Who Dares Wins

by Dominic Sandbrook

  All too often, though, the path to redemption is lined with suffering. Few of Mrs Thatcher’s allies doubted that life would be tough. Sir Keith Joseph, for example, had always maintained that to defeat inflation a successful government must be prepared to accept more unemployment. And in the early summer of 1979, most senior figures expected things to get worse before they got better. The Treasury’s strategic summary, for example, could hardly have been more downbeat. ‘It would be foolish – and counterproductive – to aim for overnight solutions,’ it warned: ‘the road to recovery will inevitably be long and gradual.’ Recovery would take time, agreed John Hoskyns. The ‘first two to three years’ would be hellish, and they must harden their hearts: ‘Ministers must say “No”, and keep on saying “No”, until their jaws ache.’28

  Yet not all the architects of Mrs Thatcher’s revolution were so pessimistic. Even months after the election, Howe was enthusing about the ‘enormous fun’ of working for someone whose openness, vigour and ‘unwillingness to be cowed’ made her so ‘dramatically exciting’. Lawson, too, recalled the ‘excitement of those first few weeks in office’, the ‘thrill’ of attempting ‘something genuinely new’. And at the beginning of August, one of Howe’s special advisers, Peter Cropper, sent a remarkable note to his colleagues. They should stop being so downbeat, he said. ‘The world economy may be gloomy, but there is absolutely no need for us to be gloomy.’ Indeed, when Cropper read the Treasury’s summary of their economic strategy, he was shocked by how miserable it was:

  There is no hint of the reforming crusade that some of us think we are launched on, and no hint of the end goal of it all – joy, wealth, national power, two acres and a cow, a second car in every garage, interesting jobs, leisure, comfortable trains, channel tunnels, atomic power stations, gleaming new coal mines, everyone a bathroom, patios for all etc. etc.

  We started out, quite rightly in my view, by displaying the bareness of the cupboard and emphasising the size of the job. But we must constantly remember that leadership, which is what we were elected to provide, consists largely in cheering people up, making them laugh, and keeping them that way.

  Gleaming new coal mines, second cars, patios for all: these were noble ambitions. But if the British people really wanted somebody to cheer them up and make them laugh, they should have chosen a different leader.29

  Howe’s first task was to deliver a Budget, due on 12 June. Given the likelihood of a world recession, the obvious approach would have been to tread carefully. But both he and Lawson were convinced that they would never get a better chance for radical course-correction. If they hesitated, the government’s energies would be dissipated in the everyday fire-fighting of parliamentary life, while their national popularity would probably never be higher than it was now, in the aftermath of victory. So, as Lawson put it, their instinct was ‘to press ahead, because deferment can become a way of life’.30

  But the Budget presented Howe with a nasty dilemma. In effect, he was committed to doing various contradictory things at once. Chief among them was cutting income tax. Contrary to what is often thought, the tax burden in 1979, about a third of GDP, was not especially high by European standards. What was unusual, though, was that so much tax was levied on personal income, which, according to the Conservatives, stifled individual ambition and free enterprise. The basic rate of tax was 33 per cent, which was high compared with some of Britain’s neighbours. But Howe’s real target was the controversial 83 per cent top tax rate, paid by those earning more than £25,000 a year (perhaps £175,000 today), which had driven a motley collection of big names, from Rod Stewart and Michael Caine to David Bowie and Don Revie, to shelter their earnings abroad.

  As Mrs Thatcher had told an audience in 1978, she regarded this as ‘sheer confiscation’. By scrapping this ‘symbol of British socialism – the symbol of envy’, the Conservatives would not only signal their enthusiasm for ‘hard work, responsibility and success’, they would also send a message that ‘top people’, such as Billy Butlin, Roger Moore and Engelbert Humperdinck, were free to return to their native land. Indeed, during the election she maintained that cutting income tax was the key to turning Britain around. ‘We really do need far more incentive in the economy to make it worthwhile for people to work hard, to create new businesses and to expand them,’ she explained. ‘Unless someone does that … then I see no hope and I see no change from perpetual decline.’31

  As soon as Howe moved into the Treasury, he told his officials to begin work on cutting the higher tax rate to 60 per cent and the basic rate from 33 per cent to 30 per cent. Although this is sometimes seen as the moment when Mrs Thatcher’s Britain began to slide into right-wing extremism, the truth is that by European standards the new rates were utterly unremarkable. Under Howe, the richest taxpayers would hand over the same as in France, while they still paid more than their counterparts in West Germany or the United States. The real issue, from the Treasury’s point of view, was how the new Chancellor proposed to pay for it. His tax cuts would leave a £4 billion hole in the government’s finances. Yet Howe was also committed to reducing borrowing to about £8 billion a year, and this at a time when the Treasury was predicting a deficit of at least £10 billion. So how would he reconcile these apparently contradictory commitments?32

  The obvious answer was to raise more money through VAT. Labour had bequeathed two different VAT rates: 12½ per cent on so-called ‘luxuries’ and 8 per cent on everything else. Howe’s plan, therefore, was to bring in a single VAT rate of 15 per cent. But as he was often to find, every solution brought problems of its own. For one thing, the Conservatives had explicitly denied rumours during the election campaign that they were going to double VAT. Raising it from 8 to 15 per cent was not quite doubling it, but it came pretty close. Howe described this as ‘the small change of election campaigning’. But at the very least it looked pretty cynical.33

  The bigger problem was that, with inflation already in double figures, the higher VAT rate would mean big price increases. Howe also knew it would encourage the unions to demand bigger pay settlements. But it was worth the risk, he thought, to bring down income tax and show the government’s determination to realize its radical aspirations. Unfortunately, Mrs Thatcher did not share his confidence. Just twelve days into her premiership, she summoned him to Number 10 and gave him a ferocious grilling. She was ‘extremely perturbed’, she said, by the thought of raising VAT to 15 per cent, which ‘could be catastrophic for the next pay round’. Instead, they ought to be making deep cuts in public spending, on which they were being ‘not nearly tough enough’.34

  Here was the first hint of what became a familiar pattern. In the public imagination, Mrs Thatcher was the Iron Lady, radical, dogmatic and unbending, the sworn enemy of appeasement and U-turns. In reality, she was acutely conscious of her own vulnerability and much more risk-averse than people imagined. Indeed, whenever Howe and Lawson presented her with genuinely daring or difficult ideas, her instinct was often to hesitate or even to say no. But for all his apparent mildness, Howe was a man who stuck doggedly to his guns. At a second meeting on 22 May, he told Mrs Thatcher that raising VAT to 15 per cent was the absolute minimum if she really wanted to cut income tax. Hang on, she said: what about inflation? And now she made what, given her reputation, seems an extraordinary suggestion. According to the minutes, she ‘wondered whether it was necessary or wise to try to achieve all of the Government’s objectives on the income tax front in the first year’. Why not focus on cutting spending, and leave their tax reforms till later? Why did they need to change everything at once? Why risk so much on a single throw of the dice?35

  Today many historians would say that Mrs Thatcher was right, and that a more cautious approach might have avoided some of the agonies of the next two years. But Howe, supported by his Chief Secretary, John Biffen, had a plausible counter-argument. Cutting income tax had been one of their most eye-catching election promises, and the Budget would be seen as a crucial ‘test of our resolut
ion’. If they bottled out of it, who would believe that they were going to deliver on their other commitments? Yes, Howe said, ‘it is true that the perceived rate of inflation will suffer an immediate shock, but this will not then be repeated month after month … In my judgement, 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.’ This was Biffen’s view, too. This was their only chance, he said. The next few years would be rough, and they could be ‘facing industrial unrest in a couple of years such as would make a later hike unthinkable. We needed to do it now if at all.’36

  In the end, Mrs Thatcher grudgingly gave way. But no sooner had they disposed of one bone of contention than another took its place. Since Howe had ruled out a return to incomes policies, he intended to use interest rates to keep inflation down. Having peaked at 15 per cent during the IMF crisis, rates had steadily fallen during the late 1970s, shot back up during the Winter of Discontent and settled at 12 per cent at the time of the election. But on 6 June, Howe told Mrs Thatcher that, thanks to the explosion in public sector pay, the money supply, measured in sterling M3, was already running out of control. He had talked to the Bank of England, and they agreed that rates should go up to 14 per cent as soon as possible – preferably the very next day.37

  Mrs Thatcher was not at all happy. High interest rates penalized her most loyal supporters: young, aspirational, middle-class homeowners with limited means but sizeable mortgages. So when, later that evening, Howe and Gordon Richardson visited Number 10, she gave them a very hard time. (She hated Richardson anyway: charming, clever but almost comically grand, he was precisely the kind of patrician bigwig who had condescended to her all her life. In private, she called him ‘that fool who runs the Bank of England’.) It would be madness, she said, to raise rates the next day, because that was the day of the European Parliament elections, and in any case a 2 per cent rise was much too drastic. In effect, then, she told them to go away and think about it. But as with VAT, Howe was not for turning. The day before the Budget, he reported that he and Richardson had indeed thought about it, but ‘we remain convinced that it should be 2 per cent’. Entirely characteristically, Mrs Thatcher got her private secretary to write back and tell him they were still wrong. But she was ‘willing to abide’, she said grumpily, ‘by the Chancellor’s and the Governor’s judgement in this matter’. So Howe got his rate rise, but she got the last word.38

  At half-past three on Tuesday 12 June, a decanter of gin and tonic at his elbow, Howe rose to present his Budget. He began in mournful fashion, setting out the details of Britain’s ‘long decline’:

  Only a quarter of a century ago – within the memory of almost every Member of this House – the people of the United Kingdom enjoyed higher living standards than the citizens of any of the larger countries of Europe. Amongst the free nations of the world, Britain was then second only to the United States in economic strength.

  It is not so today … The French people now produce half as much again as we do. The Germans produce more than twice as much, and they are moving further ahead all the time …

  In the last few years the hard facts of our relative decline have become increasingly plain, and the threat of absolute decline has gradually become very real. That is not a prospect that I am prepared to accept. Nor, I believe, are the British people. They realise that we cannot for ever go on avoiding difficult choices in the fatal, and increasingly futile, quest for easy solutions.

  Howe promised no overnight revolution. Indeed, he thought it was time to admit that there was ‘a definite limit to our capacity, as politicians, to influence these things for the better’. But he was determined to make a start anyway.

  The theme of the Budget was cuts. In total, Howe trimmed £2½ billion from Callaghan’s spending plans, partly through cash limits and civil service cuts, but also through tweaks such as higher NHS prescription charges. By selling the government’s shares in BP, he also hoped to raise a further £1 billion. But the big story was his tax changes. As agreed, income taxes came down, the top rate from 83 per cent to 60 per cent, the basic rate from 33 per cent to 30 per cent, while VAT went up to 15 per cent. Yet at the same time, Howe tightened the money supply growth target for the next twelve months to between 7 and 11 per cent, a very optimistic ambition given the reality of rising borrowing and runaway pay. All this, he said, was merely the first step in his plan ‘to reduce the role of Government. Government will spend less, Government will borrow less.’39

  Perhaps never in living memory had a new government made such a daring start. In the Mirror’s words, ‘Thatcher Keeps Her Promise … AND HOWE!’ ‘A change of direction we were promised, and a change of direction we surely have got,’ said the Express, while even the Guardian applauded the government’s ‘refreshing’ determination to deliver on its radical rhetoric. By contrast, the Observer thought the new government had sent Britain on to a ‘race track without escape roads’, and deplored its ‘dogmatically anti-egalitarian’ tax changes. And none of this was lost on the public. Many people thought the Budget ‘divisive in terms of social class’, reported Conservative Central Office, adding that ‘it was widely seen (even amongst the rich themselves) to be favouring the rich and penalising various less well off groups’. Even so, ‘it was seen by a substantial majority to involve a completely different approach to the country’s problems, to be tough but necessary and to have reflected what the majority of electors who voted Conservative had voted for’.40

  Labour, of course, hated it. But perhaps the most heartfelt opposition came from the government front bench, where Jim Prior, the most ebullient of the old Tory paternalists, found it an ‘enormous shock’. The evening before, the Employment Secretary had given Moss Evans, leader of the Transport and General Workers’ Union, dinner in his London flat, and had assured him there was no way they would raise VAT to 15 per cent. Now he felt like a fool. ‘It was then’, Prior wrote, ‘that I realised that Margaret, Geoffrey and Keith really had got the bit between their teeth and were not going to pay attention to the rest of us at all if they could possibly help it. That first budget also brought it home to me that I was really on a hiding to nothing from the very beginning.’41

  Later, Mrs Thatcher’s critics portrayed the Budget as proof that she and Howe had fallen victim to a crazed monetarist cult. It is more accurate to see the Chancellor as a gambler, taking a calculated risk that he could deliver his long-promised tax cuts while still keeping a lid on inflation. But as the weeks passed, his courage began to look an awful lot like recklessness. He had assured Mrs Thatcher that, as people’s expectations fell into line with the government’s targets, wage and price growth would return to more manageable levels. Yet in the four months that followed his Budget, retail price inflation surged from just over 10 per cent to more than 15 per cent, while sterling M3 ballooned by 14 per cent. And as the unions pressed for double-digit pay increases and oil prices surged, inflation roared on, reaching a staggering 21 per cent by the spring of 1980. In an irony that Mrs Thatcher did not enjoy, a government elected to banish the memories of the Wilson years was now presiding over the worst inflation since 1975.42

  By now even many monetarists thought Howe had paid a dangerously high price for his political success. While they generally applauded his tax cuts, economists such as Alan Walters argued that he should have never have raised VAT so high, and should have cut spending instead, as Mrs Thatcher had suggested. ‘I asked for too little, didn’t I?’ she had muttered to one of her officials after the Budget. Her opponents crowed that her policies had been exposed as a counterproductive shambles. But her supporters countered that this only proved how hard it would be to cure the ‘British disease’, a condition more deep-seated than they had realized. ‘Nothing’, declared the Daily Express that August, ‘can excuse the fact that at the moment the British have become the Playboys of the Western World, living way beyond our means. If any one of us kept on spending b
orrowed money in the spendthrift way we as a nation have, he would long ago have been declared bankrupt.’43

  That summer, as the playboys of the Western world relaxed on the beaches of Majorca, Marbella, Crete and Rhodes, Howe considered his next step. Given the inflationary situation, the obvious course would be to raise interest rates again. But higher rates would make life very painful, not just for ordinary homeowners but for Britain’s increasingly hard-pressed manufacturers. What was worse, higher rates would have serious consequences for the pound. Far from dampening the upward pressure on sterling, Howe’s Budget had intensified it. In the weeks after the Budget the pound rose and rose, reaching the dreaded heights of the $2.30s at the end of July. Nobody had expected such a surge; even Lawson thought it ‘astonishing’.

  Inside the bunker, Hoskyns was already telling people that sterling had gone too high, stifling exports, strangling industry and making recession inevitable. At the Bank of England, too, some officials thought it might be better to cut interest rates and relieve the pressure. But that would undermine the government’s commitment to sound money. In effect, then, Howe was damned whatever he did. He could cut rates to relieve the pressure on the pound and buy some breathing space for Britain’s manufacturers, but that would send inflation even higher. Or he could raise rates to bring the money supply under control, but that could send the pound shooting past $2.40 and make Britain’s exports punitively uncompetitive. Or he could do nothing and get the worst of all worlds. Never had a Chancellor more sorely needed a magic wand.44

  Mrs Thatcher, meanwhile, was becoming increasingly agitated. She hated inflation, but she also hated high interest rates. So when, scouring the Sunday papers on 24 June, she read that Howe was planning to raise mortgage rates, she scribbled a note pronouncing herself ‘very worried’. ‘This must not happen,’ she wrote, heavily underlining the word ‘not’. In her note she suggested a ‘temporary subsidy’ to keep rates down, which seemed to fly in the face of all her free-market principles. Alarmed, Howe pointed out that such a subsidy would be very expensive and would ‘seriously damage the Government’s credibility’. Even so, on 4 July she convened a meeting where she announced that any rise in mortgage rates would be ‘politically disastrous’. But Howe stood firm. The government’s entire monetary policy would be ‘fatally impaired’, he said, if they were seen to ‘hold down interest rates by artificial means’. Eventually Mrs Thatcher gave way. But it was a telling sign that, whenever free-market principle collided with the interests of the homeowning middle classes, her instinct was almost always to put ‘our people’ first.45