Margaret Thatcher: The Autobiography

by Margaret Thatcher

  This was not, of course, the end of the story for BL. In due course, it would be shown that the changes in attitude and improvements in efficiency achieved were permanent. To that extent, the account of our policy in 1979–81 towards BL is one of success. But the huge extra sums of public money that we were forced to provide came from the taxpayer, or through higher interest rates needed to finance extra borrowing, from other businesses. And every vociferous cheer for higher public spending was matched by a silent groan from those who had to pay for it.

  * Notes and coins are included in all the monetary measures. But since the great majority of transactions in the economy are not conducted in cash, but in transferring claims on the banking system (e.g., writing cheques), most measures also include some part of total bank deposits. Wider measures often include the deposits of other financial institutions such as building societies. £M3 comprises notes and coins in circulation with the public, together with all sterling deposits (including certificates of deposit) held by UK residents in both public and private sectors. The argument about which is the best measure continues, though a misplaced obsession with the exchange rate has since rather put such argument into the shade.

  * The report was damning. SLADE had been using its strength in the printing industry to recruit among freelance artists, photographic studios and advertising agencies by threatening to ‘black’ the printing of their work unless they joined the union. The report concluded that the campaign ‘was conducted without any regard whatever to the feelings, interests, or welfare of the prospective recruits’.

  * The Ryder Plan, dating from 1975, proposed the investment by government in phases over seven years of £1.4 billion to modernize BL plant and introduce new models.

  CHAPTER SEVENTEEN

  Not for Turning

  Politics and the economy in 1980–1981

  AT 2.30 ON THE AFTERNOON of Friday 10 October 1980 I rose to address the Conservative Party Conference in Brighton. Unemployment stood at over two million and rising; a deepening recession lay ahead; inflation was far higher than we had inherited, though falling; and we were at the end of a summer of government leaks and rifts. The Party was worried, and so was I. Our strategy was the right one, but the price of putting it into effect was proving so high, and there was such limited understanding of what we were trying to do, that we had great electoral difficulties. However, I was utterly convinced of one thing: there was no chance of achieving that fundamental change of attitudes which was required to wrench Britain out of decline if people believed that we were prepared to alter course under pressure. I made the point with a line provided by Ronnie Millar:

  To those waiting with bated breath for that favourite media catchphrase, the ‘U-turn’, I have only one thing to say. ‘You turn if you want to. The lady’s not for turning.’ I say that not only to you, but to our friends overseas – and also to those who are not our friends.

  The message was directed as much to some of my colleagues in the Government as it was to politicians of other parties. It was in the summer of 1980 that my critics within the Cabinet first seriously attempted to frustrate the strategy which we had been elected to carry out – an attack which reached its climax and was defeated the following year. At the time that I spoke many people felt that this group had more or less prevailed.

  Battle was to be joined over the next two years on three related issues: monetary policy, public spending and trade union reform.

  The most bitter Cabinet arguments were over public spending. In most cases those who dissented from the line which Geoffrey Howe and I took were not merely intent on opposing our whole economic strategy as doctrinaire monetarism; they were trying to protect their departmental budgets. It had soon become clear that the public expenditure plans announced in March 1980 had been far too optimistic. Local authorities, as usual, were overspending; and the recession was proving deeper than expected, increasing spending on unemployment and other benefits. Government borrowing for the first quarter of 1980 looked like being very large. In addition, Francis Pym, Defence Secretary, was pressing for an increase in the Ministry of Defence (MoD) cash limit.

  The debate continued inside and outside government. The ‘wets” central message was always the same: spend and borrow more. They used to argue that we needed extra public spending on employment and industrial schemes, over and above what we had planned and were effectively forced to spend simply as a result of the recession. But this did not escape from the fact that extra public spending – whatever it was spent on – had to come from taxes levied on private individuals and industry; or borrowing, pushing up interest rates; or printing money, setting off inflation.

  These basic differences between us came out clearly at the public spending Cabinet on 10 July 1980. Some ministers argued that the PSBR should be allowed to increase to accommodate the huge new requirements of the loss-making nationalized industries. But the PSBR was already far too high and the higher it went, the greater the pressure to raise interest rates in order to persuade people to lend the Government the necessary funds. At a certain point – if pushed too far – there would be the risk of a full-scale government funding crisis – that is, when you cannot finance your borrowing from the non-banking sector. We could not risk going further in that direction.

  The defence budget was a special problem. We had already accepted the NATO commitment for annual 3 per cent real increases in our defence spending. This had the obvious merit of demonstrating to the Soviets our determination to prevent their winning the arms race on which they had embarked, but in other respects it was unsatisfactory. First, it meant that the MoD had little incentive to get value for money in the hugely expensive equipment it purchased. Second, the 3 per cent commitment meant that Britain, spending a substantially higher proportion of its GDP on defence than other European countries and going through a peculiarly deep recession, found herself bearing an unfair and increasing burden; and by the end of 1980 the MoD had overspent its cash limit because, with the depressed state of industry, suppliers had fulfilled government orders faster than expected.

  As we moved into the winter of 1980 the economic difficulties accumulated and the political pressure built up. On Wednesday 3 September Geoffrey Howe and I met to discuss the monetary position. Measured in terms of £M3, the money supply had been rising much faster than the target we had set in the MTFS at the time of the March budget. It was hard to know how much of this was the result of our removing exchange controls in 1979 and our decision in June to remove the ‘corset’ – a device by which the Bank of England imposed limits on bank lending. Money analysts argued that both of these liberalizations had misleadingly bloated the £M3 figures.*

  Of course, we never just looked at monetary figures to gauge what was happening. We also looked at the real world around us. And what we saw told a somewhat different tale from the high £M3 figures. Inflation had slowed down markedly, particularly prices in the shops where competition was intense. Sterling was very strong, averaging just below $2.40 during the second half of 1980. And here the crucial issue was whether the high exchange rate was more or less an independent factor bringing down inflation, or rather a result of the monetary squeeze being tighter than we intended and than the £M3 figures suggested.

  Some of my closest advisers thought the latter. Professor Douglas Hague sent me a paper in which he described our policies as ‘lopsided’: first, they were bearing down more heavily on the private than the public sector (which I knew to be true), and second, they were putting too much emphasis on controlling the money supply and too little on controlling the PSBR, with the result that interest rates were higher than they should have been. (I also came to share this view over the next year.) In the summer of 1980 I consulted Alan Walters, who was to join me at the beginning of 1981 as my economic policy adviser at No. 10. Alan’s view was that the monetary squeeze was too tight and that it was the narrowest definition of ‘money’, known as the monetary base, which was the best, indeed the only reliable
, star to steer by.

  If there was uncertainty about the monetary position at this time, there was none about the trend in public spending, which was inexorably upwards. In September, Geoffrey Howe sent me a note elaborating on the warning he had already given to Cabinet about public expenditure. The increases required for the nationalized industries, particularly BSC, would require larger cuts in programmes than those agreed in July in order to hold the total. To the extent that more was provided, as the Cabinet wished, for industrial support and employment, the corresponding cuts would need to be larger still. The fifth public expenditure round in sixteen months was bound to prompt squeals of indignation: and so it proved.

  Geoffrey and I decided not to take the whole matter to Cabinet cold, as it were, so I called a meeting of key ministers to go into it first. The Chancellor described the position and outlined the arithmetic.

  Our plan succeeded. Without too much grumbling, the Cabinet of 30 October endorsed the strategy and confirmed our objective of keeping public spending in 1981–82 and later years broadly at the levels set out in the March White Paper. This meant that it would be necessary to make cuts of the order of magnitude proposed by the Treasury – though even with these reductions we would be forced to increase taxes if we were to bring the PSBR down to a level compatible with lower interest rates.

  Much stronger Cabinet opposition surfaced when we began to look at the decisions required to give effect to the strategy which had been endorsed. The ‘wets’ now claimed that they lacked sufficient information to judge whether the overall strategy was soundly based. In effect, spending ministers were trying to behave as if they were Chancellors of the Exchequer. It would be a recipe for complete absence of spending control and thus for economic chaos.

  The Autumn Statement on 24 November 1980, therefore, contained some highly unpopular measures. Employees’ National Insurance Contributions had to go up. Retirement pensions and other social security benefits would be increased by 1 per cent less than the rate of inflation next year if they turned out to have risen by 1 per cent more in the present year. There were cuts in defence and local government spending. It was announced that a new supplementary tax would be introduced on North Sea oil profits. However, there was some good news: further employment measures – and a 2 percentage point cut in the MLR.

  Few members of the public are experts in the finer matters of economics – though most have a shrewd sense when promises do not add up. By the end of 1980 I began to feel that we risked forfeiting the public’s confidence in our economic strategy. Unpopularity I could live with. But loss of confidence in our capacity to deliver our economic programme was far more dangerous. And the very last thing I could afford was well-publicized dissent from within the Cabinet itself. Yet this was what I now had to face.

  The economic and public expenditure discussions of 1980 repeatedly found their way into the press; decisions came to be seen as victories by one side or the other and Bernard Ingham told me that it was proving quite impossible to convey a sense of unity and purpose in this climate. During 1980 the public was treated to a series of speeches and lectures by Ian Gilmour and Norman St John Stevas on the shortcomings of monetarism, which, according to them, was deeply un-Tory – though they usually took care to cover themselves against charges of disloyalty by including some fulsome remarks praising me and the Government’s approach.

  Industrial leaders helped worsen the general impression of disarray: in the same month the new Director-General of the CBI was promising ‘a bare knuckle fight’ over government policies, though when I met the CBI shortly afterwards I am glad to say that knuckles were not in evidence. Then in December Jim Prior was reported as urging us not to use the language of the ‘academic seminar’. But perhaps the most astonishing remark was John Biffen’s widely reported admission to the Conservative Party Parliamentary Finance Committee that he did not share the enthusiasm for the MTFS, which he – the Chief Secretary to the Treasury – was trying, with singularly little success, to apply in the field of public expenditure.

  I decided that it was time to reshuffle the Cabinet. On Monday 5 January I made the changes, beginning with Norman St John Stevas, who left the Government. I was sorry to lose Norman. He had a first-class brain and a ready wit, but he turned indiscretion into a political principle. The other departure, Angus Maude, had employed his own sharp wit in my support but he felt that it was time to give up the job as Paymaster-General to return to writing. I moved John Nott to Defence to replace Francis Pym, convinced that someone with real understanding of finance and a commitment to efficiency was needed in this department. I moved John Biffen to replace John Nott at Trade, and at Geoffrey Howe’s request appointed Leon Brittan as Chief Secretary. Leon was enormously intelligent and hard-working and he had impressed me with the sharpness of his mind. Two very talented new Ministers of State came into the Department of Industry to support Keith Joseph: Norman Tebbit and Kenneth Baker. Norman was totally committed to our policies, shared much of my own outlook and was a devastating Commons in-fighter. Ken was given special responsibility for Information Technology, a task in which he showed his talents as a brilliant presenter of policy. Francis Pym took over the task of disseminating government information, which he combined with the position of Leader of the House of Commons. But the first half of this appointment was to prove a source of some difficulty in the months ahead.

  I shall never forget the weeks leading up to the 1981 budget. Hardly a day seemed to go by without the financial scene deteriorating in some way. Alan Walters, who had now joined me at No. 10, argued for a larger cut in the PSBR than Geoffrey Howe was proposing. He also believed that the way in which the monetary policy was conducted was defective. But the Treasury were not prepared to move to the system of monetary base control which Alan favoured and to which I was attracted.

  And this was much more than a technical disagreement. Alan Walters, John Hoskyns and Alfred Sherman had suggested that Professor Jurg Niehans, a distinguished Swiss monetary economist, should prepare a study on our monetary policy for me. Professor Niehans’s report had a clear message. It was that North Sea oil had probably not been a major factor in sterling’s appreciation; rather, tight monetary policy had caused the pound to rise so high, imposing such pressure on British industry and deepening the recession. The report argued that we should use the monetary base rather than £M3 as the main monetary measure and suggested that we should allow it to rise in the first half of 1981. In short, Professor Niehans thought monetary policy was too tight and should quickly be loosened. Alan emphatically agreed with him.

  My doubts at this time about the Treasury’s conduct of monetary policy, however, were more than matched by the concern I felt at the steady growth in its estimates of the PSBR – the target by which we steered our fiscal policy. The trend of PSBR forecasts was upwards. The likelihood was that we would budget for too low a reduction in the PSBR, as we had in 1980–81. To repeat that mistake would either force us to introduce an additional budget in late summer or autumn, or put great strains on the funding of Government borrowing. In the last resort it might lead to a funding crisis, and it would certainly force us to increase interest rates, keeping sterling high and increasing the already severe squeeze on the private sector. We had to avoid such an outcome. What we needed was a budget for employment.

  On Friday 13 February I had a further meeting with Geoffrey Howe. Alan Walters was also present. The latest forecast for the PSBR was between £13.5 billion and £13.75 billion. The tax increases Geoffrey was proposing would reduce it to something between £11.25 billion and £11.5 billion, but he did not believe it was politically possible to go below £11 billion. But Alan argued strongly that the PSBR should be lower still. He told us that a PSBR of, say, £10 billion would be no more deflationary than one of £11 billion because the latter would actually be worse for City expectations and for interest rates. Alan concluded by arguing that we had no alternative but to raise the basic rates of income tax by 1 or 2 per
cent.

  Alan was the economist. But Geoffrey and I were politicians. Geoffrey rightly observed that introducing what would be represented as a deflationary budget at the time of the deepest recession since the 1930s, via an increase in the basic rate, would make it a political nightmare. I went along with Geoffrey’s judgement about the problems of raising income tax, but without much conviction, and as the days went by my unease grew.

  When Geoffrey and I had our next budget meeting on 17 February, he said that he was now prepared to contemplate a basic rate increase. But his concern was whether it might not be better to raise the basic rate of income tax by 1 per cent and personal allowances by about 10 per cent, thus reducing the burden on people below average earnings. I confirmed that I was prepared to contemplate this, but I also told him that I was coming to the view that it was essential to get the PSBR below £11 billion.

  My advisers – Alan Walters, John Hoskyns and David Wolfson – continued to argue for this much lower PSBR with great passion. Keith Joseph also strongly backed this view. Alan, who knew that he could always have access to me more or less when he wished – as in my view any really close adviser should if a Prime Minister is not to be the prisoner of his (or her) in-tray – came in to my study to have one last attempt to get me to change my mind about the budget. I know today that he went away still believing that I was not persuaded. Yet I knew in my heart of hearts that there was only one right decision, and that it now had to be made.

  Geoffrey Howe and I, with Douglas Wass, the Treasury’s Permanent Secretary, met for a further discussion of the budget on the afternoon of Tuesday 24 February. Geoffrey still envisaged a PSBR for 1981–82 of £11.25 billion. I said that I was dismayed by such a figure and that I doubted whether it would be possible to cut interest rates, which we badly needed to do, unless Government borrowing was reduced to a figure around £10.5 billion. I said that I was even prepared to accept a penny on the standard rate.