Though she framed her objections as matters of timing and judgement, she was actually adamantly opposed on principle – or rather two principles, economic and patriotic. On the one hand she believed, as part of her free-market economic philosophy, that exchange rates could not be fixed and it was folly for governments to try to buck the markets. On the other hand, and somewhat contradictorily, she was instinctively opposed to sacrificing any shred of sovereignty over the value of the pound or the British Government’s right – illusory as it might be in practice – to set its own interest rates to try to fix it. These two objections, fiercely maintained for the next five years against the growing determination of both Lawson and Howe to join the ERM by the back door if necessary, represented a ticking bomb at the heart of the Government. This fundamental disagreement between a determined Prime Minister and an equally stubborn Chancellor ultimately destroyed them both.
1986 was the year in which Lawson’s economic management finally began to show results. In February Mrs Thatcher was driven to admit that unemployment would probably not begin to fall before the next election.24 In fact David Young’s training schemes at last began to take effect, and in October the headline figure turned down, for the first time since 1979. At the beginning of the year a sudden drop in the price of oil stymied Lawson’s hopes of dramatic cuts in income tax in his budget; but he still contrived to take a penny off the standard rate (bringing it to twenty-nine pence). The sliding oil price proved unexpectedly beneficial: sterling fell against other European currencies, giving British exports over the year the benefit of an effective 16 per cent devaluation, without the political odium that accompanies a formal devaluation. Suddenly the economy entered a ‘virtuous circle’.25 Low inflation and low interest rates combined to promote 3 per cent growth. Faster growth meant falling unemployment and higher tax revenues. Higher revenues, further boosted by increased VAT on soaring consumer spending and the windfall proceeds of privatisation, enabled the Chancellor in his 1987 budget to achieve the elusive hat-trick of higher spending, reduced borrowing and further tax cuts, just in time for a summer election. No wonder that from the autumn of 1986 the polls began to move back in the Government’s favour, or that by the spring the Tories were once again ahead.
The key to this dramatic turnaround was that most of the population – the twenty-five million in work – had more money to spend and were spending it, stimulating an explosion of small businesses and services: new shops, restaurants and wine bars, electrical consumer goods like videos and microwaves, conservatories and home improvements of every sort. Economic growth was visible, the City of London was booming and there was suddenly a heady whiff of optimism and opportunity in the air – just as the Tories had always promised would flow from deregulation and incentives.
Even as the Lawson boom took off, however, sceptical critics warned that it was not merely partial and unbalanced, but even on its own terms fragile and unsustainable. It was a boom founded on reckless consumer spending, stimulated by pay rises way above the rate of inflation, by easy credit and tax cuts paid for by oil and privatisation revenues, not based on long-term investment or increased domestic production. In fact it blatantly belied all Mrs Thatcher’s homilies about good housekeeping. Both individual families and the nation as a whole were living beyond their means. While average incomes rose by 35 per cent between 1983 and 1987, personal indebtedness rose four times as fast in the same period: new bank lending trebled, and the number of mortgages doubled in 1986–7 alone. For the first time ever, the average British household was spending more than it earned. On the national scale, increased consumption was sucking in imports at twice their 1979 level, while manufacturing output was only just back to the 1979 figure. The deficit was covered only by the temporary bonus of North Sea oil, which was not being invested for the future. The domestic manufacturing capacity to supply the new demand had been destroyed in 1979–81 and was no longer there to be revived: industrial investment was actually 16 per cent less in 1986 than it had been in 1979. The illusion of an economic miracle since 1983 was a statistical sleight of hand achieved by measuring growth only from the trough of the economic cycle in 1981; measured from peak to peak, average growth over the cycle was still only 1.8 per cent – actually lower than in the previous Labour cycle of the late 1970s.26 In 1987 Britain’s GNP fell behind that of Italy – an event gleefully hailed by the Italians as il surpasso.
Lawson’s boom, in short, contained the seeds of both renewed inflation and the next slump. Having abandoned the excessive restraints of monetarism, he had swung to the opposite extreme and unleashed a headlong pre-election spending spree similar to those of 1963 and 1973, except that he had now deprived himself of the traditional tools which previous Chancellors had used to check overheating: incomes policy, credit controls, exchange controls. Exuding a gambler’s confidence, Lawson professed himself blithely unconcerned about the growing trade gap, still insisting that manufacturing no longer mattered.27 His priority was, frankly, to win the election, then make any necessary adjustments afterwards.28 Like the sorcerer’s apprentice, he assumed that he could turn the tap off when he needed to.
Mrs Thatcher was instinctively more prudent: already in the autumn of 1986 she sensed that something was going wrong. Lawson dismissed her fears; but her intuition was right. ‘Perhaps,’ the former Labour minister Edmund Dell commented, ‘if Lawson had paid more attention to her hunches and less to her reasoning, his economic management might have been better. But that would have been too much to expect from so cerebral a Chancellor.’29 For her part, Mrs Thatcher failed to act decisively on her hunch. On the one hand she was still in thrall to her Chancellor’s greater expertise. On the other she was grateful for the turn-up in the polls and was swept up in the general excitement surrounding what she called ‘popular capitalism’.
The phrase is said to have been coined, ironically, by Michael Heseltine, shortly after he walked out of the Cabinet in January 1986. A year earlier Lawson had hailed the privatisation of British Telecom as marking ‘the birth of people’s capitalism’.30 Mrs Thatcher first used the words on 26 February 1986, when she declared: ‘We’ve got what I call popular capitalism.’31 Thereafter she made the phrase her own. She adopted it as the defining slogan of her political project in a speech to the Conservative Central Council, meeting on 15 March. This was a critical speech in which Mrs Thatcher tried to put the trauma of the Westland crisis behind her and came out fighting for her political life. First she looked back, listing the principal achievements of her Government so far – taming the unions, curbing inflation and beginning to dismantle the public sector:
Seven years ago, who would have dared forecast such a transformation of Britain? This didn’t come about because of consensus. It happened because we said: This we believe, this we will do. It’s called leadership.
By contrast, she concluded, socialist crusades to go back to the old ways were ‘muted nowadays’:
Socialists cry ‘Power to the people’, and raise the clenched fist as they say it. We all know what they really mean – power over people, power to the State. To us Conservatives, popular capitalism means… power through ownership to the man and woman in the street, given confidently with an open hand.32
Property-owning democracy
‘Popular capitalism’ was Thatcherite shorthand for three separate revolutions in British economic life: wider home-ownership, wider share-ownership and an ‘enterprise economy’ characterised by more small businesses and more people becoming self-employed. The first revolution was well under way in Mrs Thatcher’s first term, with half a million council houses already sold before the 1983 election. But the second and third took off only in the second term. The first was simple and irreversible, a major social change. The second turned out to be rather less significant than was pretended at the time, at least so far as individuals were concerned. The third was economically by far the most important: though stimulated by the Government’s supply-side reforms and initially associ
ated with the unsustainable euphoria of the Lawson boom, it represented the British reflection of universal trends – globalisation and computerisation – and an irresistible transformation of economic attitudes and behaviour, which long outlasted Mrs Thatcher and carried on vertiginously until it suddenly collapsed in the ‘credit crunch’ of 2008.
The sale of council houses was a specifically British social revolution which reflected the national obsession with home-ownership. From a mixture of prejudice and principle Mrs Thatcher believed that public-sector housing should really be abolished. She was convinced that council estates were breeding grounds of socialism, dependency, vandalism and crime. She had no interest in trying to improve them because she believed in principle that housing was not a commodity which the Government ought to provide, except for special categories like the elderly and disabled. In her memoirs she wrote unambiguously that the state should withdraw from the building and management of housing ‘just as far and as fast as possible’.33 She could not, when in office, act on this principle as decisively as she might have wished; but she certainly did everything she could to shrink the public sector and very little to help those compelled by circumstances to live in it.
Mrs Thatcher thought the sale of council houses an unalloyed good, both social and economic. She made a point of attending the handover of the millionth house to be sold. By the time she fell in 1990, the number sold was up to nearly 1.5 million, and the total proceeds had accrued £28 billion to the Treasury, which counted them – ‘duplicitously’, in Simon Jenkins’ view34 – against public spending. Spread over eleven years, this was the biggest privatisation of them all, bigger than British Telecom, British Gas and electricity put together. But the blessings were not so unmixed as she believed.
For one thing, some of those families who were persuaded to buy their houses, particularly towards the end of the decade, tempted by the easy mortgages on offer from banks falling over themselves to lend, soon found themselves, when inflation rose and the recession of the early 1990s bit, committed to payments they could not keep up. As prices fell back to more realistic levels, many found that their houses were worth less than their mortgages – the phenomenon of ‘negative equity’. Many bright dreams of ownership ended in the nightmare of repossession five years later.
Second, it was naturally the best and most desirable houses that were sold – very few flats – and the more prosperous and upwardly mobile tenants who bought them, leaving the less salubrious high-rise estates to become sinks for the unemployed and problem families. The effect of Mrs Thatcher’s sell-off was to leave the social mix narrower than before, with a much higher proportion of tenants dependent on benefit. Her belief that there were no good estates was therefore self-fulfilling.
Third, the non-replacement of the houses sold and the consequent decline in the stock of council housing, combined with the late 1980s explosion in house prices in the private sector, at a time when there were still nearly three million unemployed, left an absolute shortage of affordable housing and led by the end of the decade to the shocking appearance of a tribe of homeless people sleeping on the streets of London and other major cities. This was the most serious negative consequence of a popular policy to which Mrs Thatcher resolutely closed her eyes.
The family silver
The second ‘crusade’ of popular capitalism was privatisation. It had, of course, been under way, from cautious beginnings, since 1979. But it only really took off as a rolling process in Mrs Thatcher’s second term, when it quite suddenly became the Government’s ‘big idea’, the central pillar of Thatcherism, both the symbolic embodiment and the practical realisation of the reversal of socialism which she had been talking about since 1975. Now, starting with British Telecom, the Government moved on to the major state-owned corporations which had supplied the nation’s essential services since 1945, services which only a few years earlier no one but a few free-market fanatics had imagined could be run by anyone but the state: the telephone system, gas and electricity, the national airline, the airports, even water supply. The expectation was successfully created that, as Nigel Lawson had asserted in 1981, ‘No industry should remain under State ownership unless there is a positive and overwhelming case for doing so.’35 A momentum was established which led on – after Mrs Thatcher’s own fall – even to the two great behemoths of the public sector, coal mining and the railways. This was a huge and unexpected transformation of the economic landscape. Each successive privatisation was fought tooth and nail by both opposition parties, by the unions and most of those who worked in the affected industries, and opposed by the public as a whole, as measured by opinion polls. But each was accepted once it had happened, even by the Labour party, as an irreversible fait accompli. More than that, the privatisation process itself, to ministers’ amazement, actually generated a wave of popular excitement, fanned by an enthusiastic press. The key was the sale of shares, at knockdown prices, directly to the public.
Suddenly, John Redwood, then head of the Downing Street Policy Unit, recalled, the issue was not ‘will the public buy it?’ but ‘how can we do it technically?’36 Lawson remembers a dinner with merchant bankers, all of whom – with one exception – ‘roundly declared that the privatisation [of BT] was impossible: the capital market simply was not large enough to absorb it’.37 The answer was to by-pass the bankers and sell the shares direct to the public by mail order, television and newspaper advertisements. Mrs Thatcher ‘became excited by the possibilities’ and gave Redwood the backing he needed to convince the Treasury and the City.38
The response exceeded all expectations: two million people applied for a prospectus, and when the first instalment went on sale in November 1984, the offer was four times oversubscribed. More than a million small investors applied for shares, including 95 per cent of BT employees, defying the advice of their union; most of these had never owned shares before, but the sale was weighted to favour those who applied for the smallest number. The price was kept deliberately low – 130 pence – for political reasons, since from the Government’s point of view the sale simply had to succeed. The result was a bonanza for the lucky applicants; the price rose 90 per cent on the opening day, as many buyers sold on immediately. The second instalment in June 1985 was similarly oversubscribed. In the end the sale – of just 51 per cent of the company at this stage, in three instalments over eighteen months – raised nearly £4 billion. The company’s profits jumped spectacularly and by the end of 1985 the share price – for those buyers who had retained them – stood at 192 pence.39
Immediately the success of the BT sale became clear, Mrs Thatcher was impatient to repeat it.40 The obvious next candidate was British Gas. ‘For sheer size, prodigality of advertising, and the opportunity to involve small punters and large investing institutions alike in the calculation of a quick profit’, the Annual Register wrote, ‘the launch of British Gas in the private sector made history.’41 With the whole City now keen to get a share of the action, Rothschilds won a ‘beauty contest’ to handle the sale; four and a half million rushed to buy the shares. Once again they were deliberately undervalued and once again they were hugely oversubscribed: on the first day of trading the price leapt by 50 per cent. Labour furiously condemned the Government’s cynical underpricing of a national asset in order to bribe the public with their own money: in his first front-bench job as a Treasury spokesman Tony Blair alleged that the sell-off would cost the taxpayer £20 – 30 per household.42 But the Government had achieved its aim of making shareholding popular as never before.
The third high-profile privatisation of the second term – though in revenue terms much smaller than British Telecom and British Gas – was British Airways, which had been successfully brought into profit by one of Mrs Thatcher’s favourite businessmen, Sir John King, and was sold off in February 1987. ‘The World’s Favourite Airline’ was now a successful international leader which investors were keen to buy into; this time the shares were eleven times over subscribed, and the price
jumped 82 per cent on the opening day. Just before the election another glamorous name, Rolls-Royce – controversially nationalised by the Heath Government in 1971 – was also returned to the private sector. The only hiccup in this stage of the programme came with Britoil, which was floated in 1985 just when the oil price was falling. Millions of shares were not taken up; but the loss was the underwriters’, not the Government’s, and the political embarrassment at least did something to counter the charge that the share price of the assets sold was always set too low.
With the success of privatisation Mrs Thatcher had stumbled on an ongoing narrative which gave a central theme to her Government, and she was keen to keep the momentum going. British Steel, drastically slimmed down and restored to profitability by Ian MacGregor, was already well down the road. The 1987 Tory manifesto earmarked electricity and water as the next targets. Both posed special problems: nuclear energy on the one hand, and the public-health implications of commercialised water on the other. Still she was determined to press ahead. At the same time, however, she had not abandoned her habitual caution. She was no ideologue, but a canny politician, and she foresaw only trouble in trying to privatise the railways. Nicholas Ridley,Transport Secretary from October 1983 to May 1986, accepted the Prime Minister’s veto. But his successors were all keen to grab a share of the privatisation glory. There is no better example of Mrs Thatcher’s shrewd political instinct than the fact that she persistently warned them off. She was happy to see British Rail forced to sell off its profitable assets – hotels, ferries, hovercraft and acres of undeveloped trackside property – which only made privatisation of the rest of the business harder; but she had the good sense not to try to sell the track or the trains.
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