Such an approach, however, would take years. We were dealing with crises on a weekly basis during the second half of 1979 as we scanned the figures on public spending and borrowing, against the background of an international economy slipping faster and faster into recession. Our first task was to make whatever reductions we could for the current financial year, 1979–80. Ordinarily, public spending decisions were made by Government during the summer and autumn of the previous year and announced in November. Even though we were several months into the current financial year, we had to begin by reopening the public expenditure plans we had inherited from the Labour Government. We would announce our new public expenditure plans with the budget. The scope for cuts was limited, partly because of this, partly because of our own election pledges, and partly because some changes we wanted to make required legislation.
But I was determined that we should make as vigorous a start as possible and in the end we were able to announce £3.5 billion of economies along with Geoffrey’s budget.
No sooner had we agreed savings for the current year, 1979–80, than the still more difficult task was upon us of planning public expenditure for 1980–81 and subsequent years. In July 1979, when the crucial decisions were being hammered out, we had a series of particularly testing (and testy) Cabinet discussions on the issue. Our goal was what it had been in Opposition, that is to bring public expenditure back to the 1977–78 level in real terms. But in spite of the reductions we had made, public expenditure was already threatening to run out of control.
Nonetheless there was strong opposition from some ministers to the cuts. Geoffrey Howe was superbly stolid in resisting this pressure. Later in July he set out for colleagues the precise implications of a failure to agree the £6.5 billion reductions he was proposing. He also dispelled some of the misunderstandings. Ministers had to recognize that we were not cutting to the bone, but merely reining in the increases planned by Labour and compensating for other increases that the deepening recession had made almost inevitable.
Labour’s plans would have involved expenditure of a further £5 billion in 1980–81 to be financed out of growth that was not happening. Moreover, this overshoot had been aggravated by a rate of pay increase in the public sector which would cost another £4.5 billion. To offset these increasing obligations we had to make reductions of £6.5 billion in the expenditure plans for 1980–81, just to hold the PSBR in that year down to £9 billion. That figure was in itself too high. But the ‘wets’* continued to oppose the cuts both in Cabinet and in the indecent obscurity of leaks to the Guardian.
Over the summer the economic situation worsened. In September we again returned to public spending. We not only had to publish the conclusions we had agreed in July, but also our plans for the years up to 1983–84. And that meant more economies. We decided on a renewed drive to cut waste and reduce civil service numbers. We also agreed sharp increases in the price of electricity and gas (which had been artificially held down by Labour) that would come into effect in October 1980. Electricity would rise by 5 per cent, and gas by 10 per cent, over and above inflation.
The 1980–81 Public Expenditure White Paper was duly published on 1 November. These public spending plans honoured our pledges to provide more resources for defence, law and order and social security. They would also hold the public spending total for 1980–81 at the same level as 1979–80. In spite of the fact that this reduction of some £3.5 billion from Labour’s plans was denounced as draconian, it really was not large enough. That was evident not only to me, but also to the financial markets, already concerned about excess monetary growth.
Here, too, we seemed to be running up the ‘Down’ escalator. On 15 November we accordingly raised Minimum Lending Rate (MLR – the successor to Bank Rate) to 17 per cent. (Measured by the RPI, inflation at this time was running at 17.4 per cent.) Other measures to help fund the PSBR were also announced.
Of course, the Opposition had a field day, attacking our whole strategy as misguided and incompetent. The fact of the matter was not that our strategy was wrong but that we had yet to apply it sufficiently rigorously and get a grip on public spending and borrowing. That in turn was increasing the pressure on the private sector through higher interest rates.
I knew that we had to break this vicious spiral, otherwise private enterprise would have to bear a crushing burden of public sector profligacy. Geoffrey and I accordingly decided that we had no alternative but to seek further spending reductions in 1980–81 and in subsequent years. He brought forward a paper proposing an extra £1 billion reduction in 1980–81, and £2 billion in each of the following years. From what I had seen of departmental ministers’ fierce defence of their own budgets, I knew that this would provoke trouble. But I also knew that the great majority in the Party were determined to see the strategy succeed.
When Geoffrey Howe delivered his second budget on 26 March 1980, he was able to announce that we had found over £900 million in further savings in 1980–81 (though part of that was absorbed by an increase in the contingency reserve). Overall, at current prices this was over £5 billion less than Labour had planned to spend. In the circumstances, it was a formidable achievement, but also a fragile one. As the economy sank deeper into recession, there would be fresh demands, some difficult to resist, for higher public spending on programmes like social security and the loss-making nationalized industries. In a paper he wrote for me in June 1979, John Hoskyns, now head of my policy unit, had used a memorable phrase about governments ‘trying to pitch [their] tent in the middle of a landslide’. As we moved into the 1980–81 public expenditure round and the forecasts worsened, I could hear the canvas strain and the ground rumble.
The second half of 1979, though dominated by economic policy and by the intense round of diplomatic activity, was also a time darkened by terrorism. Barely a fortnight after entering No. 10 I had delivered the address at the Memorial Service for Airey Neave. Not long afterwards, IRA terrorists struck another blow.
I was at Chequers for the Bank Holiday Monday of 27 August when I learnt of the shocking murder of Lord Mountbatten and, that same day, of eighteen British soldiers. Lord Mountbatten was killed by an explosion on board his boat off the coast at Mullaghmore, County Sligo. Three other members of his party were killed and three injured.
The murder of our soldiers was contemptible. Eighteen were killed and five injured in a double explosion triggered by remote-controlled devices at Narrow Water, Warrenpoint, near Newry, close to the border with the Republic. The IRA had exploded the first bomb and then waited for those who came by helicopter to rescue their comrades before detonating the second. Among those murdered by the second bomb was the Commanding Officer of the Queen’s Own Highlanders.
I decided immediately that I must go to Northern Ireland to show the army, police and civilians that I understood the scale of the tragedy and to demonstrate our determination to resist terrorism. Having returned to London from Chequers, I stayed there on Tuesday to allow those involved to deal with the immediate aftermath while I held two meetings with colleagues to discuss the security requirements of the province. That evening I wrote personally to the families of the soldiers who had died; such letters are not easy to write. There were, alas, to be many more of them during my time in office.
I flew to Ulster on Wednesday morning. I went first to the Musgrave Park Hospital in Belfast and talked to the injured soldiers, then visited the Lord Mayor of Belfast at City Hall. I had insisted that I must meet the ordinary citizens of the city, and since the best way to do so was to walk through Belfast’s shopping centre, that is where I went next. I shall never forget the reception I received. It is peculiarly moving to receive good wishes from people who are suffering and I formed then an impression I have never had reason to revise, that the people of Ulster will never bow to violence.
After a buffet lunch with soldiers of all ranks from 3 Brigade, I received a briefing from the army and then departed by helicopter to the ‘bandit country’ of South A
rmagh. Dressed in a camouflage jacket, I saw the bomb-battered Crossmaglen RUC station – the most attacked RUC-Army post in the province – before running back to the helicopter. It is too dangerous for either security force personnel or helicopters to remain stationary in these parts.
My final visit was to Gough barracks, the RUC base in Armagh. It is difficult to convey the courage of the security forces whose job it is to protect the lives of us all from terrorism. In particular, members of the UDR, who do their military duty living in the community where they and their families are always vulnerable, show a quiet, matter-of-fact heroism which I have never ceased to admire.
Back in London, there were two major questions. How were we to improve the direction and co-ordination of our security operations in the province? And how were we to get more co-operation in security matters from the Irish Republic? On the first, we decided that the difficulties of co-ordinating intelligence gathered by the RUC and the army would be best overcome by instituting a new high-level security directorate. On the second, we agreed that I would tackle the Irish Prime Minister, Jack Lynch, when he arrived for Lord Mountbatten’s funeral.
Accordingly, we arranged a day’s talks with Mr Lynch and his ministerial colleagues at No. 10 on the afternoon of Wednesday 5 September. The first session was a tête-à-tête between the two Prime Ministers; then we were joined by our respective ministers and officials.
Mr Lynch had no positive suggestions of his own to make at all. When I stressed the importance of extradition of terrorists from the Republic, he said that the Irish constitution made it very difficult. Mr Lynch pointed out that under Irish law terrorists could be tried in the Republic for offences committed in the UK. So I asked that RUC officers – who would have to amass the evidence for such prosecutions – be able to attend interrogations of terrorist suspects in the south. He said they would ‘study’ it. I knew what that meant: nothing doing.
We also lost no opportunity to use the revulsion the killings provoked in the US to inform public opinion there about the realities of life in Ulster. The emotions and loyalties of millions of decent Irish-Americans are manipulated by Irish Republican extremists who have been able to give a romantic respectability to terrorism that its sordid reality belies. As a result, there has been a continuing flow of funds and arms which helps the IRA to continue its campaign, whereas in 1979 we were faced with the absurd situation that the purchase of 3,000 revolvers for the RUC was held up by a State Department review under pressure from the Irish Republican lobby in Congress.
I visited the province again on Christmas Eve. It made the troubles of a political life seem very trivial.
* In order to try to give a better indication of the real effect of government policies on living standards, we published from 17 August 1979 a new ‘Tax and Price Index’ (TPI) which combined, in one figure, a measure both of the tax changes and the movements in retail prices. For those dependent on earned income, who constituted the bulk of the population, this provided a better indicator of changes in total household costs than the RPI. However, for purposes of wage bargaining, the circumstances of an individual enterprise should determine what could be afforded.
* The proportion of the British workforce employed in the public sector crept inexorably upwards from 24 per cent in 1961 to reach almost 30 per cent by the time we came into office. By 1990 through privatization and other measures we had brought it down again to a level below that of 1961.
* The Griffiths Report of 1983 was the basis for the introduction of general management in the NHS, without which the later reforms would not have been practicable.
* It was only towards the end of my time in government that we embarked upon the radical reforms of the civil service which were contained in the ‘Next Steps’ programme. Under this programme much of the administrative – as opposed to policy-making – work of government departments is being transferred to agencies, staffed by civil servants and headed by chief executives appointed by open competition. The agencies operate within frameworks set by the departments, but are free of detailed departmental control. The quality of management within the public service promises to be significantly improved.
* ‘Wet’ is a public schoolboy term meaning ‘feeble’ or ‘timid’, as in ‘He is so wet you could shoot snipe off him.’ The opponents of government economic policy in the early 1980s were termed ‘wets’ by their opponents because they were judged to be shrinking from stern and difficult action. As often happens with pejorative political labels (cf. Tory, which originally referred to Irish political bandits), ‘wet’ was embraced by the opponents of our economic strategy, who in turn named its supporters ‘the dries’.
CHAPTER FIFTEEN
Into the Whirlwind
Foreign affairs during the first eighteen months in 1979–1980
MY FIRST EUROPEAN COUNCIL took place in Strasbourg on 21 and 22 June 1979.
I was confident that Chancellor Schmidt had taken away from our earlier discussions a clear impression of my determination to fight for large reductions in Britain’s net budget contribution. I was hoping he would pass the message on to President Giscard, who was to chair the summit; both men were former Finance ministers and should be well able to understand Britain’s point of view. (I could not help noticing too that they spoke to one another in English: but I was too tactful to remark on it.)
The background to the British budget problem is quickly described, though the precise details were extremely complicated. At the time of the negotiations for Britain’s accession we had received an assurance (as I would continue to remind other member states) that:
should an unacceptable situation arise within the present Community or an enlarged Community, the very survival of the Community would demand that the [Community] Institutions find equitable solutions. [my italics]
The reason why such an assurance had been necessary was that Britain’s unique trading pattern made her a very large net contributor to the EC budget – so large that the situation was indeed unacceptable. We traditionally imported far more from non-EC countries than did other Community members, particularly of foodstuffs. This meant that we paid more into the Community budget in the form of tariffs than they did. By contrast, the Community budget itself is heavily biased towards supporting farmers through the Common Agricultural Policy (CAP): indeed when we came into office more than 70 per cent of the budget was spent in this way. The CAP was – and is – operated in a wasteful manner. The dumping of these surpluses outside the EC distorts the world market in foodstuffs and threatens the survival of free trade between the major economies. The British economy is less dependent on agriculture than that of most other Community countries and our farms are generally larger and more efficient than those of France and Germany; consequently we receive less in subsidy than they do. Britain traditionally received a fairer share of the receipts of the Community’s non-agricultural programmes (such as the regional and social funds), but the growth of these programmes had been limited by the power of the farming lobby in Europe and by the international recession.
The previous Labour Government had made a great play of ‘renegotiating’ the terms of Britain’s original entry. In 1975 a Financial Mechanism to limit our contribution had been worked out in principle: but it had never been triggered, and never would be, unless the originally agreed conditions were changed. As a result, there was no solid agreement to which we could hold our Community partners.
One other development had worsened the overall position: Britain’s prosperity, relative to that of our European neighbours, had steadily declined. In spite of North Sea oil, by 1979 Britain had only the seventh highest GDP per head of population among the member states. Yet we were expected shortly to become the largest net contributor.
So from the first my policy was to seek to limit the damage and distortions caused by the CAP and to bring financial realities to bear on Community spending. But at the Council meeting in Strasbourg I also had two short-term objectives. First, I wante
d to have the budget question raised now and to gain acceptance of the need for action. Second, I wanted to secure a firm undertaking that at the next Council meeting in Dublin the Commission would bring forward proposals to deal with the problem.
If the budget issue was to concentrate minds as I wished, it had to be raised on the first day, because the communiqué is always drafted by officials overnight, ready for discussion the following morning. Over lunch I spoke to President Giscard about what I wanted and gained a strong impression that we would be able to deal with the budget early on.
But when we resumed, it quickly became clear that he was intent on following his previous agenda. At least I was well briefed and took an active part in the discussion about energy and the world economy. I pointed out that Britain had not flinched from the hard decisions required to ride out these difficulties and that we were making large cuts in public spending. By twenty minutes to seven that evening, we had decided, if we could, to hold Community imports of oil between 1980 and 1985 at a level no higher than that of 1978. We had committed ourselves to keep up the struggle against inflation. Inevitably, I suppose, we had agreed to say something about ‘convergence’ between the economic performance of member states (a classic piece of Euro-jargon). In fact, we had done almost everything except what I most wanted us to do – tackle the budget issue.
Fortunately, I had been warned what might happen next. President Giscard proposed that as time was getting on and we needed to get ready for dinner, the matter of the budget should be discussed the following day. Did the Prime Minister of the United Kingdom not agree? And so at my very first European Council I had to say ‘no’. As it turned out the lateness of the hour probably worked in my favour: conclusions are often easier to reach when time presses and minds are turning to the prospect of French haute cuisine. I spelt out the facts and it was agreed to include in the communiqué an instruction to the Commission to prepare proposals for the next Council to deal with the matter. So, a little late, we rose for dinner. Argument always gives one an appetite.
Margaret Thatcher: The Autobiography Page 37
