Tax reform in the UK and changes in the progressivity of the tax system, 1985-95

From the middle of the 1980s until the end of that decade, the government experienced a growing economy and consequently buoyant tax revenues. In addition to cutting the public sector borrowing requirement (PSBR) and increasing spending, these revenues were used as a means of financing massive tax cuts, and in particular cuts in income tax rates. By the early 1990s, however,it had become clear that tax revenues had been cut to an unsustainably low level as recession led to a PSBR that threatened to run out of control. In response to this, in the two Budgets of 1993 the two Chancellors introduced a package of tax increases which, in terms of revenue raised, will reverse most of the tax reductions of the late 1980s. But taxes were increased in a way very different from that in which they were reduced. The overall effect has been a substantial reform of the UK tax system. This paper examines the changes that have been made in the tax system as they affect the personal sector, i.e. changes to taxes on personal income, on personal property and on expenditure. We start the analysis with the 1985 tax system as the base, for it was in 1986 that the first cut in income tax rates was introduced and the trend for significant tax cuts was set. And it was from this date that taxation as a proportion of GDP started to fall steadily until the end of the 1980s. We end the analysis with the tax system as it would have been left at the end of 1995 by the tax changes announced in the 1993 Budgets. A decade of contrasting tax changes are examined.