The Iron Lady

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 objection 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.

Much of the press comment on the budget was fiercely critical. Even before the 364 economists published their anathema, words like ‘disastrous’, ‘perverse’ and ‘economically illiterate’ were common currency. The majority of Tory MPs were said to be ‘bewildered and uneasy’.⁵⁹ The smack of unpopular measures, however, was just what those who feared that the Government had lost its way were looking for. The Daily Telegraph hailed the budget as ‘bold, harsh and courageous’; The Times, rather more hesitantly, agreed.⁶⁰ ‘Her enemies in the Cabinet and elsewhere began to realise that if she and Geoffrey could do what they had done, then they were far tougher and stronger than people had thought.’⁶¹ Speaking to the Conservative Central Council in Cardiff at the end of the month, Mrs Thatcher dramatically reaffirmed, in characteristically personal terms, her determination to hold the moral high ground. ‘I do not greatly care what people say about me… This is the road I am resolved to follow.This is the path I must go.’⁶² She won a standing ovation. Boldness was its own reward.