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Chancellor of the Exchequer (1852–1855)

In 1852, following the appointment of Lord Aberdeen as prime minister, head of a coalition of Whigs and Peelites, Gladstone became Chancellor of the Exchequer. The Whig Sir Charles Wood and the Tory Disraeli had both been perceived to have failed in the office and so this provided Gladstone with a great political opportunity.

His first budget in 1853 almost completed the work begun by Peel eleven years before in simplifying Britain's tariff of duties and customs. 123 duties were abolished and 133 duties were reduced. The income tax had legally expired but Gladstone proposed to extend it for seven years to fund tariff reductions:

We propose, then, to re-enact it for two years, from April 1853 to April 1855, at the rate of 7d. in the £; from April 1855, to enact it for two more years at 6d. in the £; and then for three years more... from April 1857, at 5d. Under this proposal, on 5 April 1860, the income tax will by law expire.

Gladstone wanted to maintain a balance between direct and indirect taxation and to abolish income tax. He knew that its abolition depended on a considerable retrenchment in government expenditure. He therefore increased the number of people eligible to pay it by lowering the threshold from £150 to £100. The more people that paid income tax, Gladstone believed, the more the public would pressure the government into abolishing it. Gladstone argued that the £100 line was "the dividing line... between the educated and the labouring part of the community" and that therefore the income taxpayers and the electorate were to be the same people, who would then vote to cut government expenditure.

The budget speech (delivered on 18 April), nearly five hours long, raised Gladstone "at once to the front rank of financiers as of orators". H.C.G. Matthew has written that Gladstone "made finance and figures exciting, and succeeded in constructing budget speeches epic in form and performance, often with lyrical interludes to vary the tension in the Commons as the careful exposition of figures and argument was brought to a climax". The contemporary diarist Charles Greville wrote of Gladstone's speech:

... by universal consent it was one of the grandest displays and most able financial statement that ever was heard in the House of Commons; a great scheme, boldly, skilfully, and honestly devised, disdaining popular clamour and pressure from without, and the execution of it absolute perfection. Even those who do not admire the Budget, or who are injured by it, admit the merit of the performance. It has raised Gladstone to a great political elevation, and, what is of far greater consequence than the measure itself, has given the country assurance of a man equal to great political necessities, and fit to lead parties and direct governments.

During wartime, he insisted on raising taxes and not borrowing funds to pay for the war. The goal was to turn wealthy Britons against expensive wars. Britain entered the Crimean War in February 1854, and Gladstone introduced his budget on 6 March. He had to increase expenditure on the military and a vote of credit of £1,250,000 was taken to send a force of 25,000 to the front. The deficit for the year would be £2,840,000 (estimated revenue £56,680,000; estimated expenditure £59,420,000). Gladstone refused to borrow the money needed to rectify this deficit and instead increased income tax by half, from sevenpence to tenpence-halfpenny in the pound (from 2.92% to 4.38%). By May another £6,870,000 was needed for the war and Gladstone raised the income tax from tenpence halfpenny to fourteen pence in the pound to raise £3,250,000. Spirits, malt, and sugar were taxed to raise the rest of the money needed. He proclaimed:

He served until 1855, a few weeks into Lord Palmerston's first premiership, and resigned along with the rest of the Peelites after a motion was passed to appoint a committee of inquiry into the conduct of the war.