22
The 1981 Budget and beyond
‘We’ve got to move fast to save her’
Because ‘success has many fathers and failure is an orphan’, the paternity, or indeed maternity, of the 1981 Budget is hotly disputed. The politicians, including Mrs Thatcher, who were trying to agree the Budget were in the middle of a crisis, wrestling with figures that seemed to get worse every day. They were so worried by the possible result that they strove for a situation in which disaster could not be pinned on them. It was only afterwards, when the Budget came to look like a triumph, that they began to claim authorship. As it approached, it threatened to be the climactic disaster of her premiership.
At the Chequers meeting of 17 January 1981, the desperate state of the economy had become clear to Mrs Thatcher and her closest advisers. To date, the government had failed to stem the relentless rise in public expenditure, and a funding crisis, with the potential to bring down the government, seemed a real possibility. Following this meeting, therefore, debate turned urgently to the need for a severe Budget to bring the PSBR under control. ‘In the early stages of talk about a tough Budget,’ Terry Burns remembered, ‘Mrs Thatcher was quite nervous about it.’1
John Hoskyns, Alan Walters and David Wolfson felt that they could not make Mrs Thatcher focus on the problems. She seemed tired and cross: when she appeared, the next day, not to remember a late-night meeting, Hoskyns noted in his diary: ‘Oh dear! I think she’d had one or two drinks on an empty stomach.’2 On 10 February, after a meeting with Mrs Thatcher and Howe at which the PSBR was now forecast at £13 billion, Walters sent the Prime Minister a note warning what would happen if the Budget were not tough enough: ‘The trend of the forecasts of PSBR is upwards – and, by the nature of extrapolative forecasts, they are unlikely to undershoot … We are likely therefore to budget for too low a reduction in PSBR (as we did in 1980/81).’ Walters went on: ‘This will lead either to an additional late summer or autumn budget (which is to be avoided) or to putting great strain on funding. This last may lead to a funding crisis, but it certainly will lead to high interest rates, retaining high exchange rates and yet another squeeze on the private sector. This outcome must be avoided – it would be a quite impossible scenario for the approach to an election.’ He called for ‘painful decisions now’.3
Hoskyns’s memo to Mrs Thatcher agreed with Walters and was more apocalyptic in expression. He said the Budget offered a choice between ‘underkill’ and ‘overkill’. Overkill would require tax increases. Underkill, aimed at better growth and lower unemployment, would be politically popular, but ‘If we underkill we will face a mid-summer funding crisis, with a desperate attempt at further cuts, splits in Cabinet, trivial savings to show for it, and finally a further rise in MLR and then the exchange rate. This will lead to yet lower activity, higher unemployment and PSBR, which will no longer be reversible before the election. The credibility of MTFS and of Geoffrey himself will be destroyed and our own position undermined.’4
He added to Mrs Thatcher’s anxieties – and bolstered his own arguments – by enlisting detached, expert help about the damage done by the high exchange rate. On 5 February Hoskyns sent Mrs Thatcher summaries of the work done by the Swiss economist Jurg Niehans to try to answer the question ‘Why is sterling so high?’ Niehans maintained the view that monetary control was the only way to beat inflation, but argued that the shock administered by the government’s monetary squeeze had been too great and too abrupt. Sterling M3 figures gave a misleading picture of what had happened to money: money supply targets would be better expressed in terms of the monetary base, which had been ruthlessly held down. The unpleasing conclusion was that the government’s policy was in danger of undermining its own aims. The Treasury, with its MTFS, had been pursuing the ‘gradualist’ approach advocated by Milton Friedman. But the markets’ perception of what was happening had produced a high exchange rate, thus precipitating the crisis advocated as a necessary shock by Friedrich von Hayek. David Willetts,* then private secretary to Nigel Lawson, remembered: ‘Though we were trying to do Friedman, we were actually doing Hayek.’5 In conversation with Hoskyns, Niehans put his point of view bluntly: ‘If the Government goes on with its present monetary squeeze, you won’t just have a recession; you’ll have a slump.’6 What Douglas Wass called an ‘impeccable outside source’7 was predicting disaster.
David Wolfson noted that at each meeting he attended with Chancellor and Prime Minister in these weeks the PSBR kept expanding: ‘If you’re a retailer [which he was], you know that if you see a trend it is likely to continue. Walters, Hoskyns and I said to her: “If we let this continue we will no longer be economically credible.” ’ In Wolfson’s account, Mrs Thatcher picked up on their implied recommendation that the PSBR must be reined in by all means, including further cuts and tax rises, and replied, ‘Are you sure you’re right, because if not, my prime ministerial term is going to be pretty short.’8 At a meeting on 13 February attended by, among others, Mrs Thatcher, Howe, Burns, Walters, Hoskyns and Wolfson, Walters advocated that the PSBR be held back to £10 billion and that the basic rate of income tax be raised. Howe argued that a PSBR of £11.5 billion would do, and he and Mrs Thatcher united against a tax rise. In her memoirs, Mrs Thatcher reported the discussion thus:
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 would be difficult enough; doing so via an increase in the basic rate would be a political nightmare. I went along with Geoffrey’s judgement about the problems of raising income tax, but I did so without much conviction and as the days went by my unease grew.9
Those present did not notice Mrs Thatcher’s lack of conviction on the subject of tax rises at the time. Alan Walters recalled that ‘she screamed at me: “You’re just an academic and you don’t know what the political implications are.” ’10 He replied that she would be politically ruined by the collapse of financial markets and referred (knowing this would sting her) to how this had produced the fiasco of Edward Heath’s ‘dash for growth’.11 Hoskyns and co. found that, unusually, she had not read their paper on the subject. Afterwards, Hoskyns recorded in his diary, he and Walters talked ‘and I was pleased to find that Alan had been wondering whether he ought to leave, whether the whole thing wasn’t a waste of time.’12 Walters, Hoskyns and Wolfson began to speak of resigning en masse if their Budget advice was not taken.
In the course of the following week, further meetings did not seem to be winning Mrs Thatcher round. Walters kept telling her that she could not have the lower interest rates for which she longed unless there was lower government borrowing. This reduction in borrowing, if it could not come from spending cuts, had to come from higher taxes. He thought he had failed to convince her. Throughout the week, she was distracted by the disaster over pit closures. On 20 February, two days after the coal climbdown, Hoskyns sent her another note, saying that the PSBR would now get bigger yet, and reiterating that the ‘overkill’ Budget would be the ‘turning-point’. She wrote ‘sharp comments’ on it, and Hoskyns felt ‘We were now close to the point at which the relationship between advisers and the advised begins to break down, and the advisers themselves are seen as part of the problem.’13 But, just when all seemed dark, Hoskyns’s diary for 24 February then recorded: ‘In the afternoon we heard … of an amazing volte-face by Margaret. She started swinging back, in a budget bilateral with Geoffrey and Douglas Wass, to the need for a smaller PSBR and perhaps to raise income tax … Then she says that it is their problem (because Geoffrey and Douglas Wass have said it’s politically impossible), it’s up to them. Then, as they start to leave, she says words to the effect, “if there’s a funding crisis then you (Geoffrey) are for the chop.” ’14 The official record confirms some of this, sanitized. A note from Tim Lankester to Howe’s private secretary of 24 February reported: ‘The Prime Minister said she was dismayed at the prosp
ect of a PSBR for 1981/82 of £11.25 billion [which Howe was advocating]. She doubted whether it would be possible to justify a reduction in MLR unless the PSBR was reduced to around £10.5 billion. From a political standpoint, she thought it might now be possible to justify a 1p increase in the basic income tax rate on account of the increased spending on the NCB and BSC.’ Howe continued to argue that an increase in the basic rate ‘would be extremely difficult politically and would be very bad for business morale’, and Mrs Thatcher eventually said that she was ‘prepared to accept his political judgement’, but her point about the lower PSBR figure stood.15
Alan Walters called on Mrs Thatcher the next morning. She was packing her hats for her visit to the United States the following day. She told him she had said to Howe that he must take £3.5 billion off the PSBR. Walters said, ‘Are you sure?’ Mrs Thatcher replied: ‘Of course I’m sure. That’s what you want, isn’t it?’16*
Perhaps because Mrs Thatcher then left for America, perhaps because of the intensity and confusion of the proceedings, it was not immediately clear to all that a decision had been made. In a sense, it had not, since Howe’s astute solution to the tax-raising problem, which was eventually accepted, was that the money should come not from a rise in the basic rate, but by failing to raise the tax thresholds in line with inflation. Still not sure what was happening, Walters sent a note to Howe advocating an even bigger cut in the PSBR. Hoskyns, Walters and Wolfson prepared a note of resignation for when, as they still expected, their Budget advice was not taken (‘The opportunity to turn the UK economy round … has passed …’.).17 But in fact Mrs Thatcher had come round to their way of thinking and found ways of getting Howe to accept it.
The Treasury account of the Budget preparations disputes the ‘myth’ that the 1981 Budget was ‘made in Downing Street’. Douglas Wass maintained that the Treasury mandarins had prepared a ‘broadly neutral’ Budget intended to be consistent with the MTFS. When Mrs Thatcher told them that ‘I want a lower PSBR so that we can have lower interest rates,’ they were perfectly ready to co-operate: ‘Geoffrey didn’t fight very hard. If this was the objective, it was the objective.’18 In his memoirs, Howe fairly points out that he and Walters were more or less on the same side.19 He made sure that a close relationship existed between Walters and Peter Middleton, co-ordinating between No. 10 and the Treasury. Howe’s special adviser, Adam Ridley, remembered that ‘we all realized in advance this was it.’ The threat of a crisis in the gilts market dominated everything. The Treasury and No. 10 both wanted to bring about a situation in which people would say, ‘This Government is for real: we can buy lots of gilts.’20 To the extent that there was competition between the two institutions, it was that ‘each side thought the other might crack’.21 Peter Middleton recalled that he and Walters were not at odds: ‘There was a growing feeling that it [the entire anti-inflation policy] might just slip out of our hands.’ In the course of all the pre-Budget discussions between the Treasury and No. 10, ‘Geoffrey never spoke about anything that sounded like a row.’22
Nor was it unusual that Mrs Thatcher changed her mind in the course of the Budget discussions: she was often at her most apparently confused and difficult when she was in the middle of trying to persuade herself of something. It would have spoken ill of her political judgment if she had rushed into a contractionary Budget without protest. Nevertheless, there can be little doubt that the orchestration in favour of a tough Budget by her Downing Street advisers did make a great deal of difference. So did the advice and character of Walters himself. In the view of Terry Burns, who watched proceedings from the Treasury side, ‘At some stage [in February], she swung and overtook us.’23 ‘It was Walters she really listened to,’ Burns believed, drawing comfort from the clarity of what he said. Walters had a ‘disarming way of being absolutely sure he was right’.24 She, in turn, ‘did strengthen the backbone of the Treasury’, which was weakened by division between the old guard, such as Wass and Ryrie, and the younger set, including Middleton and Burns himself.25 She also emboldened Nigel Lawson, the most radical minister in the Treasury, in resisting the more consensual inclinations of Geoffrey Howe.26 In Clive Whitmore’s view, Mrs Thatcher suspected Howe of being over-influenced by the old Keynesians at the Treasury, and this made Walters all the more important.27 It was galling for a senior elected politician such as Howe that a personal adviser to the Prime Minister should have so much influence – this influence would later become intolerable to his successor, Lawson – but it was also a fact. In the weeks coming up to the 1981 Budget, so fraught with disaster and promises of even greater disaster to come, Mrs Thatcher was forced to confront the possibility that she might actually fail, and fail, at that, dishonourably, by abandoning what she believed. Walters, and other advisers close to her, helped to keep her on the straight and narrow.
Geoffrey Howe presented his Budget to Parliament on 10 March 1981. By then, the Treasury forecast for the PSBR had risen to £14.5 billion (6 per cent of GDP).* Howe’s tax increases were designed to reduce it to £10.5 billion. Child benefit and one-parent-family benefit were indexed, but the decision not to index tax thresholds brought £2 billion. There was double indexation of the levies on alcohol, tobacco and car and petrol duties. There was a once-for-all levy on the non-interest-bearing deposits of the banks, which brought £400 million. Interest rates were to come down by 2 per cent to 12 per cent. Howe also announced that in future public spending would be controlled in cash rather than volume terms.†Although this last measure made the controls on spending tougher than in the past, it also made them more predictable and therefore easier to handle. If departments knew their cash limits in advance, they were less likely to find themselves confronted with the ‘in-year’ cuts that they hated so much.
It was and is a convention that the Chancellor has sovereignty over the Budget. It is the product of his judgment, in consultation with the Prime Minister, rather than the collective decision of the Cabinet. Knowing, however, that this Budget was more controversial than usual, Howe took the precaution of exposing it privately the day before to the most senior figures in the government – Whitelaw, Carrington, Prior and Pym – seeing them individually. Although none was thrilled, only Prior expressed clear hostility, telling Howe that it was ‘pretty disastrous’.28 The following morning, before the full Cabinet was presented with the Budget in advance of the Chancellor’s statement in Parliament, Prior had breakfast with Peter Walker and Ian Gilmour, the other most dissident ministers. They debated whether they should resign. According to Peter Walker, they continued this debate outside the Cabinet room just after they had heard the full details of the Budget, but concluded that they should not do so ‘because of the effect on sterling’.29 Gilmour remembered that he, in particular, had wanted to resign, but was talked out of it by the others on the grounds of the need to ‘fight the good fight’.30 Prior, in retrospect, considered their decision, or rather indecision, feeble: ‘We were wet in the true sense of the word.’31
In the full Cabinet, Howe, who, unlike Mrs Thatcher, had always sought to include Wets in his discussions and was frustrated by their reluctance to engage, focused on their main worry – unemployment. It depended, he said, on inflation. ‘We are all at the eye of the storm.’ The reaction, apart from strong support from Keith Joseph, was gloomy. Gilmour spoke of a ‘political disaster’; Walker said he was ‘very concerned’; Pym warned that industry would be ‘depressed and disappointed’. Prior expressed his ‘immense disappointment and deep concern’. Even Willie Whitelaw, his criticism shaded by loyalty, said there was an ‘enormous need for hope’. Lord Carrington said, ‘We’ve been doing this for two years, and it doesn’t seem to be working.’ He then opened up the line of argument which was to be the Wets’ chosen weapon: the whole future of the government was at stake and yet, he complained, they had had no opportunity to discuss the content of the Budget.32 All that Mrs Thatcher felt able to say was that they should unite behind the Chancellor.
‘The Budget is not
well received,’ began Bernard Ingham’s daily press digest for the Prime Minister the following day. The Sun, with the headline ‘Howe It Hurts’, said that the government had ‘failed to deliver the goods’. The Financial Times spoke of ‘an admission of general defeat apart from inflation’, and offered the headline ‘The Strategy’s Last Chance’. There was praise – the Daily Mail spoke of ‘an act of stubborn political courage’ – but not much, and the press reported unhappiness from at least six Cabinet ministers. Changing the subject, the digest also reported: ‘Mark Thatcher to advertise Scotch on Japanese TV’.33 At the presentation of the Guardian’s Young Businessman of the Year Award, Mrs Thatcher departed from her prepared text to speak angrily about her critics: what ‘gets me’, she said, was that ‘those who are most critical of the extra tax are those who were most vociferous in demanding the extra expenditure.’34 The next day, telling tales out of school, Ingham sent Mrs Thatcher a secret memo about Francis Pym’s behaviour in his briefing of the parliamentary press lobby: ‘I think you should know that Mr Pym this afternoon … rather deftly applied public pressure for a pre-Budget discussion in Cabinet of economic strategy.’ Ingham went on: ‘How typical was his view in Cabinet? Probably typical, he said … he did not think that a tough line by the Treasury during the next public expenditure review in the autumn would be particularly well received.’ Ingham said he had subsequently discovered from a journalist that ministers were concerting for an economic strategy discussion, perhaps during a weekend at Chequers. The idea ‘is not merely being nursed by a few Ministers; it is beginning to take off.’35 Sure enough, the next day’s papers were full of stories about the group of ministers who were now demanding a say in Budget strategy: ‘Never again’, Ingham’s digest reported, ‘will they put up with the shock of learning its secrets on the morning before delivery. All this is characterised by words like “mutiny” … with Messrs Whitelaw, Pym, Prior, Walker, Gilmour and Carrington named … Guardian says many Ministers and backbenchers are openly discussing possibility of Palace revolution in summer when Government is told to change policies.’36
Margaret Thatcher: The Authorized Biography Page 84
