In general, Jim Prior was always more of a bluffer than a plotter. He saw life differently from Margaret Thatcher. He thought her leadership had created ‘the most divided Conservative cabinet ever’.17 But, apart from doing a great deal of private grumbling, he kept his head down in his department and did not foment these divisions, except when she attacked him for being too soft or too wet with the unions. For her part, she saw him as a lightweight figure. This was unfair in most people’s eyes, but not in hers. She liked to remind her inner circle that he had only received nineteen votes in the 1975 Tory leadership election. She never believed he had the fire-power to cause the slightest threat to her position. So in slow time she undermined him, marginalised him and moved him to a peripheral role in the cabinet. His last attempt to cause serious trouble was over the 1981 Budget.
THE COURAGE OF THE 1981 BUDGET
The 1981 Budget was a major turning point in the reputation of the government and of Margaret Thatcher. It did not look that way at the time, for it received one of the worst receptions of any Budget in modern times. Yet, seen with the wisdom of hindsight, this was the political event that confirmed beyond doubt that ‘The lady’s not for turning’ on economic strategy. It crushed the wets in the cabinet, and marked the end of Britain’s long and dismal record of economic decline since the early 1960s. Also it demonstrated that the Prime Minister and her Chancellor of the Exchequer deserved recognition for political courage. For it was a time when they stood alone against the prevailing opinion of the pundits, the political elite and the general populace, but they were proved right.
Just before the Christmas parliamentary recess in December 1980, Ian Gow organised a small private dinner in the House of Commons for the Prime Minister to get to know more of her new MPs. One of them asked her about the atmosphere at cabinet meetings. ‘Well, really it’s very lonely’, she replied. ‘It’s really Geoffrey and me against the rest of them.’18
This feeling of isolation grew worse. In the same pre-Christmas period she asked Brian Griffiths,† Professor of Banking at City University, to come to see her. He was one of her academic ‘voices’ on economic policy, but was unprepared for the depths of her worries. ‘Twice she came close to tears’, he recalled. ‘She felt that Geoffrey was getting it wrong, always trying to find a middle way under the influence of Treasury Keynesians like Sir Douglas Watt. She was in a despondent mood.’19
Loss of confidence in her Chancellor was increased by the gloomy news he kept reporting to her at their weekly bilaterals. In the early weeks of the New Year it emerged that all the national economic indicators were far worse than anyone had expected. The main problem was public borrowing. The high costs of subsidising the nationalised industries and of rising unemployment benefit meant that the Public Sector Borrowing Requirement (PSBR) was forecast to reach £11.5 billion. By March this forecast had increased to £14.5 billion. Margaret Thatcher had frequently proclaimed the need to cut the PSBR, but now it was soaring out of control. Would she grasp the nettle of bringing it down by higher taxation?
A new recruit to her team of advisers in January 1981 was a little-known economist, Professor Alan Walters. On his first morning at No. 10 he was given a clear signal by the Prime Minister that she thought her Chancellor’s backbone needed stiffening. ‘What should she do about Geoffrey?’ Walters recorded in his diary. ‘Who could she promote. No one. Said come and see me whenever you like.’20
Professor Walters’ proximity to the seat of power initially troubled the Chancellor, or at least his wife. ‘Elspeth clearly peeved at me being in No. 10’,21 he wrote, after a tense encounter with Lady Howe. He was an unsettling Cassandra, making good use of his access to argue that to restore prudence to the national finances, a PSBR of £10 billion was imperative, which he thought required new taxes of £4 billion. When he pressed for this at a meeting between the Chancellor and the Prime Minister on 13 February, Margaret Thatcher reacted angrily, exclaiming that she had not been elected to put up taxes. ‘Nor had I’,22 responded Sir Geoffrey Howe, but he went on in his dogged way to agree with Walters and to outline the options for raising the necessary extra taxation.
Gradually, the Prime Minister came round to the Howe–Walters view. On this occasion the Professor and the Chancellor were singing from the same hymn sheet. Another key voice was that of John Hoskyns, the head of the Prime Minister’s Policy Unit, who favoured a draconian Budget. So did the inner Treasury team of officials. But none of these advisers were elected politicians. As Margaret Thatcher tartly told Hoskyns at one point in the heated discussions: ‘It’s all very well for you. You don’t have to stand up and sell this in the House.’23
Her caution was understandable. The strategy she was about to endorse was likely to be rejected by the majority of her cabinet and by most Members of Parliament. It flew in the face of Keynesian economics and the received wisdom of pundits and commentators. Their prevailing view was that at a time of rising unemployment and deepening recession it would be politically impossible to apply the thumbscrews of higher taxation and deflation to an already depressed economy.
Margaret Thatcher saw the risks. But she continued to be swayed by Alan Walters, who convinced her that to get the economy moving out of recession the highest priority was lower interest rates, which would be impossible without lower borrowing, which could only be achieved by higher taxation. In the end this argument, backed to the hilt by Hoskyns, Howe and the Treasury, won her support. ‘Its consequences for my administration were unpredictable’, she recalled. ‘Yet I knew in my heart of hearts that there was only one right decision, and that it now had to be made.’24
Once the strategy was agreed, Geoffrey Howe implemented it with skill and courage. Instead of raising the standard rate of income tax, as the Prime Minister had accepted might be necessary, he decided to freeze all personal allowances and tax thresholds. She described this as ‘an extraordinarily bold move when inflation remained at 13 per cent’.25 Other painful measure included double-indexing the tax rates on alcohol, tobacco, cars and vehicle excise duties. Extra taxes on banks and North Sea oil companies completed a tough package, which reduced the PSBR forecast by £4 billion from £14.5 billion (6 per cent of GDP) to £10.5 billion (4.5 per cent of GDP). As a plan it was admirable for its prudence, but no one knew how it would be received politically. Shortly before the 1981 Budget was unveiled to the world, the Prime Minister confided to Alan Walters: ‘You know, Alan, they may get rid of me for this.’ But, she added, it would be a worthwhile cause. ‘At least I shall have gone knowing I did the right thing.’26
The first test of whether these apocalyptic misgivings might prove justified came on the morning of the Budget, when its details were revealed to the full cabinet. It is one of the traditions of British politics that the First and Second Lords of the Treasury (the Prime Minister and the Chancellor) keep their ministerial colleagues completely in the dark about the Budget until some three hours before it is presented to the House of Commons and the world. This secrecy is said to be essential to prevent profiteering by speculators. In 1981, secrecy was imperative to avoid a rebellion by cabinet ministers.
The chief potential rebel, although he turned out to be ineffective in this role, was Jim Prior. As a courtesy to his position, Geoffrey Howe decided to brief him on the eve of Budget day. The Secretary of State for Employment was appalled. ‘I told him [Howe] that I thought it was awful and absolutely misjudged’, recalled Prior. ‘It was far too restrictive, the PSBR was being cut by far too much, and it would add to unemployment. I couldn’t say anything bad enough about it.’27
The following morning, Prior shared his negative views with two other leading wets in the Cabinet – Ian Gilmour and Peter Walker. They talked about resigning over the Budget, but it was just talk. This was the nearest they came to a rebellion. At the cabinet meeting Prior was ‘interestingly incoherent’, according to Howe.28 But as the three musketeers neither fired a shot nor produced a strategic alternative, their revolt fizzled out wi
th barely a whimper. Led by the loyal Whitelaw, all other Ministers closed ranks behind the Chancellor and the Prime Minister. Gilmour and Prior said afterwards that they regretted not having handed in their resignations, but these were afterthoughts. At the time it was game, set and match to the Budget makers, although Alan Walters presciently noted in his diary that evening: ‘All hell breaks loose. The Wets are up in arms. We’ll have a hot summer.’29
The views of the commenting classes on the Budget were indeed hot and hostile. Geoffrey Howe was given a rough ride by Tory back-benchers at the meeting of the Finance Committee immediately after his speech. One of them, Peter Tapsell, demanded his resignation, calling the Budget ‘economically illiterate’.30
The press, from the Financial Times to the Sun, were almost as negative. The unkindest cut of all came in a letter to The Times, signed by no less than 364 economists. They forecast that the government’s policies would ‘deepen the depression, erode the industrial base of our economy and threaten its social and political stability’.31
Margaret Thatcher took not the slightest notice of these prophets of doom. She slammed the 364 economists:
Their confidence in the accuracy of their own predictions leaves me breathless. But having myself been brought up over the shop, I sometimes wonder whether they back their forecasts with their money. For I can’t help noticing that those who have to do just that – the investing institutions which have to show performance from their judgement – are giving us a very different message.32
It was a dubious argument to contrast academic economists with professional investors, but the Prime Minister, buoyed up by a rise in the stock market, and scornful toward her academic attackers, was in a mood for taking no prisoners. Mocking her critics, she trumpeted her convictions as if she was Joan of Arc issuing a call to the faithful: ‘I do not greatly care what people say about me … This is the road I am resolved to follow. This is the path I must go. I ask all who have the spirit – the bold, the steadfast, and the young in heart – to stand and join with me as we go forward.’33
This speech to the Conservative Central Council in Bournemouth three weeks after the Budget made a great impact. John Hoskyns, who sat up with her, helping her write it long into the early hours of the Saturday morning when she delivered it, believed that she was turning the Budget into a statement of her personal will power. ‘She was getting across the message that she was far tougher and stronger than anyone had thought.’34
This power of her personality changed the game. The wets were routed. The stock market was rallying. The opposition was in disarray after the formation of a new Social Democratic Party (SDP) discordantly headed by four ex-Labour cabinet ministers; Roy Jenkins, David Owen, Shirley Williams and Bill Rodgers. The only political leader who seemed to be certain where the country should be going was Margaret Thatcher. But as events were to show, she was still a vulnerable Prime Minister.
THE VULNERABLE PRIME MINISTER
Although Margaret Thatcher’s ringing enthusiasm for the 1981 Budget strategy produced some good results, such as growing City confidence, better press coverage and some early signs of increasing industrial output, negative forces were at work too. The government had to cave in to a potential miners’ strike over pit closures‡ because coal stocks were so low. Industrial action by the Civil Servants Union was ended only by an expensive pay settlement. Unemployment continued to rise towards three million.
The most troublesome problem was an outbreak of rioting, first in Brixton, South London, then in Moss Side, Manchester, and most seriously of all in Toxteth, Liverpool. The opposition and the government’s internal critics within the Conservative Party seized on the argument that the Thatcher–Howe economic policy was causing these social disturbances. The Prime Minister was having none of it. She identified with the victims. ‘Oh, those poor shopkeepers!’ was her immediate reaction on seeing the television coverage of the looting in Toxteth.35
She regarded the unrest as a police matter, and was adamant in asserting that the paramount imperatives were to stop the violence, uphold the law and punish the lawbreakers. This was right, but initially she seemed unable to express any concern for the need to look more deeply into the background to the disturbances. She delivered a disastrous party political broadcast on 8 July, in which she came across as nervous, insensitive and irrelevant. As The Times said in its leader on 10 July, ‘Not for the first time she was unable to strike the right note when a broad sense of understanding was required’.36
Michael Heseltine, hastily appointed Minister for Merseyside, wanted to reduce unemployment in the riot-torn areas with a wide-scale policy of industrial interventionism. The Prime Minister gave him a chilly reception, privately telling Alan Walters that Heseltine was ‘a very vain man – sees Toxteth as a basis for projecting himself’.37 At a meeting of the ‘E’ Committee on 15 July, Jim Prior made an impassioned plea for an extra £1 billion of public expenditure to fight unemployment.
In the middle of these tensions, the full cabinet met on 23 July to discuss the outlook for the autumn spending round. The battle lines were drawn in advance. Spending ministers had submitted bids for extra expenditure of over £6.5 billion. The Treasury put in a paper demanding further extra cuts of £5 billion in 1982–1983, over and above the already reduced totals published in a white paper at the time of the Budget. Against the background of the riots and the unemployment figures it looked as though the meeting was going to be the political equivalent of the shoot-out at the OK Corral. Margaret Thatcher knew how high the stakes were. Just before she went down from her flat to chair the cabinet, she told Denis that she would not remain as Prime Minister unless her colleagues saw the strategy through.38
Her fears of an explosive meeting were justified. After Geoffrey Howe had summarised his proposal for a programme of £5 billion of further cuts, Michael Heseltine, the Environment Secretary, led the charge against the Chancellor. Speaking after a night of fresh rioting in Toxteth, Heseltine said that Howe’s proposals would cause despair in the inner cities and bring electoral disaster for the government. He advocated a pay freeze. This would have been an astonishing U-turn. Nevertheless this heresy, striking at the root of everything that Margaret Thatcher stood for, was also supported by Peter Walker and Lord Soames. Worse was to come from the Lord Chancellor, Lord Hailsham, who spoke in doom-laden language about how in the 1930s unemployment had given birth to Herbert Hoover’s Great Depression in the United States and Hitler’s Nazi Party in Germany. Without making the same comparison, Jim Prior, Francis Pym and Ian Gilmour were almost as pessimistic about the government’s strategy.
With the temperature rising, Margaret Thatcher became ‘extremely angry’, particularly as some of her most trusted allies defected to the wets. She was astonished when John Biffen switched sides for the first time, saying that public spending should be allowed to rise. An even worse betrayal in her eyes came from John Nott, who launched a withering attack on the Treasury’s figures. ‘All at once,’ Margaret Thatcher recalled, ‘the whole strategy was at issue. It was as if tempers suddenly broke.’39
These bitter divisions brought the government to the brink of a disastrous split. Feuds with the wets had been a festering sore for over two years, but suddenly they were winning by a clear and outspoken majority. Willie Whitelaw did his best to paper over the cracks with a loyal summing up. Yet even he, after rejecting the pay freeze, gave a warning against breaking the tolerance of society.40
Margaret Thatcher had to face the reality that only she and three of her twenty-three cabinet ministers, Geoffrey Howe, Keith Joseph and Leon Brittan, the new Chief Secretary to the Treasury, fully supported her economic strategy. She closed the cabinet on a subdued note, instructing the Chancellor to produce a new paper setting out both sides of the argument. She made a fervent plea for secrecy, particularly about a pay freeze being discussed. She retired from the fray as a wounded Prime Minister. Her wounds hurt. The late summer of 1981 was the lowest point of her time in 1
0 Downing Street, apart from the dark days when she was ousted from power some nine years later.
Throughout August she had forebodings of a serious threat to her position, discussing it melodramatically with trusted members of her inner circle. ‘The men in grey suits have been to see me’, she told Tim Bell, describing how a deputation of party elders led by Lord Thorneycroft had come to give her a warning that support for her policies was collapsing. ‘They want me out.’41
In similar vein, she gave a gloomy vision of her future employment prospects to her Economic Affairs Private Secretary, Michael Scholar: ‘I can always get a job’, she told him. ‘I can always scrub floors. And I will if they kick me out.’42
This wild talk worried her staff. Her closest personal aide, Caroline Stephens, asked Ronnie Millar to come in and talk about the Prime Minister’s ‘physical and mental exhaustion, harsh public image and alienation from her friends’.43 Millar was usually a soothing presence. But he evidently felt so upset about his heroine’s prospects that he co-authored with John Hoskyns and David Wolfson a blistering private submission to her, entitled ‘Your Political Survival’. This passed into folklore as ‘The blockbuster memorandum’.44 It had a profound effect on Margaret Thatcher.
BLOCKBUSTERED INTO RESHUFFLING THE CABINET
The blockbuster memorandum offended Margaret Thatcher. This was understandable, since it was probably the most brutal internal communication ever sent to any Prime Minister from members of the No. 10 Downing Street staff. Yet, although many of its words were personally offensive, their message was politically effective. It made disagreeable reading, but it resulted in Margaret Thatcher taking decisive steps to achieve the objective of its title, ‘Your Political Survival’.
The headlines on the various sections of the memo must have come as a shock to her. They included these statements:
Margaret Thatcher: Power and Personality Page 40
