On the night of Sunday 3 February, seeking to take advantage of Mrs Thatcher’s habitual good mood after a weekend away at Chequers,20 Lawson discussed his Budget plans with the Prime Minister. He told her that the PSBR for 1984–5, at an expected £10.75 billion, would represent an overrun of £3.5 billion, of which £2.5 billion could be attributed to the coal strike. The medium-term fiscal position was deteriorating: it ‘could be a particularly difficult year’.21 The two agreed that the PSBR for 1985–6 had to come down to £7 billion, but disagreed on the way to achieve this. Lawson’s preferred package included extending VAT to newspapers. Mrs Thatcher had vetoed this the previous year on the straightforwardly presentational grounds that this would guarantee a rotten press for the entire Budget. This year, she was armed with a note from Bernard Ingham which warned: ‘I understand the Chancellor’s desire to broaden the VAT base. But I am bound to repeat: to impose it on newspapers will set against the Government a powerful and generally supportive medium.’22
Lawson also sought to confine mortgage interest tax relief to the basic rate of tax, introduce a tax on consumer credit (including mortgages) and tax pension lump sums.23 These ideas did not find favour. Mrs Thatcher disagreed particularly strongly with any reduction of mortgage interest relief. She regarded this as one of the best ways of helping young people get on the housing ladder, however much economists urged her that it merely led to higher house prices. Shortly before the 1983 election she had pressed for the ceiling to be raised from £25,000 to £35,000 but, facing resistance from Geoffrey Howe, had grudgingly agreed to a £5,000 rise.24 She wanted the ceiling for relief raised again. Prime Minister and Chancellor compromised by leaving the rate where it was.
Before the pre-Budget discussion in Cabinet the following week, Lawson circulated a paper on the economic strategy which Mrs Thatcher, scribbling on it, described as ‘very thin – and a little on the complacent side’.25 On 13 February, he had a still gloomier meeting with Mrs Thatcher, at which he told her that overspending in 1985–6 and in later years was now looking ‘increasingly evident’.26 John Redwood was almost beside himself at the figures that were emerging: ‘Taxes up, public spending up, interest rates up, unemployment up, even Income Tax and National Insurance up (as a percentage of earnings). That is the story since 1979 told in these dismal documents.’27 Mrs Thatcher thrice underlined ‘1979’, as if in pain at what her governments were failing to achieve. ‘You never give in,’ Redwood urged her. ‘Don’t let others give in for the government at such a vital juncture.’
At the Cabinet meeting itself, the consensus was in favour of caution: ‘There was a widespread feeling that this was not the year in which to embark on radical changes in the tax structure which would attract the hostility of powerful interest groups [ministers particularly had the pensions industry in mind] or increase the general price level.’28 Fairly bloody discussions about cuts inevitably ensued (‘Mr Fowler [the Social Services Secretary] has returned wounded to his tent’).29 The feeling of new opportunity which had suffused Lawson’s Budget the previous year had faded.
The Budget which Lawson presented to the House of Commons on 19 March was considered rather drab. VAT was extended only to newspaper advertising and, to fend off anxiety, the Chancellor felt he had to promise no further extensions in the Parliament. Lawson described the tax-free treatment of pension lump sums as ‘anomalous but much-loved’, and left it alone.30 He did, however, alter the income tax burden to favour the low-paid by increasing the personal allowance by double the rate of inflation, and he hit the better off by removing the ceiling on employers’ National Insurance contributions. He also committed large sums in this ‘Budget for jobs’ to the Youth Training Scheme and the Community Programme.
His reviews were mostly tepid. His Budget attracted criticism not only from Wets like Ted Heath and Jim Prior, but also from Thatcherites. Lawson’s old friend and former ministerial colleague Jock Bruce-Gardyne wrote in the Spectator that the Budget had been forced on him by his own backbenchers and was a ‘lobbyists’ victory’.31 Bruce-Gardyne lamented that ‘This was actually the last ideal year for radicalism’ before the next general election. The paper’s editor, however, did note that the Budget was consistent with Lawson’s own doctrine about what in 1979 he called ‘the Thatcher experiment’ but had quietly renamed in 1984 ‘the British experiment’. Lawson had given classic expression to this in his Mais Lecture of June 1984. The theory of the experiment was that the normal rules of ‘macro’ and ‘micro’ would be reversed. Inflation would be controlled not by ‘micro’ prices and incomes policies, but by ‘macro’ measures on the money supply. Unemployment, on the other hand, would not be brought down by the orthodox ‘macro’ measures, but by ‘micro’ efforts to remove barriers to job creation:
this is a micro-Budget, part of Thatcherism’s answer to the grand certainties of the 1944 White Paper on Employment. It is the forerunner of a series of measures which will emerge from the Departments of Education, Trade and Industry, Employment, and Health and Social Security in the next two or three months.32
This Budget, though cautious, was not, despite Redwood’s alarm, a U-turn. There was no panic in the markets. But the situation was inglorious. The government had not lost direction, but it was losing pace.
The mood was dour. Lawson felt it himself. After his 1984 Budget, Mrs Thatcher had arranged to gatecrash his post-Budget party. She had been ‘ecstatic’33 (see Chapter 7). After the 1985 Budget, Lawson gave a small party with a sense of ‘anticlimax’, and went to bed very early. He was woken at 11 o’clock by the doorbell of the No. 11 flat:
I got out of bed, shoved on a pair of trousers (I always sleep naked), and went downstairs to open it. There was Margaret, with a sheepish Ian Gow* behind her. He had not tipped me off: it appears the decision had been taken on the spur of the moment. Margaret was very chic in a black, frilly dress, and had obviously come on from somewhere to look in, as she thought, on our post-Budget party. She was naturally somewhat taken aback to find me barefoot and naked from the waist up … After a very brief and somewhat stilted chat in the doorway about the immediate reaction to the Budget, she returned to Number 10.34
It was not until the end of the summer that Lawson returned to the ERM charge. He was now clearer in his own mind. The pound, the reserves and interest rates were in better shape. He had beaten down official resistance to his ideas; and he had taken part in an important change of international approach. On 22 September, in a special meeting of the G5, Lawson had signed the Plaza Agreement (so called after the Plaza Hotel in New York City in which it was negotiated), promoted by Reagan’s new Treasury Secretary, James Baker.* Building on the G5 communiqué that January, it was designed to lower the value of the US dollar and move away from the previously prevailing doctrine of ‘free-floating’ exchange rates by accepting that serious imbalances required co-ordinated intervention. As Baker recalled it, the UK and the US were ‘on the exact same wavelength’ at the Plaza. ‘Nigel was particularly enthusiastic.’35 Knowing Mrs Thatcher’s much greater respect for American decisions than for EEC ones, Lawson believed that the Plaza Agreement would soften her up: ‘she remarked to me that the agreement created a favourable prelude to ERM membership.’36 She consented to a meeting on 30 September.
The Treasury paper in advance of the meeting expressed itself in terms more of presentational advantages than of any fundamental change of course. ‘We thought that people could understand a link to the Deutschmark more readily than all those Ms,’ Lawson recalled,37 referring to the various measures – M0, M1, M3 – of money. But the paper ended by drawing itself up to its full official height and making a major statement of intent: ‘It is the considered view of the Chancellor and the Governor that we should become full members of the EMS, joining the ERM at the earliest practicable opportunity.’38 Before the February meeting, Mrs Thatcher’s close advisers – including Alan Walters – had warned her against joining the ERM. This time, their objections of principle were sharpen
ed by the sense that Lawson was lining up the whole establishment against the Prime Minister, and perhaps that she herself had not been sufficiently clear on the subject. ‘The Treasury, Bank and City are uniting behind a new fashion,’ John Redwood wrote to Mrs Thatcher, just as he stepped down as head of the Policy Unit. He advocated a ‘more pragmatic approach’ which ‘keeps our destinies in our own hands and not in those of the Germans; and still leaves us free to try and track the DM exchange rate if we wish to do so’.39 Mrs Thatcher underlined the word ‘fashion’ three times.
David Norgrove, her new Treasury private secretary, firmly drew her attention to the high stakes:
joining the ERM could turn out to be the most important economic decision of this Parliament and quite possibly of your Administration … Your discussions with the Chancellor have moved this question to the point where it may look to the Treasury that it is a foregone conclusion that we shall join.40
David Willetts of the Policy Unit linked the economic and political aspects of the problem:
If God had intended us to join the Exchange Rate Mechanism, we would be as productive and as moderate in our wage demands as the Germans … Will the average home-owner happily accept a rise in his mortgage rate once he knows its purpose is to maintain the £’s value against the German Mark?41
Always preoccupied with housing aspirations, Mrs Thatcher doubly underlined the word ‘home-owner’.
The 30 September meeting, billed as a ‘seminar’, was much fiercer than its February predecessor. Mrs Thatcher was by now fired up against joining. ‘Need to prove the case for change’42 are her challenging words which begin Terry Burns’s record. As each grandee – first the Chancellor, then the Governor and then the Foreign Secretary – said his emollient and stately piece in favour of entry, she would jump in with objections:
Frightened about what proposing. Scared to death – don’t think can do it … Not impressed by need to reinforce strategy … Up go interest rates months before election … Divide own side … Forfeit capacity to do our own thing … Don’t like hitching to fixed exchange rate like 1960s and 70s … [people would] say ‘u-turn’ … Have to devalue … Build up credibility without selling soul to EMS … cannot fix exchange rate … gift to speculator …
At no point in the discussion did she concede anything to the Lawson thesis. When Burns suggested that her criticisms amounted to ‘arguments for not joining ever’, she baldly answered ‘Yes.’43 To this, Geoffrey Howe replied, in what amounted to a four-word summary of all his European attitudes, ‘Can’t be independent indefinitely.’ ‘Why limit manoeuvre? Argument of weakness,’ said Mrs Thatcher, exemplifying all hers.
At the end, Brian Griffiths, newly arrived as the head of the Policy Unit, was the only person present to support Mrs Thatcher’s view. He suggested that, rather than joining the ERM, the government could have an informal exchange rate target, unannounced. Lawson objected that such a target would soon be discovered. As Terry Burns abbreviated it, Mrs Thatcher said, ‘Know who to blame if went wrong’,44 which was her unnerving way of giving implied permission, but not support. With these tart, even menacing words, she closed the meeting. The official record was more decorous: ‘Bringing the discussion to a close, the Prime Minister said she was not convinced that the balance of the arguments had shifted in favour of joining.’45
Only too aware of her isolation, Mrs Thatcher called for yet another meeting, a full ministerial discussion in which she might be able to bring in a few allies. This was arranged for 13 November. In the meantime, Lawson made part of the argument public. In his annual Mansion House speech, he announced that he was dropping the £M3 target and mocked the debate about ‘the intricacies of the different measures of money’.46 Though not announced as such, this was the death-knell of monetarism in British government policy. ‘At the end of the day,’ he concluded, ‘the position is clear and unambiguous. The inflation rate is judge and jury.’ It was a rash thing to say without offering some mechanism, such as an independent central bank, to oversee inflation-rate targeting: the ‘judge and jury’ would try Lawson in front of its kangaroo court in the years to come.
For her part, Mrs Thatcher fired off a series of questions about ERM entry to be sent to the Treasury in advance of the meeting. Lawson referred to them disdainfully as ‘a rag-bag’.47 This was not an unfair description. The record discloses what No. 10 called ‘a draft exam paper for the Treasury and Bank’.48 On it, Mrs Thatcher added some questions in her own hand, omitting, as was her habit, any question marks – ‘What turbulence would you expect if we were to join’ and ‘What rate against the DM. No use to say whatever is the market rate on the day – that begs the question’. When the Treasury sent its reply two days later, Mrs Thatcher peppered it with exclamation marks and cries of ‘No’, ‘u-turn’ and ‘encourage specln’.49
Lawson’s own paper took its stand on the paradoxical argument that because the government had maintained the same policy for so long, there was ‘a growing problem of presentation’.50 He was trying to reassure Mrs Thatcher by saying that the government had done the right thing, while at the same time trying to convince her that it ought to be doing something else: ‘there is a need for a shot in the arm – a touch of imagination and freshness.’ Then he gave her an ultimatum. Not only the Governor, but also senior officials in the Treasury and the Bank (a reference to Burns, Middleton and George) had come round to his view,* and so, he implied, she was without allies. The decision not to join now, he said, would be ‘a historic missed opportunity which we would before very long come bitterly to regret’.51
Before the meeting, David Norgrove warned Mrs Thatcher that Lawson had ‘seen separately all the Ministers who are coming to this subject for the first time’,52 and had encouraged them to defer to the judgment of Chancellor and Governor. He had ‘blinded them with science’, leading them to think only of economic considerations, ‘narrowly defined’, and ignore the political disadvantages which she saw, ‘particularly in the weeks before an election’. The prospect of a Labour government might subject the pound to intolerable exchange rate pressure within the ERM. Mrs Thatcher’s supporters had not made any equivalent push to win ministerial opinion. In particular, Willie Whitelaw, usually the man called on by Mrs Thatcher to sort out disputes, had not been squared. John Wakeham, the Chief Whip, was also asked to the meeting, to lend support to Mrs Thatcher, but ‘There were no briefings for Willie or me’53 about what was at stake. Not for the first time, Mrs Thatcher was strangely innocent of Cabinet-level politics in her preparation for the meeting. By ill chance, her main advisers and officials – Nigel Wicks and David Norgrove in her private office, and Brian Griffiths in her Policy Unit – were all new to their jobs. None yet had the relevant experience to fight the Whitehall battle in the right way. Despite her astonishing personal dominance, hardly anyone was working the system to get her what she wanted.
The meeting of 13 November contained almost all the important ministers in the government – Mrs Thatcher, Lawson, Howe, Whitelaw, plus John Biffen, Leon Brittan, Norman Tebbit as party chairman and John Wakeham as chief whip. According to Nigel Wicks, who was in attendance, ‘They all arrived in a gaggle, having come from No. 11. It was a very silly thing to have done.’54 In substance, the argument did not add much to the debate of 30 September. Its significance was political and personal. Of those politicians present, only Biffen, a long-standing ‘free floater’ and Eurosceptic, opposed ERM entry. No one listened seriously to him because, as Leader of the House, he had little standing in the matter. Despite his Thatcherite reputation, Norman Tebbit supported Lawson. He recalled many years later that he had been swayed by his anger at Mrs Thatcher’s attempt to follow the counsel of an adviser rather than the minister responsible (him) over British Leyland (see Chapter 15). He felt that Mrs Thatcher should either take the advice of the minister responsible in this case (Lawson) or move him.55
Lawson addressed Mrs Thatcher’s political objection about pressure on the pound with
in the ERM in the run-up to a general election, and suggested a way out. The government would temporarily suspend membership until after an election victory. Mrs Thatcher argued ‘strongly against’ this curious notion,56 saying that such a move would ‘be taken as an indication of its [the government’s] lack of faith in its own policies’. ‘Don’t want to be behind bars,’ she said, according to Terry Burns’s personal record. She was not speaking of prison: she meant she did not want to be locked into a policy. She repeated a phrase which she had used years before when objecting at first to the MTFS – the government would be ‘in a graph paper position’.57 She hated the idea of being trapped. ‘She batted everything off in her best style.’58
After most of the argument had been heard, Willie Whitelaw spoke: ‘We have said we will join when the time is right. Now we are told it is right. If CX [the Chancellor] and Governor say time is right then that is OK for my money.’59 Mrs Thatcher responded, in words differently reported by different witnesses, that she could not accept this, no matter who was against her. Burns’s version of what she said was: ‘I’m not going in on run-up to election and put interest rates into someone else’s hands.’ Leigh-Pemberton remembered her saying: ‘I’m afraid we’re not going to do this. I’m sorry.’60 Whatever her exact words, the bald truth of the situation was exposed: almost everyone wanted to join the ERM, but nothing would persuade the Prime Minister to do so. ‘It was clear’, recalled Norgrove, ‘that she would resign rather than join.’61 In this impasse, the only thing to do was to agree not to talk about what had happened and, as the official record expressed Mrs Thatcher’s summing up, ‘to maintain rigidly the line which had been taken so far that the UK would join when the time was right’.62
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