Pursuing the subject of pay, Jim Prior submitted a memorandum recommending early talks between the government and the TUC and, separately, the government and the CBI, to consider ‘objectives’. Beside this, Mrs Thatcher wrote, ‘No.’ Prior also urged that the Clegg Commission be allowed to continue its work after it had next reported. ‘We simply cannot take the required decisions on a flimsy paper like this,’ Mrs Thatcher scrawled.9 At her request, it was taken off the Cabinet agenda. The main forum of discussion was moved from the full Cabinet to E Committee, with a memo from the Chancellor to be used as the basis for discussion. This memo, however, fared little better. In it, Geoffrey Howe recommended that the government should await the completion of the Clegg round in August and then ‘take stock’ before deciding how much Rate Support Grant (RSG) should be paid to the local authorities (‘i.e. follow the settlements!’ wrote Mrs Thatcher derisively). Once that decision had been made, he said, ‘the local authorities would themselves be left to negotiate without interference.’ ‘This is a mistake,’ Mrs Thatcher noted. ‘He who pays the piper must have some say in calling the tune.’10 As for comparability itself, Howe argued that the whole question of whether it should be a permanent feature of pay bargaining should be left open until after the end of the Clegg round.
Howe also canvassed the subject of some kind of economic and industrial forum after which he still hankered, and to which the Tories were, vaguely, committed. Although he rejected the idea that such a body should be used to set pay norms or limits, he went on, ‘The question is whether it [a forum] would be useful in conveying better public understanding of the processes and prospects of the economy’.11 The TUC must not be given a platform for formal confrontation, Howe argued, but there should be ‘informal contacts’ with union leaders. As time passed, the concept of the forum became weaker and weaker.* The Chancellor sought endorsement from Cabinet colleagues of the principles contained in his first three paragraphs. ‘There aren’t any principles in those paras,’ wrote Mrs Thatcher crossly, and she covered the document with a note which said, ‘This is a very poor paper and we can only charitably assume that the Treasury is “otherwise occupied” at the present … we certainly cannot wait until Clegg has finished all his work.’12 On 31 May 1979, having effectively gatecrashed a meeting originally planned for Professor Clegg and Prior alone, Mrs Thatcher told Clegg that he should add considerations of efficiency and overmanning to his remit. When he objected that this would be impossible, ‘The Prime Minister said that she was very disappointed to hear what Professor Clegg had to say about efficiency. This only confirmed her fears that the commission’s first reports would produce inflationary settlements. She asked Professor Clegg to consider the implications for the future reputation of the Commission.’13
The matter in which the Treasury was ‘otherwise occupied’ was the Chancellor’s first Budget. Mrs Thatcher was determined not to repeat the mistake of the Heath government which, coming into office in June 1970, had waited until the customary time the following spring before presenting its first Budget. The same applied to public spending, which the government was determined to cut even though the spending year had already begun. The date of 12 June was chosen for the Budget, so there was great haste.
Before this, however, there had to be a Queen’s Speech, with its announcement of the legislative programme. In preparing this programme, Mrs Thatcher revealed how, despite having firm objectives and a clear philosophy to govern its approach, her government did not yet have an agreed strategy. This was visible in the matter of the Price Commission, a statutory body whose attempt to control prices artificially contradicted Thatcherite principles. On his first day at work, the new Trade Secretary, John Nott, wrote to Mrs Thatcher to urge immediate abolition. Mrs Thatcher, though she did not put it in so many words, was worried about the sudden effect on the RPI. She noted, on a letter from her private secretary:
I must tell you at the outset that I favour metamorphosis rather than extinction. The two main purposes of our strategy are
i. to restore incentives by direct tax cuts and consequently to tolerate indirect tax increases and
ii. to establish credibility and authority by the necessary amendments to trade union law. It would be unwise to jeopardise these objectives.
Finally decisions reached in haste tend to be repented later.14
This version of her own strategy was strangely partial, leaving out the attack on inflation and on public spending. It was also, at least as she applied it to the Price Commission, abandoned. Keith Joseph intervened in support of Nott and immediate abolition was agreed at E Committee on 14 May. In her memoirs, Mrs Thatcher writes: ‘Perhaps the first time our opponents truly realised that the Government’s rhetorical commitment to the market would be matched by practical action was the day we announced abolition.’15 This is correct, but at the time her confusion about what to do in which order had come close to preventing it.
At the State Opening of Parliament, in which the Commons are summoned to wait upon the Queen in the House of Lords, Mrs Thatcher, in a white hat, set a new tone of smartness. She was seen, as MPs sat waiting for Black Rod to call them to the Upper House, brushing specks of scurf from Norman St John-Stevas’s collar. On 15 May, she led the debate on the Loyal Address in the Commons. In political terms, her words were combative. This had been, she said, ‘a watershed election’,16 in which a clear choice had been made in favour of the individual and against government. She gleefully quoted the right-wing Labour ex-minister Bill Rodgers* who had declared: ‘Above all the Labour Party has let the idea of freedom be filched.’ Commenting on the unhappy state of inner cities, she blamed municipal socialism: ‘where one finds poverty in inner cities, there one finds that socialist government has operated for many years.’17 Mrs Thatcher announced the quick abolition of the Price Commission. She ordered the National Enterprise Board to dispose of its holdings in profitable companies. Inter-city coach services were to be deregulated, immigration controls tightened. She promised a Bill to give tenants the right to buy their council house and the introduction of a new shorthold tenure to liberalize the private rented sector. And she foreshadowed what was later called the Assisted Places Scheme, which would pay for talented state school pupils to be educated in independent schools. There was the hint of compromise about the future of Rhodesia, and a hint of confrontation over the EEC budget. The increases in police and armed services pay, promised in the election campaign, were presented as the defence of ‘freedom under the law’ and justified because ‘security is essential to our survival as a free nation’. Their implications for the public purse were not discussed.
Treating the subject of trade unions ‘under the heading of the rule of law’, Mrs Thatcher also introduced the most controversial measure of the speech – the Bill to reform some of their practices. It was not, in reality, very radical, continuing to reflect the compromise within the party between the conciliator Jim Prior and those who wanted a complete reordering of British industrial relations. Prior, being the minister responsible, got the better part of the bargain. The Bill tried to restrict picketing to the place of work (but did nothing about blacking – the boycotting of goods and firms breaking a strike), gave individuals the right of appeal against closed-shop membership (without undermining the institution of the closed shop itself) and made public funds available for postal ballots for union elections. In avoiding the criminal prescriptions that had undone Heath’s approach to industrial relations, and in signalling a direction of travel, the Bill had some significance. But it would have little practical effect on the conduct of industrial disputes. It was not enough to establish the ‘credibility and authority’ which her strategy sought.
Except for the abolition of the Price Commission, key economic measures had to await the Budget. As the days of preparation passed, in addition to his weekly bilateral with the Prime Minister, Geoffrey Howe went more and more often through the door that connects No. 11, the Chancellor’s residence, with No. 10. H
e had to bring Mrs Thatcher worse and worse news. The consequences of the Callaghan government’s pre-election spree of borrowing and spending, including the cost of wage settlements, were playing havoc with monetary control. On 10 May 1979, Howe informed her that sterling M3, the measure of all coins, notes and bank deposits, now preferred by the Treasury as the best measure of money supply, was growing at an annual rate of 12.8 per cent, above its target range. Given that the government believed and publicly asserted that inflation was caused by excessive growth of the money supply, this was a clear warning of inflation ahead. On 6 June he warned of ‘more bad news (to place alongside the trade figures) to show that our inheritance was much worse than we had appreciated’.18 The money supply growth rate was now 13.1 per cent and would be higher still that month, the figures being ‘right outside even Denis Healey’s target range’. The government’s own target was 7–11 per cent. Howe went on to say that Gordon Richardson, the Governor of the Bank of England, advised a 2 per cent increase in the Minimum Lending Rate (MLR) to 14 per cent. This was bound to put up mortgage rates to 13 per cent. The rise should take effect the following day, Howe insisted, to avoid it becoming involved in the Budget.
Mrs Thatcher was presented, for the first time, with a dilemma which was to trouble her again and again. In those days, before the independence of the Bank of England’s Monetary Policy Committee decreed in 1997, control of interest rates rested, in effect, with the Chancellor, consulting with the Prime Minister. Decisions on putting rates up or down were therefore inevitably political, as well as economic. They were also more noticeable than most such decisions were to become by the end of the century: because of high inflation, it was hard to give a little touch to the tiller. The quarter-per-cent rate changes familiar in modern times would have been imperceptible then. Rises were often of two, once even of three, percentage points. They placed politicians in the middle of controversies which they disliked, but gave them a power that few at the time would have dreamt of giving up. Mrs Thatcher had an innate distrust of the Bank of England for what she saw as its Keynesian approach, and she was particularly suspicious of Gordon Richardson, the Governor. ‘I just don’t know how you can trust them,’ she said to Adam Ridley.19 And when, that November, a crisis in the funding of government debt in the gilts market precipitated a three-point rise in interest rates, Mrs Thatcher wrote in the margin of a memo about the Bank’s conduct: ‘I must put someone there I can rely on.’20 Richardson was an intellectual who preferred expressing himself in indirect and apparently inconclusive ways which irritated her. He was also a handsome man, but one who did not treat her as if she were an attractive woman – a fatal combination in her eyes: ‘He was feline; she was canine.’21 In her frank way which both delighted and alarmed officials, she looked up one day as John Ashworth, the government’s Chief Scientist, came into her office and said, ‘What do you think of Gordon?’ ‘Gordon who?’ said Ashworth. ‘Oh, you know, that fool who runs the Bank of England.’22 Even though monetarists such as Tim Congdon* and Hayek himself had already floated the idea of surrendering political control of interest rates, she did not contemplate passing authority to Richardson. Richardson had been Governor under Heath; even before Mrs Thatcher came into office, Gordon Pepper had persuaded her that Richardson had been as ‘guilty as hell’ over the Barber boom.23
Mrs Thatcher longed to make her role as First Lord of the Treasury real as well as titular. She saw interest rates as her main immediate weapon in her war against inflation, and would never cede political power over them. But although no one was stronger than she on the need to beat inflation, no one was more conscious of the effect of high interest rates on what she sometimes referred to as ‘our people’. The most consistent of all threads in the economic history of Margaret Thatcher was her initial objection to interest rate rises whenever they were proposed. She hated the idea that young people on or approaching the housing ladder should be penalized by a Tory government. She was fierce, in theory, about the wickedness of a person or a nation borrowing more than he, she or it could afford, but she also knew that preventing people from borrowing was a sure way to crush the aspirations which she wished, for reasons of belief and of party politics, to foster.
In early June 1979, the Chancellor and Governor were summoned to her presence. ‘The Prime Minister said she could not accept the Chancellor’s argument on timing,’ her private secretary minuted Howe’s after the meeting, because it left out consideration of the European elections. She said that the increase would have to be on Tuesday (the day of the Budget), and ‘she was doubtful whether a full 2 per cent was needed’ and was worried about mortgage rates. She asked for a reconsideration over the weekend.24
Reverting to Mrs Thatcher on Monday, Howe held fast. He and Richardson took the view that the government must send the right signals. The most basic point of all was that the government had to be able to fund its borrowings in the market: it could not do this if its strategy was disbelieved. It was essential, said Howe, to avoid the ‘subsequent feeling that the change [in interest rates] is insufficient’. He added, ‘given our commitment to monetary targets, our first use of a monetary policy instrument should be effective and unequivocal.’ Lankester wrote on Howe’s note: ‘PM seen and willing to abide by Chancellor’s judgement, albeit very reluctantly.’25 She made it clear that she thought the increase was mistaken, and would have preferred one of 1.5 per cent.
In doing so, Mrs Thatcher was perfecting a technique she was often to deploy – permitting a decision, but distancing herself from it. When, as night follows day, the rise in the Minimum Lending Rate which she had agreed led to a rise in mortgage rates, Mrs Thatcher decided to be so shocked that she broke her normal habit of writing in the margins of memos received and wrote a full memorandum to Geoffrey Howe herself: ‘I am very worried about the reports in today’s press that mortgage rates may have to go up within a few days. This must not happen. If necessary, there must be a temporary subsidy (as in 1973) from the contingency reserve to keep the rate where it is (11¾ per cent). That rate is already too high. Can you consult with Michael Heseltine and the Building Societies forthwith.’26 This subsidy was not, in the end, forthcoming; but the intervention indicated Mrs Thatcher’s unhappiness with the situation, and her readiness, for political reasons, to diverge from the market stringencies, on which, in principle, she insisted. Again and again, the Treasury and various free-market purists urged her to get rid of Mortgage Interest Relief at Source (MIRAS), the tax write-off of mortgage interest, but Mrs Thatcher refused. When rumours got out that MIRAS might be removed, Jim Callaghan challenged her at Prime Minister’s Questions. She did not hesitate: ‘I am delighted to deny it. One’s advisers are not always right, and I often tell them so.’27
As the first Budget was prepared, Mrs Thatcher quickly came into conflict with the Treasury. At a full-dress meeting with all the Treasury ministers and senior officials she complained that ‘The Treasury approach … was not nearly tough enough’ on public expenditure. She wanted a PSBR of £7.5 billion, rather than the £8.5–10 billion projected. ‘The Prime Minister said that it was essential to get the overall strategy right from the start. This must involve large public expenditure cuts this year leading on to more substantial reductions in later years; a lower growth in the money supply … and lower interest rates.’28 The search for new cuts was agreed, including a reduction of the Rate Support Grant by a further £100 million, a cut in the contingency reserve and a target of £400 million in other savings. Asset sales would raise £1 billion. There would be no adjustment to cash limits,* and there would be a cutting of staff costs in the Civil Service.
Mrs Thatcher was less robust, however, about the tax plans: ‘she was extremely perturbed at the prospect of having to increase VAT from 8 per cent to 15. This would mean a sudden jump in the RPI of at least 3 per cent. The result could be catastrophic for the next pay round.’29 As Geoffrey Howe pointed out in his memoirs, Mrs Thatcher was displaying ‘the ambivalence she often sh
owed when the time came to move from the level of high principle and evangelism to practical politics’.30 After considering matters further for a few days, Howe wrote back. His Budget, he knew, would be seen as ‘contractionary’, but that would not matter if it also gave ‘really firm and convincing indications’ of the government’s long-term determination. He wanted to cut income tax from 33 to 30 per cent at the basic rate and from 83 per cent to 60 per cent at the top rate. This could be paid for only by a 15 per cent rate of VAT.
In the constant battle in her own breast between her cautious and radical instincts, Mrs Thatcher now edged towards caution. Was it really wise, she wondered, to try to cut income tax so much, so quickly? ‘She referred in this context to the Budgets of 1952 and 1953. Mr Butler’s first Budget had been a tough one, and it was only in his second Budget that he had introduced major reductions in income tax.’31 But Howe maintained his position. The PSBR would go way over £8 billion without 15 per cent VAT. ‘What matters’, he wrote, ‘is a comparison between take home pay and prices, and everyone would be securing substantial income tax cuts. Such a package would be presented as giving greater personal choice.’ And he wanted the Budget to mark a decisive departure: ‘this Budget provides our only opportunity to make a radical switch from direct to indirect taxation and thus honour the commitment on which our credibility depends.’32 The two met the following day, and Mrs Thatcher gave her reluctant agreement to the increase in VAT, winning in exchange a decision, for the sake of the Retail Price Index, not to increase the duties on alcohol and tobacco. They also agreed that it was essential for the PSBR to be below £8.5 billion, a slippage from the originally desired £7.5 billion which they would quickly rue. In hindsight, many shared the view that Mrs Thatcher had advanced (though they did not know she had advanced it), criticizing Howe for tax cuts and changes too sudden for the precarious state of the public finances. There was much to be said for this criticism. Against this, though, was the importance of symbol. Howe could see, more clearly than Mrs Thatcher, that a new Conservative government had to signal a new view about what tax was for. It had to emphasize incentive and choice. It even, as Brian Walden had noted before the election, had to suggest the benefits that came from inequality. In a strong moral defence of her economic policies delivered not long after the Budget, Mrs Thatcher justified the cut in the top rate of tax in anti-egalitarian terms: ‘Nations depend for their health, economically, culturally and psychologically, upon the achievements of a comparatively small number of talented and determined people.’33 If her first Budget had not been bold about tax, her later ones would almost certainly have been more cautious still, and the impetus for change would have been lost.
Margaret Thatcher: The Authorized Biography Page 62
