On the morning after polling day in early May 1979, speaking to reporters, Margaret Thatcher quoted St Francis of Assisi: ‘Where there is discord, may we bring harmony. Where there is error, let me bring truth. Where there is doubt, let me bring faith. Where there is despair, let me bring hope.’ It was as if she was heralding a new era of calmness, consensus and agreement. It was to be the very opposite.
In May 1979, there was no such thing as Thatcherism. Four years later, it had established itself as an economic and political ideology, much of which was to be copied the world over. Yet Thatcher was never really an original thinker. She was a veritable magpie of ideas, picked up over the years from economic gurus such as Friedrich Hayek, Keith Joseph, Alfred Sherman, Madsen Pirie and Ralph Harris. In essence, though, many of the ideas she sought to implement in May 1979 were barely different from those articulated in the free market, forward looking manifesto which Edward Heath went to the country with in June 1970.
It is important to realise that people didn’t vote Conservative in 1979 because they were enthusiastic about Conservative economic policies. The Conservatives won because they were tired of the strikes and economic mismanagement that had occurred under Labour. They just wanted something different, and that is exactly what they got.
Things did not go smoothly initially. Sir Geoffrey Howe’s first budget, delivered only a matter of weeks after the election was nothing if not radical, and gave a firm indication of the direction of travel. Firstly, the hugely unpopular Exchange Controls, which restricted the amount of money anyone could take out of the country, were abolished at a stroke.
But if the aim of the new government was to continue to reduce inflation and public expenditure, it was perhaps rash to commit to adhere to the recommendations of the Clegg Commission on public sector pay. At a stroke the bill for public sector wages increased by 25 per cent within a year. In his budget, the chancellor, in order to cut income tax from 33p to 30p at the basic rate, and from 83p to 60p at the higher rate, he had to almost doubled the rate of VAT to 15 per cent, another move which boosted inflation. Within a year of being elected the inflation rate had shot up from 10.1% to 21.9 per cent. Left of centre economics commentator William Keegan wrote: ‘This extraordinarily lax attitude towards the inflationary implications of Clegg may in part be explained by the belief of the evangelicals that in monetarism they had found the Holy Grail. It also owed much to the reaction against incomes policies… If you controlled the money supply, you controlled inflation. That was all that mattered’.
The conventional wisdom was that the level if unemployment was equally, or far more important. That had been the case since the horrific levels of unemployment experienced in the 1930s. Although the Conservatives had slammed Labour’s record on unemployment, citing the fact that whenever Labour left office they left unemployment higher than when they had formed a government. Thatcher’s opponents in her own cabinet warned her that much higher levels of unemployment were inevitable if she continued with the monetarist policies she continued to espouse. Indeed, within a year, unemployment was up to two million and showed no signs of stopping there. Having said that, John Biffen had predicted ‘three years of unrivalled austerity’.
The Cabinet dividing lines were clear, almost from the beginning.
For the supporters of Margaret Thatcher in the Cabinet – and there still weren’t many – reducing public spending, and thereby the Public Sector Borrowing Requirement (PSBR) was of primary importance. Reduce this, by definition you reduce the money supply. This theory was rejected by all traditional Keynesian economists, 364 of whom wrote to The Times in March 1981 following the budget, protesting at the measures Sir Geoffrey Howe had taken to bring public expenditure under control.
By the middle of 1980 there were few signs that things were beginning to look brighter on the economic front. There was yet another oil crisis and Sterling had risen to its highest level for many years, despite the abolition of exchange controls. This hit exports badly and partly down to this, output was falling like a stone. Investment decisions were being delayed down to ever increasing interest rates, which by mid 1980 had reached 17% for short term borrowing. All bets were being placed on the money supply based Medium Term Financial Strategy (MTFS).
The next three years were all about bringing inflation under control, and they were three very uncomfortable years for many Tory politicians, some of whom started to lose their collective nerve and confidence in the MTFS. This was exacerbated by the complete, and possibly deliberate, monetary policy followed by the Bank of England. In 1980 there was a target of increasing the money supply by 9%. In July and September alone it increased by 8%. Mrs Thatcher hit the roof and carpeted the Governor, Gordon Richardson. It was to little avail. In response she recruited the hardline monetarist Professor Alan Walters as her personal economic adviser. It was an appointment that was to have severe political consequences later in the decade.
Few had any hope or expectation that things would come right, and these fears were heightened by the draconian measures announced by Sir Geoffrey Howe in his 1981 budget. It involved huge public spending cuts, way beyond anyone in the Cabinet was expecting. When the budget was presented to the Cabinet, on the morning of the day it was delivered to the House of Commons, there were gasps of collective shock around the Cabinet table. The PSBR was the be all and end all. The CBI had lobbied for it to be £15 billion. Treasury civil servants thought it should be lower than that but didn’t go along with Treasury political advisers and ministers, including the Chancellor who thought it should be as low as possible. In the budget he announced a reduction in the current PSBR of £13.5 billion to £10.5 billion. Hence the gasps around the Cabinet table that morning. But it was too late. The die was cast.
March 10 1981 proved to be a seminal date in the history of the Thatcher government’s first term. Budget day. It was also the day when the ‘wets’ in the Cabinet were effectively vanquished.
A few months later, in July 1981 the Chancellor came back for £5 billion of public spending cuts. This was too much for several of the ‘wets’ in the Cabinet to stomach and they revolted. The revolt did not last long. Jim Prior had been reshuffled to Northern Ireland. Mark Carlisle, Ian Gilmour, Christopher Soames and Norman St John Stevas were all sacked. In came Nigel Lawson, Norman Tebbit and Cecil Parkinson, all (for the moment at least) devoted Thatcher supporters.
On the plus side, both the Pound and interest rates came down, but the further squeeze on public spending continued to suppress domestic demand
Despite a 5% fall in GDP between 1979 and 1981, 1982 saw the start, albeit gradual of a return to growth. At the same time, consumer spending started to grow again, as had real incomes. Inflation had been cut to 4-5%, the PSBR was down to £7.5 billion, but the fly in the economic ointment continued to be unemployment, which by the time of the June 1983 general election had climbed to 11.4% of the working age population. It didn’t start coming down until the third quarter of 1984. By the time Margaret Thatcher left office in 1990 it had fallen to 7.6%.
At this point, it might be wise to mention two other issues which had a major impact on the economy both in the short and long terms.
North Sea oil tax revenues started to come in in meaningful amounts in the early 1980s and were used to cut the PSBR. In Norway, these revenues were used to start a Sovereign Wealth Fund, a long term aim which is benefiting the Norwegian economy today. Short term gains were considered more important by the Thatcher government. Between 1979 and 1984 the share of GDP which came from North Sea oil tax revenues rose from 1% to 3%, although by 1990 it had fallen back to under 1%.
The sale of council houses had been the standout announcement in the 1979 Conservative manifesto. Under the Right to Buy legislation 935,000 council houses were sold off during the period of the Thatcher government. As I write there are still around 18,000 sales a year. Revenues turned out to be far greater than expected but rather than go to local councils, all the money went to HM Treasury, with 25% being returned to the councils. Between 1980 and 2021 it is estimated that £47 billion was paid into Treasury coffers through Right to Buy. The scheme was in many ways an outrageous success. It enabled many thousands of people to achieve something they had never considered was within their reach – that of home ownership. Whole council estates were transformed as people felt more invested in the place they called home. In the 1983 and 1987 elections the Conservatives were richly rewarded in terms of votes from the so-called C2s and D2s. I well remember being at the count in the Labour marginal seat of Norwich North in June 1983 and watching the Conservative votes pouring out of the ballot boxes from the Mile Cross estate, one of the so-called ‘roughest’ in the whole city. Half the seat’s electorate lived on council estates. The Conservatives took the seat with a majority of more than 5,000 and retained it until 1997. This was repeated all over the country, as Mrs Thatcher headed to a landslide majority of 144.
The economy started to grow faster as did real incomes for those in work. Inflation bobbed around and only became a bigger problem towards the end of her tenure, mainly due to the over expansionist policies of Nigel Lawson, who replaced Sir Geoffrey Howe as Chancellor after the 1983 election. His main achievement was to cut the basic rate of income tax from 30p to 25p in the Pound over a period of six years. He also cut the top rate from 60p to 40p. He was a radical, reforming Chancellor, even if eventually he fell from Margaret Thatcher’s favour over when Britain, or if, it should join the European Exchange Rate Mechanism.
Lawson oversaw the privatisation of huge swatches of the nationalised industries. Denationalisation, as it had up until then been called, barely featured in the 1979 manifesto. Indeed, in the first term of Margaret Thatcher’s government, Transport Secretary Norman Fowler took the National Freight Consortium and the British Transport Docks Board (which became the hugely successful Associated British Ports) into the private sector, and there were a few other privatisations like Cable and Wireless, British Aerospace, Britoil, British Rail Hotels and Amersham International, but these were small beer for what was to follow over the next seven years, and indeed then under John Major.
The 1983 manifest unveiled promises to privatise 51% of British Telecom, Rolls Royce, British Airways and substantial parts of British Steel, British Shipbuilders and British Leyland, and various national and regional airports.
Overall, it was privatisation that changed the British economy more than any other policy introduced during the Thatcher era. Indeed, it was a policy which was exported all over the world, with British pioneers of privatisation being in great demand to teach other governments how to do it, not least in post communist eastern Europe. Even left of centre governments like those in New Zealand under David Lange and Roger Douglas, and in Australia under Bob Hawke and Paul Keating embraced the concept.
The 1980s was a radical decade which saw huge changes in the British economy, most of them as a direct result of Margaret Thatcher’s governments’ economic policies. Thirty five years on, most of them are still in place to one degree or another. Few were tinkered with by Tony Blair or Gordon Brown, and although he might have removed Margaret Thatcher’s portrait from Number 10, Keir Starmer, at least at the time of writing, shows little sign of reversing any of the Thatcher economic settlement.
Margaret Thatcher by Iain Dale is published by Swift Press in hardback at £16.99.
