Advocates of free trade have often promised it would bring more productive industry, the curtailment of monopolies, and more choice for consumers. However, free trade required a rethink of fiscal systems since, at least prior to the 20th century, most national governments relied on customs duties for a substantial part of their revenues. Those who argued against free trade often pointed to this as a reason not to abandon protective tariffs. In Britain, the advocates of free trade answered the protectionist critique by pointing to new sources of government revenues, particularly taxes on incomes and property. The so-called People’s Budget of 1909 was likely the most politically and economically consequential budget legislation in British history.
Liberals and Trade
David Lloyd George, perhaps the most memorable figure in early 20th century British politics, was not yet Prime Minister when he crafted what would become known as the ‘People’s Budget’. In the government established after the Liberal Party won the general election of 1906, he served as President of the Board of Trade and later as Chancellor of the Exchequer under Prime Minister Asquith. It was not an easy time to be in charge of British trade and finance. Unemployment and the fiscal deficit were high and the popular appeal of the Liberal cause of free trade was waning.
The deficit had been rising due to other Liberal policies, including recently implemented old-age pensions. On trade, the pro-tariff Liberal Unionists in the opposition were increasingly winning the argument. After all, higher tariffs on imports would solve the deficit problem without increasing unpopular direct taxation and, supporters insisted, would support employment too. The government’s position was further weakened by adversaries in the House of Lords. The upper chamber had already blocked Liberal reforms on issues as important to party faithful as land value taxes and increased licensing fees on pubs, the latter an aim of the temperance movement.
The Exchequer
Clearly, the Liberal government was presenting its budget for 1909-10 at a moment of political vulnerability. It may seem that a small deficit shouldn’t be a problem but the issue was complicated by the fact the Liberals had limited room to maneuver. The party couldn’t raise customs duties since, as it had always pointed out, higher tariffs would increase costs for basic commodities, and therefore the cost of living, and higher input costs would also damage industry. Lloyd George himself argued that tariffs were essentially “taxing the bread of the poor”. However, the government had to be financed somehow and excise taxes were also unpopular and could hardly cover the entire deficit.
The Chancellor expected this deficit to reach £17 million without new taxes. Old age pensions and increasing navy expenditures added £8 million and £3 million to the deficit respectively and these expenses could not be reversed without embarrassment, so the government was also constrained on the expense side. Further, existing taxes were collecting less revenue due to a weak economy. True, it could just live with the prospect of borrowing more than it liked but peacetime borrowing was also politically unpopular. Indeed, it would be hypocritical since the Liberal Party had in past years criticized the borrowings of previous Conservative governments even during the Boer War.
The People’s Budget
In the face of these constraints, Lloyd George turned to land value taxes, ‘sin’ taxes, estate taxes, and an income tax on high earners. The approach would be ‘progressive’ yet in line with liberal orthodoxy as such taxes would neither damage productive industry nor disadvantage the poor. Still, these taxes were numerous and its critics, including some in the Liberal government, argued that Lloyd George was making the state of the public finances appear worse than they really were in order to justify them.
Higher direct taxes, such as those on incomes and estates, were to raise £10.2 million, though a new land tax was to make up just £500,000 of this. Land taxes had previously been a favorite liberal cause but were to contribute little to the new budget. The reason was the fact that the 20% tax on land appreciation was not made to be retrospective. Rather, it would be based only on appreciation from the values of 1909.
The land tax was also difficult to implement. As part of its imposition, all land in the country, urban and rural, would have to receive a new valuation. This required nothing short of a new ‘Domesday Book’, the medieval survey of land ownership ordered by William the Conqueror. In any case, other new land taxes targeted mineral rights, undeveloped non-agricultural land, and any incomes resulting from lease terminations, but the £500,000 figure was the sum to be collected from all of these.
This was the ‘People’s Budget’ because the taxes it turned to largely spared the poor and working classes. However, they were not entirely unaffected; one of the larger tax rises was an increase in tobacco and spirits taxes. These were expected to raise £3.4 million and was supplemented by another excise tax affecting higher earners, a new tax on motorcars and fuel. In true Liberal form, customs duties were not to be used to close the deficit but rather taxes on unproductive landowners and the alcohol trade would be turned to.
Besides excise taxes, higher estate taxes and a new surtax on high incomes also contributed meaningfully to revenues. Under a new ‘supertax’, income taxes on those earning more than £5,000 a year were increased by six pence per pound of income in excess of £3,000. Few incomes so high existed, perhaps 11,500 in total across the country and a far lower proportion outside London. In any case, the new ‘supertax’ on incomes essentially made for a graduated income tax system. By contrast, previous income taxes had been flat across incomes and an argument against raising them had been their effect on smaller earners.
The People’s Budget was controversial and historically significant for how it changed the profile of public revenues; new public expenses were few. Only small sums of new money were assigned to initiatives like labor exchanges, a ‘national development grant’ program, and a central road authority to improve roads for automobiles. The latter of these was to be funded by the taxes on cars and fuel specifically. These provisions garnered little interest and there was similarly little disagreement on the rising pension and naval expenses that were putting pressure on the budget in the first place. In fact, the Conservative Party in opposition was campaigning on an even lower retirement age and more warships. Thus, the entire debate around Lloyd George’s budget for 1909 stemmed virtually exclusively from taxation.
The Lords
Though the Liberals had a strong majority in the House of Commons, they could secure passage of the budget no further than there. Conservatives and Liberal Unionists in the House of Lords strongly opposed the People’s Budget. Their opposition was certainly ideological to some extent but the scene of unelected lords blocking what was known as the People’s Budget was certain to look like an act of pure self-interest. There was also a constitutional issue. The House of Lords had, by custom, refrained from blocking budget legislation even though it could theoretically. By threatening to sink the budget, it was testing a party with little to lose in challenging the future legislative role of the upper house of Parliament.
In any case, that is exactly what the House of Lords did, rejecting the budget in November 1909. That act forced a general election which the Liberals nearly lost. The voters who narrowly reelected the Liberals escalated pressure on the party to consider reforming the House of Lords. With that, the People’s Budget had opened up a constitutional debate in Britain which ultimately culminated in the reduction of the House of Lord’s powers two years later.
The Country
The battle for the People’s Budget was also waged far from Parliament as campaigners spoke for and against the budget across the country. Fearing that the media would be biased against them, the Liberal Party established the ‘Budget League’ to rally public support for the budget. The organization also countered the work of the ‘Budget Protest League’ campaigning against it. The outcome was historically remarkable. Perhaps never before in Britain had budget legislation been the object of such popular political activity as cities and towns were plastered with pro- and anti-Budget posters.
The debate over the budget was infused with considerations of social class. This was partially the result of the Liberal’s focus on the land tax which, though it raised only a small portion of the new revenues, was the easiest to campaign on. The Conservatives and Unionists took the bait, perhaps inevitably because it was among the landed class’s larger grievances with the budget.
In an effort to support the tax rises on the wealthy, those backing the budget dug into tax records that showed the estates and mansions of the landed aristocracy were taxed on ridiculously low valuations. As just one example, the London mansion of the Marquess of Lansdowne was assessed based on a rental value of 7.5 pence per square foot while a social club nearby was taxed based on a rental value of over five shillings per square foot. Whether helped by scandals such as this or not, the Liberal’s narrow election victory in 1910 allowed the budget to pass in April that year. The party subsequently pivoted towards limiting the power of the House of Lords and enacting further social and economic reforms.
Results
Once passed, the budget did solve the budget shortfall and revenues from the taxes grew quickly in subsequent years. Though the ‘People’s Budget’ was designed to resolve a budget shortfall with limited borrowing, revenues in the early 1910s exceeded expectations, going so far as creating budget surpluses. The fiscal situation would only again turn negative during the First World War. However, it wasn’t all a success. The contentious land tax created its own problem with the task of valuing all the land in the country taking years and millions of pounds to complete. It had also raised very little revenue, especially once several court cases about the tax led to the suspension of many of its provisions.
Lesson
Whatever its shortcomings, the People’s Budget was a step in the transformation of the British fiscal system. It continued the transition away from relying on customs duties as a means of financing the government. The budget also saw the introduction of a graduated tax on incomes, today a common sight around the world. However, much of the significance of Lloyd George’s 1909 budget was its political consequences. The People’s Budget saw popular support and criticism on a scale that few state budgets, if any, had previously. It gave many a political education and a fiscal one too.
More from the Tontine Coffee-House
The Revenue Act of 1913 in some ways did for America what the People’s Budget did for Britain. Learn more about free trade in British history, from the corn laws to the one of the earliest free trade deals in history. Also consider subscribing to this blog’s newsletter here.
Further Reading
1. Murray, Bruce K. “The Politics of the ‘People’s Budget.’” The Historical Journal, vol. 16, no. 3, Sept. 1973, pp. 555–570.
2. Packer, Ian. “The Public Finances of 1909 and the Key Proposals of the 1909 Budget.” 1909 People’s Budget Symposium. Oct. 2009.
3. Porritt, Edward. “The Struggle over the Lloyd-George Budget.” The Quarterly Journal of Economics, vol. 24, no. 2, Feb. 1910, pp. 243–278.
4. “The Budget.” The Manchester Guardian, 30 Apr. 1909, pp. 9.
