Tax Cuts In An Election Year? They Can Boost Consumer Confidence And Work Wonders For A Governing Party

6th March 2024

A budget in the year of an election is a big moment for any government. In 2024, it could be the chancellor of the exchequer's last chance to try and generate a sense of economic optimism and improve consumer confidence after years of households feeling squeezed by austerity measures and rising prices.

Jeremy Hunt will also be mindful of reviving the electoral fortunes of the Conservative Party - and keeping his job.

His predecessors have faced similar challenges. And several chancellors of Conservative governments have decided to remove the financial brakes when a general election is imminent, to make people feel a little better off.

My research looks at how people feel about their economic prospects, and how this is linked to the way they behave as consumers. And a brief look at election year budgets from the past suggests that tax cuts can make voters feel more positive about a governing party.

Richard Austen Butler for example, was chancellor in the early 1950s, serving prime ministers Winston Churchill and Anthony Eden. For his final budget in April 1955, Butler decided to significantly reduce income tax rates.

The election was held the following month, and the Conservative Party won with an increased majority.

This was a prime example of a chancellor attempting to manipulate the economy to enhance his political party's prospects. But from a macroeconomic perspective (looking at the UK economy as a whole), the 1955 budget was widely considered to be misguided. For the tax relief Butler provided came at a time of an economic boom, when supply couldn't keep pace with demand, which led to inflationary pressure.

Towards the end of the same decade, it was Derick Heathcoat Amory in the economic hot seat, dealing with prime minister Harold Macmillan's perpetual fear of an economic slump.

Although there were concerns about the consequences for inflation and the UK's balance of payments, in April 1959, Amory delivered what economists call an "expansionary budget" - increasing spending and cutting taxes. Six months on, the Conservatives won another general election.

Howe to do it
Twenty years later, when Margaret Thatcher moved into No 10 Downing Street in May 1979, she appointed Geoffrey Howe as chancellor. During his time in office, any unpopular or controversial measures - including public spending cuts and tax increases - happened in his first three budgets.

This allowed him to present more attractive policies in the one that immediately preceded the next general election.

By the time of his final budget, in March 1983, Howe felt that inflation and the government's finances were sufficiently under control to grant widespread tax cuts, including to North Sea oil companies and small businesses. The general election in June 1983 saw the Conservative Party win an overwhelming victory (also helped by increased popularity after the Falklands war).

Nigel Lawson then replaced Howe as chancellor, in relatively favourable economic circumstances. He went on to pursue a tax cutting agenda, believing that increasing the incentive to work would reduce unemployment.

For his 1987 budget in March, preceding a general election in June, Lawson cut income tax, reduced fuel duty, and brought down the the tax rate for small businesses. His actions helped the Conservatives win another overwhelming victory in the election.

After John Major became prime minister in 1990, he appointed Norman Lamont as chancellor under difficult economic circumstances.

Consumer confidence trick?
A recession was officially declared in January 1991 - which continued until April 1993. Meanwhile, when Lamont delivered his second budget on March 10 1992, ahead of a general election in April, a key feature was the introduction of a new, lower 20% rate of tax on the first £2,000 of taxable income.

Again, the Conservatives won. Members of the Institute for Fiscal Studies later described that budget as the "clearest example of pre-election tax cuts followed by post-election tax rises".

But it worked. And all of these examples might provide Hunt with strong encouragement to ignore fiscal rectitude when it comes to preparing his 2024 budget. A tax cut would likely promote an increase in consumer confidence, which motivates households to buy things.

Yet Hunt is unlikely to forget that he was given his job after the financial chaos caused by the so-called "mini-budget" delivered by Kwasi Kwarteng - then the chancellor during Liz Truss's short premiership - in September 2022.

So an array of unfunded tax cuts is not an option.

It would be very surprising though, if Hunt didn't try to make voters feel a little better off ahead of a general election. The prime minister maintains that the trajectory is lower taxes, and his desire to reward people who work would suggest another reduction in national insurance payments.

While this may not be the most prudent form of action, it may yet provide households with a sliver of economic confidence - and a boost to the Conservative's chances of winning another election.

Author
Robert Gausden
Senior Lecturer in Economics, University of Portsmouth

Note
This article is form The Conversation web site. To read it with links to more information go HERE