In a sense, however, all this activity was marginal because it did not touch the core of the Government’s problem – the great loss-making dinosaurs of the nationalised sector: British Rail, British Steel, the National Coal Board (NCB) and the permanently struggling car maker British Leyland. Much as they would have loved to have been rid of them, Mrs Thatcher and Keith Joseph were stuck with these monsters. Their ambition in 1979–81 was limited to trying to cut their costs, to reduce the drain on the Exchequer of their annual losses as part of the drive to cut public borrowing. To this end Joseph imposed tight cash limits on each industry, within which financial discipline they were expected to operate as far as possible like commercial companies – shedding surplus labour, raising productivity, selling off ancillary businesses and resisting unearned pay demands in order to meet their financial targets within a fixed timescale; meanwhile, the Government ostentatiously stood back and proclaimed its refusal to print money to buy off strikes or underwrite further losses. In 1981 the CPRS proposed a scheme for groups of outside industrialists to monitor the nationalised industries; and a search was set in hand for a new breed of tough, commercially minded managers from the private sector to replace the old style of corporatist bosses.
Joseph, however, found the practice of non-intervention much harder than the theory. As a humane man, and as a practical politician, he could not wash his hands while whole industries went to the wall. He could not simply close down British Steel, British Leyland or Belfast shipbuilders, however chronic their losses. So he agonised and, against his principles, ended up – to his subsequent shame – spending more taxpayers’ millions: in two years his budget actually increased by 50 per cent, from £2.2 billion to £3.3 billion per annum.
Mrs Thatcher despaired of him. He was both her economic mentor and the man who, more than anyone else, had opened the way for her to become Prime Minister. She still listened to his advice in private; but he was a hopelessly indecisive minister. ‘In the end’, Jim Prior wrote, ‘it all became impossible and Keith was moved to Education.’47
Joseph’s first big test was a major steel strike at the beginning of 1980.The ostensible issue was pay; but behind that lay the British Steel Corporation’s plans for drastically restructuring – that is, shrinking – the industry. In the first half of 1979 British Steel lost £145 million; by the end of the year it was losing £7 million a week. Clearly this could not continue. Joseph set the BSC a target to cut its deficit by the end of 1980. At the end of November 1979 the corporation announced the closure of plants with the loss of 50,000 jobs – one-third of the workforce.At the same time it offered the remainder a pay rise of just 2 per cent. The two main steel unions called a strike from 2 January; both unions and management then sat back and waited for the Government to come up with more money. But Joseph refused to intervene. The effect of a long steel strike on the rest of industry was potentially devastating. Mrs Thatcher was worried – she personally chaired a special group of ministers and officials to keep close watch on the situation – but she was adamant that the Government would not weaken. She was determined to teach the lesson that steel must stand on its own feet.
Finally, the two sides agreed to an old-fashioned inquiry, headed by the former Labour Cabinet Minister Harold Lever. Mrs Thatcher was deeply suspicious; her doubts were confirmed when Lever predictably split the difference between the BSC’s final offer and the union’s demand and recommended a settlement around 16 per cent, including productivity deals. (Inflation was then around 20 per cent.) Both sides accepted it and the strike was called off at the beginning of April.
On the face of it this was not much of a victory for the Government. Yet Joseph and Mrs Thatcher had made their point by not intervening, despite great pressure from the rest of industry (and much of the Cabinet), leaving management and unions to make their own deal. The real victory for the Government was that, under cover of the pay rise, BSC’s plant closures were accepted. On this basis Joseph agreed to carry on subsidising the corporation for another year. Then, after a long search, the sixty-eight-year-old Scottish-born but Americanised Ian MacGregor – a tough manager with a reputation for defeating strikes – was recruited from Lazard Frères at a huge salary.
MacGregor earned his salary. In two years he transformed British Steel from the least efficient to one of the best steelmakers in Europe, bringing it almost into profit – at the cost of losing nearly half the workforce. Five years later the slimmed-down corporation was successfully privatised. This was Thatcherite industrial policy as it was meant to work – the long-term reward for the Government standing firm in the early months of 1980. The casualties – apart from the workers who lost their jobs – were, ironically the private steelmakers who were forced out of business while BSC was subsidised into profitability.
Less happy in the short term – indeed a major embarrassment to a government pledged not to support lame ducks – was the necessity to go on funding British Leyland. BL symbolised everything that was wrong with British industry: it was overmanned, underproductive, racked by unofficial strikes, a once-major car manufacturer increasingly unable to compete with European and Japanese rivals. Here was a prime candidate for the new Government’s free-market philosophy: if Joseph was true to his convictions, he would refuse to subsidise BL any further but simply close it down. Nothing the Government could have done in its first year would have sent a clearer message to the rest of industry. But two considerations pulled the other way. First, BL was a big employer in the politically marginal West Midlands. The effect of closure would have been devastating. Second, BL had a dynamic new chairman, the South African-born Michael Edwardes, who was making a real effort to solve the company’s labour problems. This was a factor that made a special appeal to Mrs Thatcher. ‘I knew that whatever we decided to do about BL would have an impact on the psychology and morale of British managers as a whole’, she wrote in her memoirs, ‘and I was determined to send the right signals… We had to back Michael Edwardes.’48
In December 1979 BL was given an additional £300 million, with a warning that if the latest Corporate Plan was derailed by the militants there would be no more. Yet the company lost another £93 million in the first half of 1980. By the end of the year Edwardes was asking for another £900 million to carry forward his restructuring during 1981 – 2. The same arguments applied. In Cabinet Committee before Christmas Joseph still favoured paying up. Mrs Thatcher was pragmatically clear that, for political not economic reasons, ‘BL had to be supported.’49
On television she graphically presented the decision to keep on funding BL as a matter of timing. With productivity improving and a new model – the Metro – soon to be launched, she explained in one of those surprising phrases which occasionally came to her that this was not the moment to say, ‘No, I’m going to chop you off at the stocking tops.’50 This was a bravura defence of what might easily have been seen as a U-turn. In fact this rescue too was vindicated in the long run. After a couple of hiccups, BL – its name by then changed to Rover – was finally sold to the already privatised British Aerospace in 1987. By that time Mrs Thatcher was just glad to be rid of it.
Two hard-nosed managers like Michael Edwardes and Ian MacGregor provided cover for the Government continuing to fund British Leyland and British Steel through their difficulties. No such fig leaf was available to explain a third reversal, which really did seem to suggest that the Government’s resolution was weaker than its rhetoric when it came to implementing its industrial strategy. This third challenge came from the miners – still the vanguard of the union movement, whose two strikes in 1972 and 1974 had humiliated and then destroyed the previous Conservative Government. Of all the beasts in the industrial jungle, the National Union of Mineworkers (NUM) was the one Mrs Thatcher knew she would have to take on and defeat at some point. Detailed planning to withstand a coal strike had begun the moment the Government came into office. Yet when the opportunity for a showdown with the NUM arose in February 1981 it was Mrs Thatcher w
ho backed down. It was her decision, overriding her Energy Secretary who was preparing to stand firm. (The Cabinet was not consulted.) Three years later, of course, it was very different. That epic confrontation in 1984–5 sealed her rout of the unions. From the perspective of 1985 the earlier retreat could be understood as merely tactical. But at the time it appeared to show that Mrs Thatcher had learned from Ted Heath’s experience that it was wiser not to tangle with the miners.
The issue, as in 1984, was the closure of uneconomic pits. The NCB’s announcement of plans to close twenty-three pits with the loss of 13,000 jobs raised fundamental fears for the future of the industry. Faced with the threat of a strike, Mrs Thatcher was initially robust. Asked by Michael Foot in the Commons if she would reconsider the closures before she was forced to, she replied defiantly: ‘No, Sir… I am not forced to do many things.’51 Pit closures were a matter for the NCB. ‘I am not directing that industry.’52 But she was appalled to discover that the NCB had made no contingency plans to withstand a strike: surplus coal was piling up at the pithead, but there were only minimal stocks at the power stations where it was needed. With her instinct for the realities of power she swiftly concluded that this was a dispute the Government could not win.
‘All we could do’, she wrote in her memoirs, ‘was cut our losses and live to fight another day.’53 But the NUM’s crowing, and her own supporters’ undisguised dismay, must have been hard to bear. The Observer gleefully reported that the Government ‘did not even wait to see the whites of their eyes before climbing down’. The NUM was unwise to gloat, however. In the long war between the miners and the Tories, 1981 was a Pyrrhic victory. Her ignominious retreat only hardened Mrs Thatcher’s determination to exact a decisive revenge when the time was ripe.
One group of workers she had no compunction about taking on, however, was the Civil Service. Any Government intent on cutting public spending was bound to start with its own servants. But more than that, it was Mrs Thatcher’s positive intention to ‘deprivilege’ the Civil Service. Though she admired individual officials, she regarded the bureaucracy as a whole as an obstacle to the culture she was trying to create. One of Geoffrey Howe’s first actions in 1979 was to set a target to cut the Civil Service by 100,000 jobs over the next five years. At the beginning of 1981 he announced that the 6 per cent cash limit already set for local authorities would also apply to central government. The nine Civil Service unions promptly rejected an offer of 7 per cent and started a highly effective campaign of selective strikes directed at Inland Revenue collection, customs and excise, vehicle licences and other Government agencies – including the secret intelligence monitoring centre at Cheltenham (GCHQ).
This last enraged Mrs Thatcher more than all the others; but after three months the loss of revenue to the Government was becoming serious. The Cabinet Office minister responsible for the Civil Service, Christopher Soames – fresh from his proconsular triumph in Zimbabwe – applied his heavyweight experience to trying to negotiate a settlement. He succeeded, with a very modestly increased offer of 7.5 per cent; but Mrs Thatcher would not have it. She wanted to make a demonstration of the Government’s determination to stick to its cash limit, whatever the cost. In fact a few weeks later – at the end of July – she was persuaded to settle at the same figure that she had earlier rejected, plus an inquiry to be chaired by a High Court judge. It was an expensive display of Prime Ministerial stubbornness which was estimated to have cost the Government anything between £350 million and £500 million. Nigel Lawson, still at the Treasury, thought it was worth it; but Geoffrey Howe felt that ‘the line on which we were obliged to stand was not well chosen’.54 As usual she took her revenge. In her Cabinet reshuffle that September Soames was sacked. More than that, the Civil Service Department itself was abolished, its Permanent Secretary prematurely retired and the management of the Civil Service split between the Treasury and the Cabinet Office. This was not only a matter of public spending, but a critical assertion of Mrs Thatcher’s subordination of Whitehall.
The 1981 budget and the routing of the wets
The key turning point in the critical first two and a half years was Geoffrey Howe’s third budget in March 1981. This was the make-or-break moment when the increasingly embattled Prime Minister and her dogged Chancellor defied the whole weight of conventional economic wisdom and political punditry to demonstrate beyond doubt their determination to stick to their fundamental strategy. The timing was important. It was just coming up to two years since the Government had taken office – exactly the point at which so many previous Governments which had started out with high ambitions had run into a brick wall of economic reality. Despite her defiant declaration at the party conference, there was widespread scepticism that Mrs Thatcher’s experience would be any different.
Mrs Thatcher was acutely sensitive to such criticism. She believed that the Government’s radicalism was being continually undermined by leaked whispers of the wets’ unhappiness. In fact the dissenting ministers did not only voice their reservations off the record. Several of them, including Gilmour, Pym and Walker, did not shrink from making their barely coded criticism public. Over Christmas 1980, therefore, Mrs Thatcher determined on her first reshuffle.
The single victim, however, was the Leader of the House, Norman St John Stevas – the softest target among the wets. She wanted to move Francis Pym, who had fought too successfully against cuts in his defence budget, embarrassing her by turning her own arguments against her. Pym was too senior to be easily sacked, but the Leadership of the House offered a suitably dignified sideways move, appropriate for a former Chief Whip. So Stevas – an amusing lightweight who had tested her tolerance by inventing satirical nicknames for her – was the scapegoat. He was devastated.
With just this one dismissal Mrs Thatcher simultaneously achieved a significant rebalancing of the Cabinet. As well as Pym from Defence, she also moved John Biffen from the Treasury, where he had proved a disappointingly soft touch as Chief Secretary. Biffen was switched to Trade, while John Nott was sent to sort out the Ministry of Defence. Overall the effect of the changes represented a slight tilt to the right.
But something more dramatic was required. The first weeks of 1981 saw the British Leyland rescue, and the Government’s retreat from confrontation with the NUM. At the end of February Ian Gow warned Mrs Thatcher of ‘a serious deterioration in the morale of our backbenchers.’55 In this atmosphere Howe’s forthcoming budget took on huge importance. Though there were differences of emphasis, the Prime Minister with her private advisers essentially agreed with Howe and his Treasury team that the first priority must still be to maintain the pressure on inflation by redoubling the attack on public borrowing. Their argument among themselves was about how, and by how much, the borrowing requirement could be cut. The alternative strategy – the orthodox Keynesian approach, followed by every previous British Government since the war – prescribed on the contrary that at a time of increasing unemployment, public spending must be allowed to rise. This would have been the policy of three-quarters of the Cabinet, had they been consulted. But they were not.
Mrs Thatcher had staked her reputation on the need to keep on cutting borrowing, yet so far it had only kept on rising. What she wanted from the budget was above all an emphatic demonstration that the Lady was not for turning. Having cut income tax in 1979 she and Howe were determined not to have to raise it again. The solution was eventually provided by Lord Cockfield – the Tory party’s long-standing tax specialist. By freezing personal allowances, withholding the usual increases in tax thresholds, he suggested, the Chancellor could achieve the same effect without the political odium.
The 1981 budget actually marked the abandonment of strict monetarism in favour of what has been termed ‘fiscalism’.56 But it delivered a massive deflationary squeeze to an already depressed economy. This was what horrified the wets when the budget was revealed to the Cabinet a few hours before Howe was due to present it in the House of Commons. It was also the object
ion of the 364 university economists – including five former Chief Economic Advisers to successive governments – who famously wrote to The Times to denounce it.57 The budget’s authors, on the contrary, argued that it was not deflationary at all, merely an unavoidable response to the Government’s inability to control public expenditure. If anything it was actually reflationary.
Ian Gilmour, the most cerebral of the wets, rejected this – as he rejected the whole philosophy of Thatcherism – maintaining that the homely analogy of ‘housewife’ economics is false, since when Government cuts its spending it also cuts its income: it merely balances the books at a lower level of economic activity. This is what happened in 1981. In the short term the budget did further depress the economy – or would have done if the Government had stuck to its monetarist guns. Instead, the loosening of personal credit controls in the summer fuelled an expansion of demand which led to the beginnings of a recovery.58 The fact is, once again, that the budget was less an act of economic management than of political will. Its strictly economic effect is still disputed. Howe and Lawson insist that it laid the foundations of the recovery, which took off spectacularly after 1983; Gilmour counters that recovery from the Government-exacerbated recession of 1979 – 81 would have come anyway, and was actually delayed by the budget. This is an argument that can never be settled. What is indisputable is that the budget marked a decisive stage in Mrs Thatcher’s routing of the wets.
The real weakness of the wets’ position was that – as Mrs Thatcher contemptuously jeered – they had no practical or principled alternative. They knew that they did not like the policy of deflation and high unemployment, and feared the social consequences; they congratulated themselves when the money supply turned out not to be the philosopher’s stone the monetarists had pretended. But their criticism amounted to warning that the Government’s measures were too harsh in current circumstances. As Conservatives they accepted in principle that public spending took too large a share of GDP and should be reduced: they were simply afraid of the consequences of trying to cut it during a recession. Right or wrong, the Prime Minister and her Chancellor were following a positive strategy which attracted admiration for its sheer conviction; by contrast the wets’ anguished mutterings were easily portrayed as feeble. The universal adoption of the term ‘wet’ damned them to irrelevance.
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