The Downing Street Years

by Margaret Thatcher

  We were now, though, put under pressure to approve the plan before the Christmas recess — without waiting for completion of BL’s wage negotiations — in order to enable the company to sign a collaborative deal with Honda for a new middle-range car. I was not prepared to be bounced into a commitment. In any case, past experience suggested to me that the plan would not in fact be fulfilled. BL’s annual plans always forecast major improvements: but every year things seemed to get worse. Its share of the UK market for cars had slumped from 33 per cent in 1974 to 20 per cent in 1979, and had fallen further, down to only 16 per cent, over the last two months. BL’s productivity was only two-thirds that of its European competitors, and lower still compared with the Japanese: for the company to become competitive again productivity needed to improve by something like 50 per cent. It remained to be seen whether the Plan could transform that. The proposed new models could help. But the first of these was not due until the end of the following year, and by then all its competitors would have new models too. Meanwhile, BL was already running out of cash and would need an advance on money allocated for the next financial year.

  I, therefore, asked John Nott, who brought to the problem the expertise and scepticism of a banker, to go over BL’s accounts with the company’s Finance Director. Keith Joseph, John Biffen and others also went over the plan in detail with Michael Edwardes. Their conclusion was that there was only a small chance of BL surviving and that it was probable that the plan would fail, followed by a run-down or liquidation of the company. About a third of BL was thought to be saleable. But the final judgement had to be based on wider considerations. We reluctantly decided that people would simply not understand liquidation of the company at the very moment when its management was standing up to the unions and talking the language of hard commercial common sense. And so, after much discussion, we agreed to endorse the Plan and to provide the necessary financial support. Keith announced our decision to the House of Commons on 20 December.

  Agreeing to provide more public money was not, though, the end of the problem: it rarely is. BL’s ballot on their pay offer went badly wrong, partly because the question put to the workforce — ‘do you support your Negotiating Committee’s rejection of the Company’s wage and conditions offer?’ — was confusing. Fifty-nine per cent of those taking part voted against the offer. Moreover, the AUEW enquiry found that Robinson had been unfairly dismissed by the company and an official strike was announced, to begin on 11 February. Michael Edwardes rightly refused to reinstate him or to improve on the pay offer. Contingency plans were made by the BL Board, assisted by Department of Industry and Treasury officials, to cope with the situation if the Plan had to be withdrawn and the company put into liquidation. Michael Edwardes was unwilling, even at this stage, to approach possible foreign buyers for a sell-off of BL, although he agreed to respond positively to any approaches potential buyers might make to him. Certainly, the workforce at BL could be in little doubt as to the seriousness of their position. BL’s share of the market had fallen so low that in January Ford sold more of one model (the Cortina) than BL’s total sales.

  Michael Edwardes and the BL Board held their nerve and faced down the union threat. The strikers were told that unless they returned to work by Wednesday 23 April they would be dismissed. But much as I admired BL’s tenacity, I was becoming increasingly unhappy about the Board’s commercial approach. In particular, there was strong resistance from the Board to selling all or part of the company, though this took the form of obstruction rather than declared hostility.

  For example, there was fierce initial resistance to my suggestion of engaging an independent financial adviser to advise on the disposal of the company’s assets. It was argued that such an appointment would undermine confidence in the company’s future. It was even suggested that these were matters for management, not government. I could not accept this. Government was the major shareholder in BL and it was right that the shareholder should have a say as to when and how the company’s assets should be sold. In fact, such an adviser was in due course appointed, with Michael Edwardes’s acquiescence.

  On Wednesday 21 May Michael Edwardes and two of his colleagues came to a working dinner at No. 10. On the Government side, Geoffrey Howe and Keith Joseph, Robin Ibbs the head of the CPRS, and my private secretary were also present. Michael Edwardes said that BL faced a worse trading environment than when the 1980 Plan was prepared. It would be able to live within its agreed cash limit for 1980 but the £130 million limit provisionally decided for 1981 and the assumption that no government funding would be necessary thereafter were, he said, unrealistic. He claimed to have high hopes of collaboration with a German manufacturer, but that the prospects for selling most parts of the business in the near future were not encouraging. Only Land Rover would fetch a good price at that time, but to sell it separately would leave the rest of the business seriously weakened. Other parts of BL might be sold in a year or two as the recovery programme proceeded. It was obvious where all this was leading: BL was about to present us with yet another demand for taxpayers’ money, and probably for a huge amount.

  In reply, I acknowledged that BL had achieved a great deal. But I stressed my anxiety about the endless demands for extra money. I said that BL had failed to meet the targets set out in its Plan. There could be no presumption that any additional money would be provided.

  As the summer wore on it became clear that the company’s financial position was deteriorating even further. Michael Edwardes bombarded us with complaints. He was upset about Japanese imports. He drew attention to the (undoubtedly real) difficulties of exporting to Spain because of that country’s high tariffs, while they nevertheless exported their cars freely to us. He worried about the level of sterling. But none of this could disguise the fact that things were going badly wrong at BL and that the Board seemed unable to turn things round. The company lost £93.4 million before interest and tax in the first half-year compared with a profit of £47.7 million for the same period the previous year. Michael Edwardes tried to get the Government to agree to fund the new BL medium-range car — known as the LM10 — separately and in advance of the 1981 Corporate Plan. Indeed, he wanted me to announce the Government’s commitment to this at a dinner given by the Society of Motor Manufacturers and Traders (SMMT) on 6 October. I had no intention of agreeing; once again, I would not be bounced.

  Instead, I delivered a rather different and possibly less welcome message to the motor industry. I acknowledged that some of the problems they faced were caused by the world recession. But that was not the real reason for the industry’s difficulties. I said:

  This year we have the lowest car production for twenty years. Not because home sales are the lowest — far from it. But because people are buying foreign cars rather than our own. And some of those come from high-wage, high-exchange-rate economies. The world recession may have exacerbated our problems, but it is not the root cause in the motor industry. What has happened to the motor industry since the 1950s exemplifies what has been going wrong in too many other parts of British industry: higher pay not matched by higher productivity; low profits, so low investment; too little going into R & D and new design … and why haven’t we had the productivity? Overmanning. Resistance to change. Too many strikes and stoppages.

  The last part of that message seemed to fall on deaf ears. On 27 October BL’s trade unions decided overwhelmingly to reject the company’s offer of a pay increase of 6.8 per cent and recommended a strike. Michael Edwardes wrote to Keith Joseph to say that a strike would make it impossible to achieve the 1981 Corporate Plan submitted just a week before. To win support for the pay offer, he wanted to write to inform union officials of the key aspects of the 1981 Plan, including the funds required for 1981 and 1982 — a figure which he would put at £800 million. I reluctantly accepted Michael Edwardes’s approach but only on the clear understanding that the Department of Industry would make it known that the Government was not committed in any way to finding these f
unds and that the matter had yet to be considered. In fact, on 18 November BL’s union representatives backed down and finally decided to accept the company’s offer. History repeated itself: almost the same thing had happened the previous year. The need to deal with an industrial relations crisis made it extremely difficult to avoid the impression that we were prepared to provide large amounts of extra public funding for the company. No matter how clear our disclaimers, inevitably people drew that conclusion.

  On any rational commercial judgement, there were no good reasons for continuing to fund British Leyland. The 1980 Corporate Plan had foreseen the need for about £130 million of new government equity in the period of 1981 and beyond. In the 1981 Plan which we were now asked to approve that sum had grown by £1 billion. Meanwhile, the outlook for profits was worse. The predictions for market share in successive Plans had grown ever gloomier. Many of BL’s models were uncompetitive. The Metro and the BL/Honda Bounty would help, but neither would yield much in profits. BL was still a high-cost, low-volume manufacturer of cars in a world where low cost and high volume were essential for success.

  On 12 January I held a meeting at No. 10 to discuss the Corporate Plan with Keith Joseph, Geoffrey Howe, Norman Tebbit and others. I continued to argue that we should try to find some middle way between total closure and fully funding the Corporate Plan.

  I knew that closure of the volume car business, with all that would mean for the West Midlands and the Oxford area, would not be politically acceptable to the Cabinet or the Party, at least in the short term. It would also be a huge cost to the Exchequer — perhaps not very different to the sort of sums BL was now seeking. I told a meeting of ministers on 16 January that the Government must get rid of its financial liability for the volume car business in a way which was both humane and politically acceptable. We might need to pay a ‘dowry’ to make the car business attractive to a buyer: ultimately, of course, it might mean closure — the market, not government, would ultimately determine BL’s future. I said that I was in favour of supporting the BL Plan — but on condition that BL disposed of its assets rapidly or arranged mergers with other companies.

  This last point was still extremely contentious. Michael Edwardes told Geoffrey Howe and Keith Joseph that the BL Board would be willing to sell Land Rover and such other parts of the business as they could and close down the volume car business: but they were not willing to sell Land Rover if they were also required to go on trying to salvage the volume car business. He said that the Board’s position would be quite impossible if a public deadline were to be set for its sale.

  This attitude, of course, put us in a very difficult position — as it was doubtless intended to do. It irritated one or two ministers to the point of turning them against the whole Plan. Moreover, it had not been possible for us to find the ‘middle way’ which I had sought and which would have involved progressive sale of the business without a total and immediate shut-down. But the political realities had to be faced. BL had to be supported. We agreed to accept BL’s Corporate Plan, involving the division of the company into four more or less independent businesses. We settled the contingencies which would lead to the Plan being abandoned. We set out the objectives for further collaboration with other companies. And — most painfully — we provided £990 million.

  This was not, of course, the end of the story for BL, any more than it was for BSC. In due course, it would be shown that the changes in attitude and improvements in efficiency achieved in these years were permanent.* To that extent, the account of our policy in 1979–81 towards BL is one of success — at a cost. 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.

  * These were areas, typically around 500 acres in size, within which major tax incentives were made available to business — 100 per cent capital allowances for industrial and commercial buildings, complete relief from development land tax, exemption from local taxation, drastically simplified planning control and lighter regulation. The idea was Geoffrey’s own brainchild.

  * 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. There were two important points which were forgotten by many of those who criticized the MTFS on the basis of the changes we made. First, ‘monetarism’ is simply the view that inflation is a monetary phenomenon and that, therefore, the reduction in the rate of growth of the money stock is essential to achieving a permanent reduction in inflation. Second, there is a difference between the measurement and the control of the money supply. Our difficulty was to measure the money supply, which led to our seeking different or better measures to supplement £M3. We knew how to control the money supply, through interest rates, and did so: indeed Alan Walters was to argue persuasively that we had controlled it too much.

  * See below, pp. 102–4, 107.

  * 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.

  * See pp. 679–80.

  CHAPTER V

  Not for Turning

  Politics and the economy in 1980–1981

  NO U-TURNS

  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.

  ARGUMENTS ABOUT PUBLIC

  EXPENDITURE

  Battle was to be joined over the next two years on three related issues: monetary policy, public spending and trade union reform. The ‘wets’ argued that because we had emb
raced a dogmatic monetary theory that inflation could only be brought down by a fierce monetary squeeze, we were squeezing the economy in the middle of a recession. Such dogmatism, they argued, similary prevented our using practical tools of economic policy like prices and incomes control and forced us to cut public spending when, as Keynes had argued, public spending should be increased to lift an economy suffering from lack of demand.

  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. In particular, the large turn round from losses towards profitability in the nationalized industries was not going to come about; 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.

  We had decided to have a general economic discussion in Cabinet on 3 July 1980, before our first collective discussion of the 1981–2 public expenditure round on 10 July. Our aim was to confront spending ministers with the full implications for taxation of a failure to control spending, and to smoke out the arguments for reflation, which were almost daily to be found in the newspapers and in the mouths of pressure groups. But I had no illusions that it would be easy to subject my colleagues’ aspirations to a salutary dose of realism.