The 1975 Budget and Subsequent Fiscal Policy
The 1975 Chancellor’s Budget holds a unique position in UK fiscal history, representing a significant policy decision that has seemingly deterred subsequent administrations from similar action.
The year 1975 was marked by notable political developments in the United Kingdom. In February, Margaret Thatcher’s victory in the Conservative leadership election over the incumbent Ted Heath signalled a shift in the political landscape. This was followed in June by the UK’s first national referendum on its membership of the European Economic Community (EEC), which resulted in a decisive 67% vote in favour of remaining.
Tax Increase and its Implications
Positioned between these two significant events was the April 1975 budget, in which the Labour Chancellor, Denis Healey, raised the basic rate of income tax by 2% to 35%. The subsequent defeat of the Labour party in the 1979 general election to Margaret Thatcher’s Conservatives, leading to an 18-year period in opposition, is a likely factor in the reluctance of future Chancellors to increase the basic rate of income tax. This historical context may also explain the tendency of major political parties to make firm income tax pledges in their manifestos, a practice economists often view as potentially restrictive over a five-year parliamentary term.
The Significance of Income Tax Revenue
Income tax constitutes the largest single source of revenue for the UK government. Projections from the Office for Budget Responsibility indicate that in the fiscal year 2025/26, income tax will account for 30% of all tax revenue. This figure significantly exceeds the revenue generated by the next largest contributor, National Insurance Contributions (NICs). Analysis suggests that a 1% increase in the basic rate of income tax could generate an additional £7.9 billion for the Exchequer in 2026/27. Furthermore, the administrative framework for income tax collection is relatively efficient, with approximately six out of every seven pounds collected through the Pay As You Earn (PAYE) system.
Despite the potential revenue benefits and administrative ease of adjusting the basic rate of income tax, an increase is considered improbable for the remainder of the current Parliament. The current Shadow Chancellor, Rachel Reeves, has seemingly followed the precedent set by her predecessors by opting for an increase in National Insurance Contributions. While technically levied only on earnings, NICs can be argued to function as another form of income tax. Notably, while the basic rate of income tax has decreased since 1975, National Insurance Contributions have gradually increased in both their rates and the range of income to which they are applied.
The Evolving Landscape of Earnings Taxation
Consequently, when considering the taxation of earnings, the traditionally prominent basic rate of income tax now represents a proportionally smaller component of the overall tax burden. The increasing significance of National Insurance Contributions has altered the landscape of how earnings are taxed in the United Kingdom.
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