What Motivated Margaret Thatcher

Working Paper: Reforms Under Thatcher and Major

Reduction of political pensions: ideas or interests

The two authors Philip Booth and John Meadowcroft devote their paper to the question of how, once established, and period by period, political rents that accrue to the beneficiaries can be reduced. There are two main theories in the literature that try to explain how political rents can be reduced. According to the first theory, Keynes is right and for a change in politics new ideas must prevail, which thus contribute to a reduction in existing political rents. According to the second theory, it is not ideas that move the world, but financial and other interests of people. According to this view, changes in interests lead to a change in politics and thus also to a reduction in existing political pensions.

Privatizations in the 1980s and 1990s

Booth and Meadowcroft examine the tax policies of the Conservative Thatcher and Major governments. From 1979 to 1997 the level of state activity was significantly reduced. Industries in the fields of electricity, gas, water, steel, telecommunications, automobiles and the state airline were denationalized and many tasks were transferred from the state to quasi-autonomous private companies. As a result of these measures, the ratio of government spending to gross domestic product fell from 43% in 1980 to 36% in 2000.

The privatizations caused government spending to fall, but wiped out political rents for those who benefited from the fact that the industries privatized as part of the reforms had previously been nationalized. In their paper, Booth and Meadowcroft examine whether the conservative governments may have used tax policy to secure support for their reforms towards a freer market economy.

If the conservative governments reduced their tax revenues by relieving all income taxpayers equally, that would be an indication that ideas, not interests, were responsible for tax policy in the 1980s and 1990s, according to the two authors. If, on the other hand, the conservative governments used tax policy to primarily relieve their potential voters, this would be an indication that interests guide tax policy.

UK Tax Policy: Interests

Booth and Meadowcroft show that from 1979 to 1997 mainly tax policy measures were taken, from which high-income households in particular benefited.

First, the tax allowance has fallen relative to average income. All those who earn more than the tax allowance benefit equally from tax allowances. If the government's goal had been to reduce the income tax burden for as many as possible, it would have had to significantly increase the tax allowances.

Second, marginal tax rates have been reduced, particularly marginal tax rates on relatively high incomes. These measures did not result in income tax relief for the general population either, but primarily for households with relatively high incomes, which benefited more from the lowering of the highest marginal tax rates.

Third, the income threshold above which the highest marginal tax rate applies has fallen relative to average income. As a result, the income of additional households with middle incomes was taxed at the highest marginal tax rate in some cases.

Economic Policy 1979-1997: Ideas and Interests

The combination of declining tax allowances, lower marginal tax rates for high incomes, and a lower income limit above which the highest marginal tax rate applies, leads the authors to conclude that Thatcher and Major's economic policies were driven by both ideas and interests. The reduction in the scope of state activities, which is consistent with the ideas of a free market economy, was made possible by taking into account the tax policy interests of the Conservative Party electorate. Due to their own tax advantages, they were more inclined to support the government's privatization course. It seems that in this case ideas and interests moved the world.

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