The ‘People’s Budget’: Causes and Consequences

by Professor Martin Pugh

new perspective. Volume 1, Number 1. September 1995

Summary: The genesis of the 1909 budget was the need for more taxation and a reappraisal of ways to raise revenue but opposition in the House of Lords invited the Liberals to curb the power of that House. When achieved it speeded the decline of the peerage and moves toward social change and the interventionist State.

Historians can be accused of resorting too freely to major turning-points to punctuate their narratives. But the case for putting Lloyd George’s famous budget of 1909 in this category seems particularly strong. Both in terms of its immediate impact in polarising Edwardian politics, and in terms of its lasting influence on national taxation it ranks as a crucial formative event.

The Need for More Taxation

Like most key issues the budget of 1909 must be explained at several different levels. For example, in one sense it was simply a response to the predicament faced by the Chancellor of the Exchequer in trying to raise enough revenue to cover the government’s anticipated expenditure for the year ahead. By early 1909 it became clear that the Exchequer faced a shortfall of revenue which Lloyd George estimated at 16-17 million. This resulted largely from a depression in trade which reduced Government income from taxes on spending, and also from several extraordinary items of expenditure: 3 million to build new Dreadnought battleships and a scheme for old age pensions which cost over 8 million.

In short, the budget of 1909 had to involve some major changes. But Lloyd George used the opportunity to introduce certain radical innovations that would be more than temporary expedients. Like most new Chancellors he wanted to make a splash with his first budget and he was fully aware of the need to boost the general morale of the Liberals or ‘stop the electoral rot’ as he put it. For some time he and Winston Churchill, President of the Board of Trade, had been planning a series of social reforms which could only be accomplished by expanding the resources of the State. In this sense the budget was a very political measure not a mere matter of balancing the books. In view of the subsequent reaction there has always been a suspicion that Lloyd George deliberately designed his budget to provoke the House of Lords into rejecting it and thereby creating the maximum political benefit.

He was not, however, quite that cunning. Modern research suggests that the Chancellor intended to kill several birds with one stone. He would, on the one hand, prove that he could finance the more novel social reforms and, on the other, use the budget as a device for enacting certain traditional items - such as higher public house licences and land valuation - which the peers had rejected as ordinary legislation. He had told his brother he was ‘thinking out some exquisite plans for outwitting the Lords on licensing’. In other words he assumed that on past precedent the peers would not reject the budget even though they disliked it.

Changing Political Attitudes to Taxation

However, short-term motives are by no means a sufficient explanation. For the budget of 1909 represented the culmination of a long period of rethinking about national finance by both Liberals and Conservatives. Traditionally, Victorian governments regarded taxation as a necessary evil and used it to raise just enough to pay for basic services like the police, civil service, the armed forces and the civil list. Revenue was drawn more from indirect than from direct taxation. Throughout the nineteenth century Radicals criticised this on the grounds that vast wealth, notably landed, was scarcely taxed at all. By the turn of the century many Liberals and Socialists had concluded that taxation was both inadequate and unfair. In a book called Riches and Poverty (1905) Leo C. Money, a Liberal MP, showed how the bias towards indirect taxation meant that poor people could pay as high a proportion of their income to the government as rich people. Thus, the case for moving towards direct taxation on income and wealth and to a graduated system of taxation gained ground. Neither Gladstone nor Salisbury had been at all sympathetic to these arguments. However, during the 1880s and 1890s their governments experienced increasing difficulty in trying to manage on the basis of conventional finance. Costly imperial campaigns, naval rebuilding, subsidies to local authorities and social reforms forced them to raise the income tax gradually but steadily. The war in South Africa (1899-1902) turned this problem into a crisis. Consequently, all parties were obliged to reconsider their financial policies. In 1903 Joseph Chamberlain adopted a bold solution - tariff reform. In theory, tariffs paid on imports of foreign goods would generate an extra source of revenue for the government. The Liberals, however, refused to abandon free trade. Yet this deepened their dilemma because it left Chamberlain free to claim that only the Conservatives would be able to pay for innovations such as old age pensions.

In fact the Liberal alternative had already begun to emerge in the shape of Sir William Harcourt’s budget of 1894 which introduced a radical scheme of graduated death duties. The process of innovation was extended by Asquith in 1906-7 by taxing unearned incomes at a higher rate than earned incomes, and by planning for a ‘super tax’ on very high incomes. Thus, well before Lloyd George’s budget, the idea that the tax an individual paid ought to reflect his ability to pay had been well established. In appointing Lloyd George as his Chancellor Asquith fully intended to complete the escape from Gladstonian finance.

Who Did the Budget Tax More Heavily?

How was this accomplished in 1909? Income tax on earned incomes was held at nine (old) pence in the pound, but raised to one shilling on incomes above 2,000; those earning over 5,000 would pay an additional super tax at six (old) pence in the pound on income above 3,000; and death duties were levied at steeper rates than before. These taxes were carefully targeted on a small number of rich people. Only 25,000 people earned above 3,000 and those liable for super tax numbered around 10,000. Further methods for hitting the wealthy were the new licences for motor cars and a three (old) pence per gallon levy on petrol. Finally, there were the taxes on land, though in spite of the controversy they aroused they were unlikely to yield much revenue until a full valuation of land had been carried out; Lloyd George inserted a figure for the revenue from land simply to justify starting the process of valuation.

There was enough here to substantiate the radicals’ claims about making the idle rich pay a fair share of national taxation. But historians have also noticed the care taken to ensure that most middle-class earners paid no extra direct taxation. After discussions in cabinet Lloyd George granted those with under 500 annual income - the majority of the middle classes - a tax relief of 10 for every child under 16 years. Moreover, as liability for income tax only began at an annual income of œ160, most working men escaped it altogether.

The Political Impact of the Budget

The immediate importance of the 1909 budget lay in its transforming effect on the political situation. Between 1906 and 1908 the euphoria of the Liberals’ landslide election victory had worn off. For although the government had several achievements in social reform, bills that were dear to traditional Liberals had been mauled by the House of Lords which refused to be intimidated by the government’s popular mandate. The peers had shrewdly calculated that measures for licensing or education reform which pleased Nonconformist Liberal activists did not stir the public at large. Meanwhile Keir Hardie had freely attacked the government over unemployment, and the by-elections of 1907 suggested that the Labour party was gaining support.

Consequently Lloyd George always intended to recapture the initiative for the Liberals: in the event he exceeded that modest objective. For the rejection of his budget provoked a controversy of a kind that had not been heard since 1885 when Joseph Chamberlain launched his ‘unauthorised programme’ against the landowning class. In some rumbustious speeches at Limehouse in London and at Newcastle-upon-Tyne during July and October 1909 Lloyd George openly attacked the peers for their selfishness in refusing to pay a fair contribution to national defence and social reform. He was humorous as usual:

‘… a fully-equipped Duke costs as much to keep as two Dreadnoughts - and they are just as great a terror - and they last longer.’

But he also threatened a more radical assault on property:

‘They are forcing a revolution, and they will get it ... Who made ten thousand men the owners of the soil and the rest of us trespassers in the land of our birth?’

The Chancellor showed his tactical skill in engaging the enemy in this way, for the Conservatives could hardly withdraw from their intransigent position without humiliation. When the peers finally threw out the budget in November by 350 votes to 75, Lloyd George positively crowed: ‘We have got them at last’. By this he meant that the Liberals had been presented with a popular issue with which to attack the peers. In the past the temptation to over-rule them by appealing to the country had always been resisted. Now the risk could be taken - indeed, it had to be if the budget were to be saved. There followed a general election in January 1910 which was virtually a referendum on the budget and the peers.

The Liberals’ success at this election had important implications for all the other parties. Although the Conservatives recovered some of the votes lost in 1906, their gamble had clearly failed and the peers reluctantly swallowed the budget they had so vociferously condemned a few months earlier. Even worse, they now realised that Lloyd George had defeated their tariff reform strategy by proving that by widening the tax base the country could enjoy social reforms and a stronger navy on the one hand while retaining the benefits of free trade on the other. As a result the Conservatives began to fall into disarray over protectionism. Some questioned whether it was sensible to stick to a policy that had alienated working-class voters and thus threatened to keep them in opposition indefinitely.

In a rather different way the Labour party had also been trapped by the budget strategy, for Ramsay MacDonald and his colleagues fully supported the taxation of wealth and the attack on the House of Lords. This logically meant that the electoral pact with the Liberals must be continued in the 1910 elections. But while the pact ensured a secure group of 40 MPs for Labour, it also made it very difficult to grow beyond that point. No longer was there any danger of Labour outflanking the Liberals, and it is significant that no further gains were made even in by-elections.

Why the Liberals did not Win More Seats in 1910

However, the outcome of the 1910 elections was by no means an unqualified triumph for the Liberals. After all, the government had cut short a seven-year term of office after a little over four years. Moreover, whereas they had enjoyed an overall majority in the House of Commons after 1906, in January 1910 they were reduced to 275 seats (to 273 for the Conservatives), which meant that they depended for a majority on the 82 Irish Nationalist and 40 Labour members. This raises a question which has not been given as much attention as it deserves. Why did the government not do better in January 1910 if the budget was a popular platform? The Liberal and Labour share of the poll was 51 per cent as against 46.9 per cent for the Conservatives, a clear but not overwhelming lead. Constituency studies suggest that the Liberals succeeded in retaining working-class votes. But on the other hand the extreme language used by Lloyd George and Winston Churchill in attacking the wealthy and titled may have frightened off too much middle-class support and thus helped to lose a 100 more marginal seats in the South and Midlands.

Lloyd George Widens His Political Ambition

Looking beyond the immediate political impact of the budget we must consider some important indirect consequences. These stemmed from the way in which the debate developed in the autumn of 1909. Lloyd George spent less time defending the details of his budget than in attacking the Tory peers. In this way he was deliberately extending the issue to encompass the role of the hereditary House of Lords. This problem had been hanging over Liberal governments at least since the 1880s when the drift of many Whigs away from Gladstone had created an overwhelming Conservative majority in the upper house. The budget became the means of achieving a lasting victory over the Lords, though a second election was required in December 1910. This was because the government could not be confident of passing a bill to reform the upper house unless hundreds of new Liberal peers were created, and the King insisted he would do this only after Asquith had won another election.

Thus, when the December election produced virtually the same result as the January one, Asquith brought in the Parliament Bill which removed the peers’ veto over financial legislation and restricted the veto on ordinary legislation; in effect the Commons would be able to over-rule the upper house by enacting a contentious bill three times in not less than two years.

The Consequences of the Parliament Act

In turn the Parliament Act had several major ramifications. For example, it immediately restored Irish Home Rule to the top of the agenda because the Nationalist MPs could now argue that its passage was feasible for the first time. The third Home Rule Bill duly proceeded three times through the Commons and required only the royal assent to become law when war broke out in 1914. Also, the defeat of the peers had a powerful impact on the Conservative party. The right-wing believed that the Lords should have rejected the Parliament Bill and defied the King to create Liberal peers.They blamed the disaster on the moderates who had backed down and in particular on the party’s leader A.J. Balfour. In 1911 he was unceremoniously forced to resign as leader, thereby setting a pattern that was to become almost a habit for twentieth-century Conservatives.

But the ripples from the Parliament Act spread still further. One of the apparently minor concessions in the legislation was a reduction in the life of a parliament from seven years to five. This has meant that prime ministers have frequently chosen to hold elections at four yearly intervals during the twentieth century. In the medium term the effect was that Asquith’s government would come to the end of its life by December 1915 at the latest. This turned out to be a difficult stage in the First World War. It was largely because of the need to avoid fighting a general election in 1915 that Asquith opted to replace his Liberal government with a three-party coalition in May of that year.

The Sun Sets over the Peers

Finally, the whole controversy over the budget and the Parliament Act contributed powerfully to the steady decline of the House of Lords and the peerage in the British system of government. In 1911 the Conservatives claimed that Asquith had virtually created one-chamber government and they therefore promised a complete reform of the composition as well as the powers of the upper chamber which would have involved some modification of the hereditary principle. Indeed, as the preamble to the Act indicated, even the Liberals regarded their reform as an interim measure not a final solution. Yet, significantly the Tory leaders failed to redeem their promise despite rank and file pressure to do so even during the inter-war period. Tacitly they accepted the marginalisation of the House of Lords and, thus, of peers in general. This was underlined in 1923 when, following the resignation of the Conservative prime minister, Andrew Bonar Law, the obvious successor, Lord Curzon, was turned down because of his membership of the upper house. Never again would a peer become prime minister, though in 1963 Lord Home achieved the impossible by renouncing his peerage and returning to the House of Commons.

Financial and Social Consequences of the Budget

Finally, it remains to assess the long-term significance of the budget for British national finance. This can best be done by looking back into the Victorian period and forward into the twentieth century. It is sobering to think that since its introduction to cope with the costs of the French Revolutionary wars the income tax had been regarded as a temporary expedient. As late as the 1870s Gladstone had proposed to abolish it. He never quite succeeded, and in the 1880s and 1890s the rate rose to eight (old) pence in the pound. By 1914 Lloyd George had pushed the standard rate up to one shilling and four pence. By the end of the First World War it stood at six shillings. During the 1920s and 1930s despite enormous political pressure, income tax was only modestly reduced to four shillings. In short, all governments came to rely heavily on income tax as the central element in national finance. Even the government of Mrs Thatcher managed totrim income tax only to 25 (new) pence, equivalent to five shillings, which was historically a high rate.

The only aspect of the 1909 budget which failed to survive was Lloyd George’s famous land taxes. The laborious process of land valuation went ahead up to 1914. But during the war his involvement in the coalition government put the whole enterprise in jeopardy. Although Lloyd George remained prime minister until 1922 he was too dependent on his Conservative colleagues to resurrect the land taxes; by 1920 they had been abandoned.

In spite of this setback, the social consequences of the Edwardian reforms were enduring. The effect of a graduated system of taxation combined with social welfare measures was to begin the process of redistributing national income from the rich to the poor, albeit slightly. This process continued in each succeeding decade regardless of changing circumstances and political parties. Not until after 1979 was the trend finally checked by reductions in taxation for very high earners and a shift to taxes on consumption paid by the poor and those on average incomes.

Need for Limitations on the Free Market Accepted

Nor should one overlook the broader implications of the budget for the role of governments in the economy. Although the Edwardian Liberals had not by any means abandoned private enterprise, they were, in effect, working out a mixture of collectivist and individualist strategies for running the economy. Many politicians had accepted that the free market did not work satisfactorily as the recurrent problem of unemployment demonstrated. The introduction of Labour Exchanges was the first step towards a solution. The budget incorporated a further expedient in the form of the Development Commission. This involved placing 200,000 of national revenues in a fund every year to finance land reclamation, afforestation, transport, experimental farming and scientific research. It was, in short, designed to fill crucial gaps where private individuals failed to invest sufficiently in economic resources and development. It was understood that the government would spend this money through the Development Commission with a view to stimulating demand and employment in years of recession. Later generations would call this a counter-cyclical policy. In the event little use was made of the Commission before 1914 because the boom in the economy seemed to make it less necessary. After the war aspects of the scheme re-emerged, for example in the form of the Forestry Commission. More generally the seeds had been sown for what after 1945 was to be known as Keynesian economic management.

Words and concepts to note

civil list: annual sum voted by Parliament to members of the Royal Family.

direct taxation: taxes levied in income or property.

graduated taxation: any system whereby tax is charged at a higher rate as income rises; for example Harcourt’s death duties were set at 1 per cent on property worth 500 or less, 5 per cent on property worth between 25,000 and 50,000 and a maximum of 8 per cent on property worth œ1 million or more.

indirect taxation: taxes levied on goods or services at the point of consumption.

Keynesianism: the application of state resources so as to maintain a level of employment by stimulating income and thereby demand for goods and services.

unearned income: income arising out of ownership of land or property in the form of rents or royalties.

Questions to consider

• How far was it the need for state intervention, driven by economic change and rearmament, rather than Liberal policy, which made taxation changes necessary?

• Was the restriction of the Lords’ powers bound to follow from the Reform Acts of 1867 and 1884?

• Can it be argued from the election returns of 1910 that the voters were indifferent about he Lords’ powers

 

Further Reading: H.V. Emy, Liberals, Radicals and Social Politics 1892-1914, Cambridge, 1973; H.V. Emy ‘The Impact of Financial Policy on English Party Politics Before 1914’, Historical Journal, 15, 1972; John Grigg, Lloyd George: the People’s Champion 1902-1911, London, 1978; Roy Jenkins, Mr Balfour’s Poodle, Oxford, 1930; Bruce Murray, ‘The Politics of the "People’s Budget"’, Historical Journal 16, 1973; Alan O’Day ed., The Edwardian Age: Conflict and Stability 1900-1914, London, 1979; G.C. Peden, British Economic and Social Polity: Lloyd George to Margaret Thatcher, London, 1985; Martin Pugh Lloyd George, London, 1988.

The ‘People’s Budget’: Causes and Consequences by Martin Pugh. new perspective 1995

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