The Downing Street Years

by Margaret Thatcher

  When I was questioned later about the declaration in the House of Commons, I replied: ‘I must make it quite clear that I do not in any way believe in a federated Europe. Nor does that document. ‘Certainly it did not transfer powers to a centralized Europe in the way that the Maastricht Treaty was to do. But the high-flown language of the declaration has become familiar from later developments: the linguistic skeleton on which so much institutional flesh would grow was already visible.

  THE ECONOMY

  It sometimes happens in politics that relatively small matters, with no obvious connection between them, combine to create a political atmosphere in which the Government seems to do nothing right. I have suggested earlier some underlying reasons why such an atmosphere developed at the start of our second term. But there were other problems. There continued to be misunderstanding and resentment of the new system by which the retirement pension was uprated in line with inflation. Many of our best supporters were angry that proposals to reintroduce capital punishment were thrown out on a free vote by a Conservative-dominated House of Commons, some of whose members had undoubtedly dissembled their views (or worse) to those who had selected them. Also, shortly afterwards Members of Parliament decided to vote themselves a pay rise considerably greater than the Government had recommended, at a time when unemployment was rising and many people could expect little or no increase.

  But this malaise would have had little importance had it not been for the economy. The underlying economy was sound: indeed, as we pressed ahead with further structural changes, especially privatization, it would steadily become sounder still. When I spoke in the House of Commons on 22 June 1983, introducing the Queen’ Speech, I could point to the lowest rate of inflation since 1968, to higher output and to record levels of productivity. But part of the trouble was that after an election a government’ past achievements are immediately discounted. As one of my advisers put it, paraphrasing La Rochefoucauld: ‘the only gratitude in politics is for favours still to be received.’ And we had been so lucky in choosing the date of the election (though it was not all luck) that expectations about the rate of future progress had risen too high. Inflation started to move up from the low point of 3.7 per cent in May and June to reach 5.3 per cent in December, though it would stay at that level or lower for the next twelve months. Unemployment also began to rise again, remaining above three million, and it seemed very difficult to predict when the higher economic growth which was now apparent would begin to bring the total down. Although the interest rate actually fell, mortgage rates rose to meet the extra demand for mortgages — in itself a sign of the progress we were making towards a property-owning democracy, but naturally unpopular with borrowers. All this led to accusations that the Government had ‘cooked the books’ on the economy before the election.

  It was public spending which became the focus of this attack. Indeed, there had been tell-tale signs of trouble in the weeks before the election. In April, the first month of the new financial year, the PSBR was well above target and it soon became clear that the provisional outturn for the PSBR for 1982–3 – a figure we regularly published — would be £9.2 billion, £1.7 billion higher than the budget estimate. It was possible that lower than expected revenues were part of the problem. But there had been an earlier misjudgement about the extent to which cash limits would be underspent, and much of the problem arose from the action we took to correct this. The previous winter we had had such strong evidence that capital programmes were being underspent that we had taken positive action to encourage spending up to target. (In principle, it is right to spend up to planned levels, otherwise you pile up spending for future years, damage the construction industry and increase unemployment.)

  I had discussed the problem with the then Chancellor, Geoffrey Howe, on Thursday 21 April. As so often, it seemed that the Ministry of Defence had been the main villain. The last instruction from the Treasury to the MoD before the budget had been to minimize their underspending. The MoD had complied with unwonted energy. Having been predicting a substantial underspend, they turned out to be overspending with a vengeance. Geoffrey and I were appalled and decided to give the MoD a much-needed rebuke. But the damage had been done.

  After the election the new Chancellor had another look at the borrowing figures. Nigel Lawson found himself in an unenviable position. The Treasury’ summer forecast had just been completed and it suggested that the PSBR for the current financial year would be overrun by &3 billion. Inevitably there was a large margin of error in these figures — as always with the PSBR which is constituted by the difference between two enormous sums of money, public sector income and expenditure. But the signs were bad. To add to the problem, the money supply figures for May were poor and we knew that sterling, though high at the time, might soon come under pressure if American interest rates kept on rising. In any case, if we were really on course for a huge overshoot in the PSBR, something had to be done.

  When on Wednesday 29 June I received a note from Nigel setting out how he wished to act I too became distinctly worried and emerged no less so from the discussion I had with him the following evening. It is never an easy matter to rein back public spending part way through a fiscal year, but the argument for early action was overwhelming. The earlier you make a cut the less drastic it has to be and the more chance you have of sustaining your credibility with the markets, which is a useful bonus. The obverse of this, however, was that to announce further public expenditure cuts just weeks into a new Parliament would be extremely unpopular and politically embarrassing. The public would think that we had deceived them at the election and spending ministers would feel bounced. Nigel fully understood this and it was a mark of his courage that he recommended immediate action.

  He made three proposals. The first was to raise more money for the Government by selling an extra tranche of BP shares. But while this might help fund the PSBR it did not allow escape from the need for real cuts in spending. It was not possible to take action on the non-cash-limited programmes in mid-year, so that we had to concentrate on cash-limited spending. But should the cash squeeze apply to all of this spending or just some of it? Nigel’ initial view was that it should only apply to the non-pay element of central government spending because pay was extremely difficult to hold down successfully. My advisers and I queried this and after Nigel and I talked the matter through at Chequers the following Saturday we settled on a package that included the pay bill within the squeeze. Alan Walters shared Nigel’ view that immediate action had to be taken and urged a 3 per cent reduction in cash limits, greater than Nigel originally proposed. In fact, we settled on a 1 per cent reduction in the pay bill and a 2 per cent reduction in other cash limits.

  Nigel had one further ingenious proposal, originally suggested by Leon Brittan earlier in the year: the introduction of ‘end-year flexibility’. By Treasury convention, departments which failed to spend up to their allocation during the financial year were not allowed to carry over the unspent sum into the following year; they lost the money, in effect. The result, of course, was that departments which found themselves underspending as the end of the financial year approached tended to put on a spurt to use up their allocation and public spending would surge. ‘End-year flexibility ‘sought to diminish this effect by permitting them to carry over a proportion of that underspending into the next year.

  Altogether these proposals for asset sales, public spending cuts and an improvement in the technique of public expenditure control would, we believed, reduce that year’ public expenditure by more than &1 billion.

  Nigel and I expected trouble at Cabinet. It would have been helpful if we could have briefed ministers in advance, but we knew that if papers were circulated the proposals would probably leak. In the end some ministers were briefed individually, as were the Permanent Secretaries of their Departments, but despite our precautions when Cabinet met on Thursday 7 July to discuss the proposals, they had already appeared in print, splashed across the front pages that mor
ning. This did not make the meeting any easier. But Cabinet faced up to what had to be done and Nigel was able to announce the decisions to the House of Commons that afternoon. We emphasized that these were not cuts in planned public spending but rather a package of savings necessary to remain within it. It was perhaps too much to hope that this distinction would be widely grasped.

  DIPLOMACY: VISITS TO THE NETHERLANDS, WEST GERMANY, CANADA AND THE UNITED STATES

  I spent most of August on holiday in Switzerland, getting over an awkward and painful eye operation that I had had at the beginning of the month. On Friday 29 July I had been at the passing out parade at the RAF College at Cranwell. When the parade and the fly-past were over I turned and walked up some steps into the College for lunch. All of a sudden something happened to my right eye: black spots floated across the field of vision. I rubbed, but they wouldn’t go away. Later when I was back at Chequers I bathed the eye. But it did not improve.

  On Sunday I rang my doctor. I went over to his house, not far from Chequers, and he examined the eye — having heard my description of what had happened he already had an eye specialist there. He told me that he thought I had a torn and detached retina and suggested laser treatment, followed by two days lying down until we could be sure that it had worked. Lying still for very long was something I found difficult, but I filled part of the time enjoyably enough listening to novels on tape. On Wednesday I went to his surgery to receive the verdict. I had packed an overnight case, as an insurance policy, half-thinking that I would not need it. But the news was bad. He examined me again and said that there had been no improvement at all; if anything, my eye was worse. As a precaution he had already booked an operating theatre for later that day and I went straight to hospital where the operation was successfully performed.

  By the time I returned to England from my Swiss holiday I felt fully recovered, which was all to the good since I had to make several important foreign visits in September.

  The first of these was to the Netherlands and West Germany. The two issues which dominated my talks in both countries were the deployment of Cruise and Pershing missiles and the approaching European Council in Athens, which was due to be held in December. On Monday 19 September I arrived in the Netherlands to be met by the Dutch Prime Minister, Ruud Lubbers. I liked Mr Lubbers, a young practical businessman who now applied his talents to good effect in Dutch politics. Although his instincts were federalist, like the leaders of other small countries in the European Community, in day-to-day Community business we often found ourselves on the same side. This was very much a short working visit with no formal speeches. Over lunch, I discussed the general political scene with Mr Lubbers and his Foreign minister, Hans Van Den Broek — another Dutchman whose company and conversation I enjoyed, even when I did not agree with him. The Dutch Government, being a coalition, was in its usual somewhat fragile condition, with problems over its budget and in the background the question of nuclear arms exercising a general destabilizing influence.

  The summit’ plenary session in the afternoon was entirely devoted to European Community matters. There was a large measure of agreement between us on the fundamental practical questions, but the Dutch urged compromise in the run-up to Athens and I was not going to give the impression that our stance was weakening. We seemed to be getting nowhere in our campaign for a tough guideline on future CAP expenditure. Moreover, I was concerned that the Community should not drift further into protectionism. As regards the future financing of the Community, there was no question of my agreeing at Athens to an increase in the Community’ ‘own resources’ in isolation from the other essential conditions we had laid down. I also sought to draw Dutch attention to something which is still not properly grasped: if the Community expected the Germans to go on paying an open-ended share of its costs this would store up political trouble for the future. He who paid the piper would eventually wish to call the tune.

  From the Netherlands I flew on to West Germany, where I visited British forces. On Wednesday afternoon (21 September) I arrived in Bonn for talks and dinner with Chancellor Kohl. He and I discussed the approach to the Athens summit. I told him that it would be deplorable if the impetus he had given to reform at Stuttgart were now lost. So I was relieved when Herr Kohl said that sorting out the CAP and the system of financing the Community must take priority over new policies. He also told me that the European Community was ‘politically essential to Germany’ but it was ‘no good having the Community as a roof over Germany if the roof was leaking’ — an interesting metaphor, I thought; and anyone dealing with the European Community should pay careful attention to metaphors. We in Britain were inclined to minimize their significance — whether about ‘roofs’ or ‘trains’ — and to concentrate on the practicalities — mending the leaking roof, in Chancellor Kohl’ phrase. We had to learn the hard way that by agreement to what were apparently empty generalizations or vague aspirations we were later held to have committed ourselves to political structures which were contrary to our interests. But this is to anticipate a little.

  However, I was already beginning to feel — I did so increasingly as the years went by — that there was an imbalance in western diplomacy. European Community heads of government and ministers met regularly, drawn together initially by Community problems, but at the same time discussing wider international issues. By contrast, there was not enough contact and understanding between the European countries and our transatlantic allies in NATO — the United States and Canada. I hoped that my visit to Canada and the United States at the end of September would do something to put this right.

  The Canadian visit was, in fact, made on their initiative. The sensitive question of the patriation of the Canadian Constitution from the Westminster Parliament was now behind us.* My visit was an opportunity to emphasize the value of trade and investment links and, still more important, to try to persuade Canadians to take a larger and more vigorous part in the western alliance than they had under their present Prime Minister, Pierre Trudeau. It was common knowledge that Pierre Trudeau and his Liberal Government — who sometimes seemed more interested in the politics of the Third World than in the great East-West issues — were extremely unpopular. But I would also be meeting the Conservative prime ministers of the provinces of Ontario and Alberta, as well as the new Conservative leader at federal level, Brian Mulroney, who had just been elected to the Canadian Parliament and who was firm favourite to replace Pierre Trudeau as Prime Minister at the next election.

  I flew into Ottawa on the evening of Sunday 25 September and had supper at the High Commission, one of the great historic buildings in Ottawa. Two of the paragraphs of the speech I was to deliver the following day to the Canadian House of Commons were in French and a French teacher had been specially laid on when I arrived so that I could get my pronunciation just right and avoid international incidents.

  The following morning I had talks with Pierre Trudeau and his Cabinet. East-West issues provided the main point of contention, as I had thought they would. Mr Trudeau’ line was that technicians had taken over arms control negotiations from the politicians, and that this was why they were getting nowhere. I did not agree. After all, disarmament talks were bound to be highly technical: if we got the technicalities wrong we would be in trouble. However, Mr Trudeau developed his theme, arguing that the shooting down of the South Korean Airliner by the Soviets — with the loss of Canadian lives — on 1 September also demonstrated the dangers when politicians were not in command. He understood that the aircraft had been shot down on the orders of a local military commander without reference to Moscow. I replied that what this really showed was that the Soviet command structure and rules of engagement were unsound, because these should not have allowed an aircraft to be shot down without political direction. What liberal leftists like him seemed unable to grasp was that such acts of brutality as the shooting down of a civilian aircraft were by no means uncharacteristic of the communist system itself.

  Later that morning I
had a private meeting with Mr Trudeau. We discussed international affairs — Hong Kong, China, Belize — but most interesting for me was his impression of Mikhail Gorbachev, of whom I had heard but whom I did not yet know. Mr Gorbachev had visited Canada earlier in the year, under the pretext of examining Canada’ agricultural achievements but really with a view to discussing long term security questions. Pierre Trudeau had found him sticking to the conventional line as regards the INF negotiations, but without the blinkered hostility which characterized the other Soviet leaders. Mr Gorbachev had apparently been prepared to argue and make at least verbal concessions. I did not at this time foresee the importance of Mr Gorbachev for the future. The conversation served mainly to confirm my view that we must persuade the new Soviet leader, Yuri Andropov, to visit the West. How were we to make a proper assessment of the Soviet leaders if we did not have personal contact with them? Still more important, how were we to persuade them to see further than their own propaganda if we never showed them what the West was really like?

  After lunch I had my first meeting with Brian Mulroney. Mr Mulroney was undergoing that most misleading of experiences — a political honeymoon. He was charming and charismatic but he lacked any real political experience. It was to his credit that he fully realized this and at his request I spent most of our time talking about my own experience of Opposition and government. Brian Mulroney and I were to become good friends, though we were very different sorts of politician and were to have some serious disagreements. As Leader of the Progressive Conservatives I thought he put too much stress on the adjective as opposed to the noun.

  The speech I delivered to the Canadian Parliament that afternoon went very well. It was a more powerful defence of values and principles than they were used to hearing from their own Government and was interrupted by frequent applause. Apart from one or two MPs, I received a standing ovation which included members of the Diplomatic Corps. This itself provided an interesting vignette of attitudes behind the Iron Curtain: the Soviet, Czech and Bulgarian Ambassadors remained rooted to their seats, while the Hungarian and the Pole rose enthusiastically to join the applause.