Since the public spending row of the previous July (see Chapter 4), little had seemed to go right for the new Chancellor. He had immediately become associated in the public mind with the punitive rather than the aspirational side of Thatcherism. His speech at the party conference in October had been, in his own words, ‘rather indifferent’.2 To the British public, he seemed clever, but his cleverness caused other people to feel stupid, and therefore irritated. No one doubted his abilities, but he had little political following. And because he had to wait not far short of a year before he delivered his first Budget, he had had no opportunity to make a decisive mark.
Lawson used his time well, however. He began preparing his Budget, by his own account, on the aeroplane back from a conference in the United States on 28 September 1983. He later claimed that of the eight main tax reform ideas he jotted down on the flight, six found their way into his first Budget.3 Although there was not complete agreement between No. 10 and No. 11 – Mrs Thatcher’s people wanted a tighter PSBR than the Treasury, for example – the sense of common purpose between the two at that time was strong. As Lawson developed his tax ideas, John Redwood encouraged them, invoking the long-distance support of Alan Walters* from across the Atlantic to bolster his case. Writing to Mrs Thatcher, Redwood backed Lawson’s plans to concentrate on business taxation, ‘removing tax impediments to individual enterprise and initiative’: ‘This is the budget to be bold. It should stake out the radical tax measures of this Parliament.’4 At the Department of Trade and Industry (DTI), Norman Tebbit, who admired ‘the great determination’ for reform which he observed at Lawson’s Treasury, also weighed in on Lawson’s side, arguing, for example, for the vital importance of getting rid of the job-damaging employers’ National Insurance Surcharge (NIS) which Labour had imposed. ‘I had, to a reasonable extent, the confidence of the PM, and I had the friendship of Nigel,’ he recalled. ‘So I could sweet-talk them.’5 The Tebbit–Lawson combination was formidable. ‘I couched my submissions along lines which supported Nigel’s own intentions,’ Tebbit recalled, ‘knowing of course that they would probably be drawn to the attention of the PM.’6 Jeffrey Sterling,† special adviser to all Mrs Thatcher’s DTI secretaries of state, considered that ‘If Norman and Nigel worked together, they would nearly always succeed in persuading her.’7
On most of the matters at stake in the 1984 Budget, Mrs Thatcher did not need a huge amount of persuasion. In Lawson’s view, she did not share his interest in producing a more logical tax system: ‘This idea of tax neutrality – the removal of special reliefs for this, that or the other … held no appeal for her.’8 She did not care as much about undistorted markets as he did. Her natural inclination was to use the tax system actively to favour those with whom she sympathized, most notably homeowners, or potential homeowners, and pensioners. But she was also fervently in favour of reducing burdens on business and obstacles to job creation. She therefore supported her Chancellor’s desire to cut the rate of corporation tax, while coppicing its forest of allowances and reliefs, and to get rid of the NIS. So long as income tax cuts were recognized as the ultimate, though not necessarily immediate, goal, she was happy to enter into the spirit of Lawson’s first Budget. In her first administration, Lawson told her, ‘our major achievement was bringing down inflation’, but they had not managed a ‘radical structural reform of … business taxation … We now have a rare opportunity.’ He had a plan for the Parliament, sequenced for electoral advantage: ‘With a neutral Budget in 1984 and a large fiscal adjustment [partly due to asset sales] in prospect for 1985, this leaves room for desirable changes in personal taxation, provided we keep public expenditure flat.’9 She underlined the words ‘provided’ and ‘flat’ many times, to encourage rigour.
Under the British system, the Budget is not a Cabinet decision, though the Cabinet is perfunctorily consulted and informed before it is unveiled to Parliament. It belongs exclusively to the Chancellor, and, ‘The only person the Chancellor is obliged to consult is the Prime Minister.’10 Lawson was more jealous of the Chancellor’s rights in this area than the more conciliatory Geoffrey Howe had been. He made it clear, from the first, that he would be master in his own house. He ruthlessly squashed Mrs Thatcher’s hope that Lord Cockfield, who, since the election, had been Chancellor of the Duchy of Lancaster and, in effect, adviser to Mrs Thatcher on fiscal and business subjects, could be an independent source of tax reform. He also did little to enlighten the Cabinet about his Budget thoughts, provoking irritation. It got back to Mrs Thatcher, via Bernard Ingham, that John Biffen* had been so annoyed by Lawson’s attitude that he had briefed lobby journalists that ‘Cabinet this morning [9 February] had been one of the most bland, miserably disappointing and boring meetings he had ever been at. It was absolutely awful; there was no lively debate, just unctious [sic] self-satisfaction. Things had been described as “going along nicely”, although unemployment was still high.’11 The incautious outburst of the increasingly and dangerously frank Biffen was untypical of the Cabinet, but he was probably reflecting colleagues’ feelings of exclusion.
In fulfilling his duty to consult Mrs Thatcher over the Budget, Lawson was less punctilious than Howe. His preferred method was discussion after a Sunday-night supper in No. 11. Denis and Margaret and Nigel and his wife Thérèse would eat together, and then Chancellor and Prime Minister would retire to discuss Budget plans à deux.12 This method avoided leaks, because, on such matters, Mrs Thatcher was utterly discreet. Lawson also believed that it relaxed her, but in fact it made her somewhat uneasy because she preferred serious government business to be done on paper. Matters were not clearly argued through. As time went on, Lawson’s preference for chat became a means of avoiding important differences and made Mrs Thatcher more suspicious.13 This was not so in 1984, but already it caused muddle. Andrew Turnbull, for example, had to seek Mrs Thatcher’s guidance after Lawson’s private office made assertions about what had been agreed about extensions of value-added tax (VAT) at one of these tête-à-têtes: ‘It would be very helpful if you could confirm whether this account is consistent with your account of the meeting.’14 She said it was. Confusions in later years were not to be so easily dealt with.
In the preparation for the 1984 Budget, however, differences between Mrs Thatcher and Lawson mostly worked to their shared advantage. She qualified his reforming zeal with her political sense of what she called ‘our people’. She advised him against the levy on consumer credit which he proposed (though Walters supported him),15 and fretted about VAT extensions to house repairs. She agreed personally to soothe the feelings of Nissan, the Japanese car company whose entry into British manufacturing in the north-east had been sweetened by capital allowances which now stood to be reduced by the proposed reforms.16 In particular, she followed the lead of Bernard Ingham, who warned that Lawson’s idea of extending VAT to newspapers would spoil everything:
It may be objected that Fleet Street could afford to pay VAT if only it would sort itself out [by taking on the print unions]. That is no doubt true and I have very little sympathy or patience left with Fleet Street. But that is still not a good reason for setting Fleet Street against you. Look what happened to Mr Macmillan.17
Fleet Street proprietors often owned the more estimable local press too, Ingham reminded her. He came on strong: ‘I am profoundly concerned lest you set potential or actual supporters against you,’ he said. ‘Please show to N.L.,’ wrote Mrs Thatcher beneath these words. She personally told the Chancellor not to spoil the ‘wonderful reception’ his ‘wonderful Budget’ would otherwise get.18 VAT was not extended to newspapers. Politically, if in no other sense, Mrs Thatcher and Ingham were undoubtedly right, and Lawson wrong.
Despite the most comprehensive leak in Budget history, when the Guardian published a full early draft of the text almost two weeks before delivery,19 Lawson’s first Budget speech still came almost as a surprise. It confounded the expectations of the political market-place. Because of Lawson’s early difficulties as Chancell
or, the media had forgotten his mastery of his subject and the strength of his ambition. ‘This Budget will set the Government’s course for this Parliament’ were his first words.20 He set out his two themes – the further reduction of inflation and his reforms of business taxation and how these would pave the way for tax cuts. The man who had invented the Medium-Term Financial Strategy (MTFS) seemed to carry authority as he gave the House the future narrative which he wanted.
Lawson set the PSBR, optimistically, at only £7.25 billion (Walters had been even more hopeful, recommending £6 billion),21 though in the previous year it had hit £10 billion. It was his tax changes, however, which commanded the most attention. He halved stamp duty, withdrew all new life insurance premium relief, and got rid of the ‘investment income surcharge’, which taxed ‘unearned’ income at a higher rate. He changed capital allowances to discourage companies from hiding from tax in industrial buildings, machinery and plant, and he laid out plans for a phased reduction in corporation tax, lowering the rate over several years from 52 per cent to 35 per cent. The small companies rate fell to 30 per cent. Share options were taken out of income tax altogether and the NIS (‘this tax on jobs’) was abolished. He extended VAT to building alterations and hot take-away food, creating a press outcry about punishing fish and chips. In a little coup de théâtre, Lawson complained about a European ruling forcing him to tax beer as heavily as wine. He said he would obey it – largely by cutting the duty on wine. He held income tax rates at existing levels, but raised their thresholds well above inflation.
All this Lawson accomplished in a crisp, short speech, delivered with confidence and the suppressed excitement that a writer might feel when, after years of drafting his magnum opus, volume one at last appears. He gave the impression of knowing what he wanted and where he was going. Reviews like ‘A Star is Born’ (the Spectator),22 ‘a pyrotechnic display of economic and financial skills’ (Guardian),23 followed. A delighted Mrs Thatcher excitedly gatecrashed Lawson’s thank-you party for staff in No. 11 afterwards. A week later, John Redwood was moved to write to Mrs Thatcher, ‘The Government has now regained momentum, thanks to a strong Tory radical Budget.’24 He argued that Lawson had successfully advanced the radicals without alienating the consolidators. The radicalism must continue, or there would be ‘a lack of wind in the sails’, but the Tories must also remember that ‘vested interests’ were often their essential supporters. The task of the government was to bring these apparent opposites ‘behind purposes about which they could all unite’. It was a novel and pleasing experience for Mrs Thatcher to be presented with a Budget which was, in her view, right, and also popular. It was the first big achievement which made Nigel Lawson, in the word she was to use at a later, much less happy moment, ‘unassailable’.
One important issue over which most radicals and consolidators could be persuaded to unite was privatization. The subject had also been well foreshadowed in the supposedly overcautious manifesto for the 1983 election. The manifesto had boasted that ‘We have returned to free enterprise many state firms, in order to provide better service to the customer and save taxpayers’ money.’ It listed the sales achieved so far and made much of employee share ownership as ‘the truest public ownership of all’. More important, it promised to go much further. The word ‘privatised’ appeared, though slightly sotto voce, under the heading of ‘The Nationalised Industries’. Their reform, the manifesto declared, was ‘central to economic recovery’.
Big names were named. BT, Rolls-Royce, British Airways and substantial parts of the British Steel Corporation, British Shipbuilders and British Leyland were promised for sale. So were British Gas’s offshore oil interests. The Tories said they would ‘seek other means’ of encouraging competition and capital in the gas and energy industries. They also stated: ‘Merely to replace state monopolies with private ones would be to waste an historic opportunity.’ There was a clear policy purpose and a clear agenda to get through. It was not ‘a great ideological crusade’,25 more a determination to solve a collection of problems which government was peculiarly ill equipped to deal with, searching for ‘a route out of this mess’.
In this, however, it helped very much that Mrs Thatcher and Nigel Lawson were ideological soulmates in most of the economic aspects of Thatcherism. Her relationship with Geoffrey Howe as Chancellor, though vitally important and, broadly speaking, successful, had been forged more by necessity than by shared zeal. Lawson, younger than Howe, and therefore in the early days more of an acolyte than an equal to Mrs Thatcher, had seen himself as a proto-Thatcherite. He was a more systematic developer of her own ideas than she was herself. He had also, both as financial secretary to the Treasury and as energy secretary, led privatization in the first term.
David Pascall, who moved over from the Think Tank when Mrs Thatcher closed it down, to join the Policy Unit, immediately felt this sense of common purpose at the heart of the government. ‘This was the most creative period, and we [the Policy Unit] were custodians of the strategy.’26 Although seconded from industry, and not politically engaged, Pascall was tremendously impressed by the Prime Minister. She had ‘both strategic depth and attention to detail, and that curiosity which was never satisfied. She was in a league of her own.’ Bob Young, who also joined the Policy Unit at this time, had a similar sense that they were witnessing a ‘major shift in the way the economy and society were working’.27 He described this time as ‘the golden years’.
The ‘big push’, as the No. 10 unit saw it, was for a competition agenda, rolling back the state, popular share ownership.28 Indeed, the Policy Unit was even more preoccupied with these themes than was Mrs Thatcher herself. Privatization was central. Mrs Thatcher had an ‘abiding hatred’29 of the nationalized industries because of the amount of government time and money they consumed, their appalling labour relations and their inability, in their existing form, to raise capital for proper investment. ‘I do hope to be able to show to people that privatisation works,’ she said shortly before the 1983 election. ‘It is often more efficient because people know … they are on their own, whereas if they are nationalised they think, “Oh well, we can turn round and the taxpayer has got to subsidise us.” ’30 She longed for ‘decisions to be taken at a commercial and not a political level’.31 According to Peter Warry, who joined the Policy Unit in the summer of 1984, having previously been chief executive of a British Leyland subsidiary, the DTI and, to a lesser extent, the Treasury ‘were quite well captured by the nationalized industries’.32 Mrs Thatcher was not: she regarded most of their managements as incompetent and weak. She was often very well informed about particular nationalized industries, especially the ‘smokestack’ ones. She was well advised, Warry believed, by Denis: ‘When I was discussing BL with her, I found I was really on my mettle. She was very impressive. Sometimes she knew things I had not read.’33 Tebbit agreed, from a different perspective: ‘I had dark suspicions that Denis had given, informal, brutal advice on BL.’34
The Treasury, keen to sell off state assets, was primarily concerned with the benefit to the public finances from the proceeds.* Mrs Thatcher saw the issue more widely – in political, social and industrial as well as financial terms. This difference of emphasis between No. 10 and the Treasury was – on this subject – largely harmonious, one of function rather than ideology. Lawson, after all, had given more orderly thought to the whole philosophy of privatization than had Mrs Thatcher herself. ‘We saw Lawson as understanding it all,’ recalled Oliver Letwin. ‘He was completely on the side of the market.’35 John Redwood, who succeeded Ferdinand Mount as head of the Policy Unit at the end of 1983, was, as he immodestly but correctly put it, its ‘guru on privatization’.36 Mount had recommended him for the post partly because he saw the rising importance of this whole area of policy.37 Under Redwood – much more than Mount, who had helped draft the 1983 manifesto – there was a sense within the Policy Unit that the manifesto had been ‘too empty of actual policy’.38 The unit’s new, self-appointed role was to m
ake government more ‘pro-active’, and less defined by its conflicts with the NUM or the ‘loony left’.39 All issues of ownership, above all privatization, contributed to this drive.
Part of Redwood’s job was liaison with John Moore,* the Treasury junior minister chosen by Lawson to push through the privatization programme. Moore, a telegenic, young, self-made son of a factory bench-hand turned publican, was an example of Thatcherism in practice and was widely regarded as Mrs Thatcher’s ‘blue-eyed boy’ of the time. He felt empowered by this, and by Lawson’s own enthusiasm for privatization – ‘a boss who really believed the same way’.40 He saw the link with Redwood at No. 10 as ‘very important for keeping in touch’41 and in retrospect saw the period from June to December 1983 as the key one for the whole privatization programme. If it did not get off to a flying start, backed by all the relevant departments, too little would be accomplished by the next election. The Policy Unit felt the same way – ‘If we did not push, everyone else would water it down’42 – and found themselves in the congenial position not only of making policy, but, as Bob Young saw it, of ‘getting things done’.43 This was made possible by prime ministerial determination, her endless progress-chasing and her unique authority across the whole of government. ‘Without her support,’ Moore recalled, ‘we could not have done any of these things.’44
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