The economy
THE new Parliament met on Wednesday 9 May to re-elect the Speaker. But the House did not meet again for serious business until the State Opening the following Tuesday, with the formal unveiling of the Government’s legislative programme in the Queen’s Speech. It comprised a curiously modest assortment of Bills, since the radical thrust of the Government’s agenda was not primarily legislative. There was – there had to be, after the events of the previous winter – a measure of trade-union reform. There was legislation to oblige local authorities to sell council houses and slow the advance of comprehensive schools. In addition the Government announced tighter immigration controls, the deregulation of intercity coach services and the establishment of a second commercial television channel.
As usual, however, Mrs Thatcher’s language implied a good deal more than the Gracious Speech promised. Contradicting Callaghan, who complacently predicted that the period of Tory rule would be ‘a brief interruption’ before Labour resumed its forward march, and the Liberal leader David Steel, who reminded her that she had won the lowest share of the poll of any post-war Conservative Government, Mrs Thatcher hailed her victory as ‘a watershed election’ which marked a decisive rejection of ‘the all-powerful corporatist state’. In its place she promised to restore incentives and individual choice, particularly in housing, health and education. Where once she had been sceptical about selling council houses, she now saw the right to buy as one of those things ‘so fundamental that they must apply to all citizens regardless of the local authority area in which they live’. The Government was taking power to force reluctant Labour authorities to sell their housing stock because ‘we believe that the right to buy council houses should belong to everyone’. She also warned that ‘there is no such thing as a free service in the Health Service’.
Significantly, she dealt with the trade-union question under the heading of law and order. Yet she was careful – as she had been during the election – not to be provocative. She still went out of her way to stress that ‘a strong and responsible trade union movement must play a large part in our economic recovery.’1 Perhaps fearing that she had been too conciliatory, however, she emphasised her personal commitment to action on union reform. ‘I am not known for my purposes or policies being unclear,’ she assured a backbench questioner. ‘I believe that my policies on this are known.’ She believed that they were ‘overwhelmingly supported by the vast majority of people in this country, who believe that a law must be introduced to deal with certain aspects of the closed shop, picketing and the postal ballot’.2 To the disappointment of the Tory right, however, Jim Prior’s Employment Bill, when it was eventually published at the end of the year, turned out to be a very cautious measure. While she hinted at her sympathy for the hardliners behind Prior’s back, Mrs Thatcher had no wish to plunge into battle with the unions before she was ready. All the Government’s initial energy was concentrated on setting a new course for the economy. Howe’s first budget was fixed for the earliest possible date, 12 June, just five weeks after the election.
The first objective was quite clear. The Prime Minister and her inner group of economic ministers were determined to mount an immediate assault on public spending. But this was a goal easier to proclaim in opposition than to realise in government. On taking office, ministers found their room for major economies seriously constrained – partly by inescapable external factors, but also by their own political choices. On the one hand the value of sterling, already high due to the recent tripling of the price of oil (since sterling was now a petrocurrency), was boosted further by the weakness of the dollar and the markets’ satisfaction at the Government’s election. The high pound sharply increased the cost of British exports, creating unemployment, which swelled the social security budget while reducing revenue. But at the same time ministers had tied their own hands by commitments they had made during the election.
In opposition the Iron Lady had lived up to her reputation by supporting NATO’s request for an extra 3 per cent annual spending on defence. Once in office, Howe tried to row back from this pledge, but Mrs Thatcher was immovable: in her book, strong defence took precedence over everything else, even cutting public spending. Likewise she had promised substantial pay rises to the armed forces and the police; and the Tory manifesto also committed the new Government to increase old-age pensions. Finally Patrick Jenkin as Shadow Health Secretary had bounced Howe into promising that spending on the NHS would be protected for at least three years. All these undertakings left very little scope for the sort of big savings the Prime Minister and Chancellor were looking for. As Mrs Thatcher wrote in her memoirs: ‘We seemed to be boxed in.’3
In fact, Howe squeezed
These economies were designed to make room for dramatic tax cuts. In the end Howe was able to cut the standard rate of income tax by three pence in the pound, from 33 to 30 per cent, and reduce the top rate from Labour’s penal 83 per cent to a more moderate 60 per cent. This was a bold early signal of the new Government’s intentions. But it was made possible only by virtually doubling Value Added Tax (VAT). It had always been part of the Tories’ strategy to switch a greater proportion of the burden from direct to indirect taxation. But during the election Howe specifically denied that he planned to double VAT. In the event he could not finance the income-tax cuts he was determined on in any other way. Mrs Thatcher was very worried by the drastic impact that such a steep hike would have on prices. With inflation already rising, she had reason to be worried: however long planned, it was the worst possible moment for such a switch. In his memoirs Howe wryly noted ‘the ambivalence which Margaret often showed when the time came to move from the level of high principle and evangelism to practical politics’.4 Nigel Lawson wrote more bluntly that she was ‘fearful’ of the political fallout, ‘but Geoffrey persuaded her that if we did not grasp this nettle in the first budget it would never be grasped at all’.5 For her part Lady Thatcher acknowledged that ‘Geoffrey stuck to his guns’ and overcame her doubts.6 But this – the first really unpopular decision the Government had to take, within three weeks of taking office – was not the last time that a cautious Prime Minister had to be hauled over the hurdle by her more resolute colleagues.
Another instance was the abolition of exchange controls. This was arguably the single most important step the Thatcher Government took to give practical effect to its belief in free markets: by doing away with the restrictions on the movement of capital which had been in place since 1939, the Government dared to expose the British economy to the judgement of the global market. It was an act of faith which might have resulted in a catastrophic run on sterling. In the event it had the opposite effect: the markets were impressed by the new Government’s show of confidence and the pound, already strong, dipped only momentarily and then went on rising. Howe later wrote that the abolition of controls was ‘the only economic decision of my life that ever caused me to lose a night’s sleep. But it was right.’7
In the long run it undoubtedly was; and it was brave to take the decision in the first few months in office. But in the short run it played havoc with the Government’s monetary policy. Controlling the money supply was supposed to be the linchpin of the Government’s new monetarist approach. The trouble was that Labour had already been controlling it very effectively before the election. Denis Healey and the Permanent Secretary of the Treasury, Douglas Wass, were not ideological monetarists like Joseph, Howe and Lawson, who had embraced monetarism with quasi-religious certainty: they were ‘reluctant monetarists’ who had pragmatically concluded – at the prompting of the International Monetary Fund (IMF) – that tight monetary targets were a necessary part of economic policy. But in practice monetary policy did not change in May 1979 so dramatically as either Labour or the Government liked to pretend. When Healey denounced Tory policies it sometimes suited Mrs Thatcher to remind the House that ‘the previous Labour Chancellor was more of a monetarist than he now cares to admit’.8
Howe’s first budget was a bold statement of intent, taking a huge gamble on early tax cuts at the risk of
