on shorthold tenancies, a move that created a boom in student accommodation and repossession-based schemes;
    • Car benefit tax scales were doubled;
    • Capital gains rebasing to 1982 was introduced and all gains above a reduced annual allowance became taxable as the top slice of income (i.e. at up to 40% rather than the previous flat 30% rate).
  • Lawson’s final (1989) Budget was much duller in comparison, against a backdrop of rising inflation and interest rates of 13%, destined to reach 15% later in the year. It saw a further sharp rise in car benefit tax and a clampdown on life policies held by companies.

Nigel Lawson resigned in October 1989 (shortly after interest rates reached 15%) over whether or not the UK should join the Exchange Rate Mechanism – Lawson was in favour, but Margaret Thatcher and her favoured economic adviser, Alan Walters were not. The UK eventually joined the ERM in 1990, but then crashed out on Black Wednesday, just under two years later.

A former Secretary of State for Energy, Nigel Lawson is now a leading climate change sceptic and recently became chairman of the Vote Leave group, campaigning for the UK’s exit from the European Union.

What he said

“If I really believed in Friedman’s economic theory, then I’d be quite satisfied to spend the rest of my life with a garden hose shoved down my throat, being filled with custard by representatives of the people of China.” (Speech to the Conservative Party Conference, October, 1988).

Budget soundtracks

March 1987 Boy George ‘Everything I Own’
March 1988 Kylie Minogue ‘I Should Be So Lucky’
March 1989 Jason Donovan ‘Too Many Broken Hearts’

 

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