Lessons of History: A ritual ride on the electoral cycle: Peter Clarke traces the evolution of the modern Budget back to Gladstone, whose legacy goes beyond his brass-handled box

Budget day has its own ritual. The Chancellor is expected to take a quiet stroll in St James's Park at an early hour - early enough to catch the evening paper deadlines anyway. The flock of photographers, who nowadays outnumber the Canada geese, have a second chance to get their shots later in the day when the Chancellor leaves for the House of Commons. Scaffolding is put up opposite No 11 Downing Street to accommodate the massed lens-power which records the moment when the Chancellor holds aloft a small, scuffed box, complete with an old-fashioned brass handle. It was made for Mr Gladstone in 1860 and is still going strong.

Gladstone would not have been shocked by any of this. Not only was he expert at grabbing the attention of the media but he was also adept in that great Victorian practice, the invention of tradition. The tradition of the Budget owes more to him than to anyone else. With one short interval, the Treasury was occupied by either Gladstone or Disraeli from 1852 to 1868. They used it to project their rivalry in the country as well as in Parliament, and helped to establish the pivotal role of the annual Budget.

For Gladstone, Budget day was an opportunity to achieve two objectives simultaneously: to make a very long speech and to elevate the moral tone of the nation. It was a way of getting the nation to sit in judgement on itself - and, of course, on its heroic Chancellor. Hence his subsequent scorn for the way the country had gone to the dogs under the Tories. 'There is no crowd of people wishing to know, as there used to be,' he lamented in 1879, 'wishing to know what is the condition of this great Empire.'

Gladstone's conception of the Budget as a great national account owed something to his sense of theatre as well as to administrative tidiness in consolidating a single annual Finance Bill. What he achieved through his Budgets was the acceptance of a consensus on national finance which lasted well into the 20th century. Free trade was its premise. This implied that government could not rely on import duties, which were a form of indirect taxation, falling upon rich and poor alike. Instead, direct taxation had to make up a substantial part of the revenue. Peel had introduced a peacetime income tax in the 1840s. It was supposed to be temporary and Gladstone toyed with a plan for its abolition. In practice his reform of its structure made the new burden tolerable to the taxpaying public, and thus ensured that income tax would stay.

By alleviating indirect taxes, moreover, Gladstone's big Budgets of the 1850s and 1860s made him a popular figure. He proclaimed that wealth should be left to 'fructify in the pockets of the people'. He was able to square the circle by rigid economy, which he took to comical lengths. Maybe the Foreign Office did not see the joke when he made it give up its large sheets of thick writing paper for thin sheets; but such triumphs for Treasury cheese-paring had a symbolic effect. Part of Gladstone's legacy was an abiding Treasury ethos of parsimony, carried into all departments of life.

In the 1860 Budget, armed with his brand-new Budget box, Gladstone spoke for four hours, frequently refreshing himself with a concoction of egg and wine that Mrs Gladstone had prepared. Perhaps in acknowledgement, the duty on wine was one of those that he reduced. This was also the Budget in which Gladstone abolished the paper duties, bringing cheaper newsprint, which was increasingly used to carry dense columns of his words to the people. Gladstone's coup was to infuse Treasury orthodoxy with a populist appeal which made his Budgets into political landmarks.

It is sometimes said that Gladstone was at the Treasury for the rest of the century. Year by year, the Budget was balanced according to the principles that he had set in stone. Even his Conservative successors lived under his gigantic shadow, enforcing doctrines of retrenchment, and keeping a balance between direct and indirect taxation. Only the speeches were shorter.

In fact, it took a Liberal Chancellor to rival Gladstone's loquacity while subverting his heritage. In introducing his first Budget in April 1909, Lloyd George spoke for four and a half hours. It did not go well. The silver-tongued orator was for once reading his speech - and stumbling over it as though he barely understood it. This 'People's Budget', as he called it, did not make an immediate splash but its ripples were to be momentous.

The Liberal government, losing by-elections steadily, had been faced with multiple problems. The tax base was fragile, overloaded with expanding new commitments. Old age pensions had been introduced the previous year, with inadequate fiscal provision. Moreover, the government now entered a naval race with Germany, with the hideously expensive Dreadnoughts to pay for. Both at home and abroad, therefore, the Gladstonian policy of minimum expenditure had been cast aside. The Conservatives said that the old Liberal nostrum of Free Trade would have to go too, while everyone agreed that the Budget still had to be balanced. How on earth could it be done?

What the People's Budget succeeded in doing was devising a fiscal strategy that enabled the government to regain the initiative. By plumping for higher direct taxation to plug his deficit, notably a 'super-tax' on high incomes, Lloyd George made a virtue of necessity. He identified the Liberals with social reform and social justice, while branding the Conservatives as the party which, by means of tariffs, would shift taxes on to the poor. When the Conservative majority in the House of Lords took the unprecedented step of rejecting the Budget, the stakes were raised even higher. For a generation, Liberals had vainly denounced the House of Lords; only now did the Lords have a chance to get their own back.

Naturally, the Liberals denounced the action of the Lords as unconstitutional. 'They have elected to set at nought in regard to finance the unwritten but time-honoured conventions of our constitution,' said Asquith - not a straightforward case to make, since there was nothing unlawful in what had happened. Lloyd George cut through the niceties by asking whether '500 men, ordinary men chosen accidentally from among the unemployed', should be allowed to prevail. In the end the Liberals were vindicated by electoral victory, the Lords were duly shorn of their powers, and the welfare state was fostered under a regime of progressive direct taxation. All this turned upon a Budget that the Chancellor had made a mess of

introducing.

As Chancellor, Lloyd George opened the door to state intervention and redistributive taxation. Yet it was not until after the First World War that government was pushed into accepting a responsibility for the performance of the economy. The Treasury's doctrine was quite clear. Its job was simply to manage the public finances, to see that the Budget was balanced, and to protect the parity of the currency. This vision of a self-acting system was the basis of 'sound finance'. Ideally it required that free trade be maintained; and it also required that Britain return to the gold standard, which had been abandoned on the outbreak of war in 1914.

This is why Winston Churchill's period as Chancellor in the Twenties is so instructive. His Budgets showed a Gladstonian ability to capture headlines even though he sometimes fell short of the Grand Old Man in fiscal rectitude.

Churchill used his first Budget in 1925 to announce the return to the gold standard. As an old free trader, one who had changed party on the issue, Churchill knew all the arguments for allowing full rein to the play of the free market. Thus, in tying sterling to gold at a fixed parity, and using high interest rates to protect it, he hoped against hope that British exports would none the less become competitive enough to permit economic recovery. He was not the last Chancellor to be disappointed.

Churchill clung stubbornly to this policy, at least in public, reserving his private barbs for his Treasury officials and for Montagu Norman, the governor of the Bank of England. Indeed in 1929 Churchill again used his Budget speech to dramatise the Treasury case. Demands for measures to tackle unemployment had now become big politics, with Lloyd George championing the public works strategy urged by John Maynard Keynes.

Instead of capitulating, Churchill's Budget speech proclaimed the orthodox 'Treasury View' in double-or-quit style. He declared that it was impossible for government action to raise the level of output in the economy as a whole.

Churchill's eloquence was not enough to stave off the final collapse of his sterling policy, which was handed on, like a time bomb, to the incoming Labour government under Ramsay MacDonald. In 1931 Britain was forced off the gold standard, thus completing an erosion of Gladstonian finance that Churchill was shrewd enough to spot. 'I was the last orthodox Chancellor of the Victorian epoch,' he commented. Moreover, as prime minister during the Second World War, he was to preside over an even more decisive shift in policy.

The 1941 Budget put up taxes to pay for the war. So far, so familiar. But it adopted an unfamiliar rationale: that of restraining domestic demand and thereby controlling inflation. A newly invented form of accounts was used, measuring national income and expenditure, not simply the Government's own revenue and outgoings. Here were the tools for a Keynesian policy of using the Budget to manage the economy as a whole. Post-war Budgets thus acquired a new dimension, with a 'Budget judgement' of how much demand to put in or take out of the economy.

Far from the old theatrical aspects of Budget day being superseded, they have continued to yield their share of melodrama. Hugh Dalton's resignation as Labour Chancellor in November 1947 directly stemmed from the ritual of the Budget. Fresh from displaying Gladstone's box to the press, Dalton prematurely confided some of its secrets to one of their number - who had expected to be told nothing more pressing than whether the Chancellor was drinking rum and milk that year. As it was, Fleet Street achieved a classic scoop. Within 40 minutes, the Star carried the story in its Stop Press column. In those days resignation was the honourable course.

In the Keynesian era of full employment after the Second World War, the government was increasingly held responsible for the state of the economy. The Budget became an instrument through which the Treasury practised fine tuning of aggregate demand, raising taxes when inflation menaced, cutting taxes when unemployment threatened. There was an annual trade-off between the two maladies and the two remedies.

In practice, of course, it was not just the business cycle but the electoral cycle that governed policy, a process which reached its apogee in the Fifties. Conservative Chancellors introduced memorable tax-cutting Budgets in 1955 and 1959. It is also memorable that both were years in which the Conservatives fought successful electoral campaigns.

Indeed, Chancellors have come to be judged by their ability to ride two cycles at once. Roy Jenkins was blamed for Labour's unexpected defeat in 1970 because, despite the improvement in economic performance under his Chancellorship, he refrained from presenting a vulgar giveaway Budget. More recently, Nigel Lawson displayed his political navety - or intellectual honesty - by timing his great tax-cutting Budget for 1988. If it was a mistake, as it now seems, it must have been an honest mistake. A cynical Chancellor would hardly have squandered his largesse the year after a general election.

It is apparent, then, that the noisy repudiation of Keynesian thinking by the Thatcher government did not mean that it abjured responsibility for macroeconomic management. A return to the age of innocence, when the Treasury simply balanced the books and washed its hands of the consequences, is impossible. Political accountability remains a key issue. As long as this is so, the annual Budget will remain central not only to government policy but to its presentation. Mr Lamont, like Mr Gladstone before him, must face the day of reckoning.

Peter Clarke is Professor of Modern British History at Cambridge University and is a Fellow of St John's College.

(Photographs omitted)