With Labour odds-on for a thumping general election victory on 4 July and analysts musing on what the implications could be for UK personal finances, it’s an opportune moment to look back to when the party last enjoyed a landslide and the key policies introduced in its early days at HM Treasury. When chancellor, Gordon Brown's decisions have had long-lasting effects on personal finance and are still debated today.
Brown's abolition of dividend tax relief has been blamed for driving the decline of defined-benefit (DB) pension schemes in the private sector. Funds couldn't make up the shortfall in the context of rising life expectancies, making these 'gold-plated' schemes more expensive. The policy, introduced in 1997, saved the exchequer roughly £5bn a year: before Brown's change, pension funds could claim a 20 per cent tax credit on the dividends they received. Brown argued that this system was effectively incentivising companies to pay out dividends instead of investing. He said in his Budget statement that “many pension funds are in substantial surplus and at present many companies are enjoying pension holidays”.
Not everyone accepts the narrative that Brown drove the DB decline, even if most pension consultants are in agreement that the policy had a big impact. Nest Insight argues that “DB schemes were arguably also in long-term decline as a result of demographic change, and had traditionally only covered a small part of the working age population. Rescuing DB schemes could not ensure universal second-tier pensions coverage”.
From Peps to Isas
It was not just pensions affected by the new chancellor's first set of policies. The overhaul also brought a new tax-efficient wrapper. Nigel Lawson had introduced the personal equity plan (Pep) in his 1986 Budget at the time of the Big Bang reforms, a key part of the Thatcher government's plan to spread share ownership and drive forwards a vision of "popular capitalism". Brown brought in the individual savings account (Isa) as the new vehicle for tax-efficient saving. He cut the contribution limit from £9,000 to £7,000, and from 2004 onwards neither Isas nor Peps could reclaim a 10 per cent tax credit on dividends (the chancellor halved the credit from 20 per cent to 10 per cent in 1997). The Isa limit wouldn't materially increase until 2009, Brown claiming that he wanted to "encourage the habit of saving among people who have never saved before".
Labour has pledged in this election campaign not to raise income tax or national insurance (although the tax burden will still rise because income tax thresholds aren't being increased with inflation). In a similar way, Labour's 1997 manifesto promised not to raise the basic or top rates of income tax, yet fiscal drag certainly occurred under Brown. He increased tax thresholds using inflation instead of wage data, meaning the number of higher-rate taxpayers rose by a million between 1997-98 and 2009-10.
Marginal tax rates are a big discussion point at the moment, given some higher-rate taxpayers face a 60 per cent tax bill (or more) because of the way the personal allowance tapers off on income over £100,000. Brown introduced a version of this tapering in 2009, at the same time as bringing in a 50p additional tax rate on income over £150,000.
The Institute for Fiscal Studies (IFS) adds that one of Brown's legacies as chancellor was "a large increase in the number of workers with high marginal effective tax rates (over 70 per cent) as a result of the extension of in-work benefits and tax credits".
Income tax changes earlier in Brown's chancellorship also introduced more complexity into the system. He replaced the 20p lower rate of income tax with a 10p rate in 1999, but ended up abolishing the new rate in 2008 (this was controversial, as a cut in the basic rate of tax at the same time meant that many lower earners were adversely impacted, and the government ultimately increased the personal allowance to try to deal with the consequences). Between 1997 and 2010, the basic rate fell from 23p to 20p.
Capital gains
Brown also made some significant changes to capital taxes. The key move was the 1998 reform of the capital gains tax (CGT) system, where Brown abolished indexation allowances and introduced taper relief. The allowances had removed inflation from gains, but Brown thought that in a low-inflation world it made sense to do away with them. The taper relief change rewarded investors who held assets for longer by reducing their tax bill. For example, higher-rate income taxpayers could enjoy a 10 per cent CGT rate on business asset gains if they held them for at least two years (the policy originally specified 10 years, but was lowered in subsequent Brown budgets). The system was completely rejigged in 2007 when tapers were removed and a flat rate of CGT introduced at 18 per cent.
Another notable tax change Brown implemented was the abolition of mortgage interest tax relief (MIRAS), which removed a tax allowance on the first £30,000 of a mortgage.
Monetary policy
One of Brown's first moves was to fundamentally reshape the macroeconomic landscape by giving the Bank of England operational independence over monetary policy.
Tony Blair described this as "the biggest decision in economic policy making since the war". It was certainly a momentous moment, as the power to move interest rates was transferred from the chancellor to the Old Lady of Threadneedle Street. Labour argued that the change was about long-term stability and removing short-term political concerns from rate decisions, although the sceptic could argue that public criticism for monetary policy missteps was handily directed away from politicians and towards central bankers thereafter.
A 2023 report by the House of Lords economic affairs committee found that the “enhanced credibility of monetary policy brought about by independence” helped create the low-inflation environment enjoyed for much of the period since 1997. However, it pointed to other criticisms regarding a disconnect between fiscal and monetary policy, the rapid expansion of the central bank's remit, a lack of intellectual disagreement internally, and the question of whether unelected bank officials are accountable enough for their decision making. At these levels, the benefits and drawbacks of Brown's decision are still being passionately analysed.
That gold sale...
It is impossilbe to analyse Brown’s stint in the Treasury without mentioning his decision to sell off the UK’s pile of gold. From 1999 to 2002, Brown sold more than half of the country’s gold reserves at an average price of $275 an ounce. Gold subsequently shot up in value and currently sits at over $2,300 an ounce, but the sale can be seen as a story of sensible asset diversification rather than stupidity.
Between 1999 to 2022, Brown sold more than half of the country's gold reserves at an average price of $275 an ounce. Given that gold subsequently shot up in value (and currently sits at over $2,300 an ounce), the problem looks obvious.
The money from the bullion sales was invested in US Treasuries which have yielded a return, albeit much lower than would have been the case had the gold been kept. But the important context is one in which other central banks were selling off gold, and the fact that the metal had become significantly less important to the global central banking system. So, the sale should really be seen as a story of sensible asset diversification rather than stupidity. In terms of long-term financial magnitude, the decision was really irrelevant in respect to the British economy. The optics were very poor, however, and Brown is still mocked for selling off bullion at the "bottom of the market" by political opponents.
