the loose financial policy it typified were now becoming apparent. The Treasury, at least, had started to worry about the economy, which was growing at a clearly unsustainable rate of well over 5 per cent. The money supply, as measured by M3 (broad money), was growing too fast — though the (narrower) Mi, which the Government preferred, less so.[30] The March 1973 Budget did nothing to cool the overheating and was heavily distorted by the need to keep down prices and charges so as to support the ‘counter- inflation policy’, as the prices and incomes policy was hopefully called. In May modest public expenditure reductions were agreed. But it was too little, and far too late. Although inflation rose during the first six months of 1973, Minimum Lending Rate (MLR) was steadily cut and a temporary mortgage subsidy was introduced. The Prime Minister also ordered that preparations be made to take statutory control of the mortgage rate if the building societies failed to hold it down when the subsidy ended. These fantastic proposals only served to distract us from the need to tackle the growing problem of monetary laxity. Only in July was MLR raised from 7.5 per cent, first to 9 per cent and then to 11.5 per cent. We were actually ahead of Labour in the opinion polls in June 1973, for the first time since 1970. But in July the Liberals took Ely and Ripon from us at by-elections. Economically and politically we had, without knowing it, already begun to reap the whirlwind.
Over the summer of 1973 Ted held more talks with the TUC, seeking their agreement to Stage 3. The detailed work was done by a group of ministers chaired by Ted, and the rest of us knew little about it. Nor did I know at the time that close attention was already being given to the problem which might arise with the miners. Like most of my colleagues, I imagine, I believed that they had had their pound of flesh already and would not come back for more.
I hope, though, that I would have given a great deal more attention than anyone seems to have done to building up coal stocks against the eventuality, however remote, of another miners’ strike. The miners either had to be appeased or beaten. Yet, for all its technocratic jargon, this was a government which signally lacked a sense of strategy. Ted apparently felt no need of one since, as we now know, he had held a secret meeting with Joe Gormley in the garden of No. 10 and thought he had found a formula to square the miners — extra payment for ‘unsocial hours’. But this proved to be a miscalculation. The miners’ demands could not be accommodated within Stage 3.
In October Cabinet duly endorsed the Stage 3 White Paper. It was immensely complicated and represented the high-point — if that is the correct expression — of the Heath Government’s collectivism. Pay increases were to be limited to ?2.25 a week or 7 per cent with a maximum ?350 per annum; there were complex provisions to pay shift workers more for ‘unsocial hours’, and room was made for additional payments in respect of productivity agreements and moves towards equal pay for women. In addition, there were ‘threshold payments’ to be made if inflation rose to specified levels — we made some rosy assumptions about future rates of inflation — and there was also money for pensioners and a new mortgage subsidy for first-time buyers. But the most significant new development– and one whose necessity ultimately demonstrated the futility of the kind of approach we were pursuing — was the provision that the Pay Board should set up an inquiry into ‘relativities’ between groups of workers, with the aim of accommodating grievances on this score in Stage 4. All possible eventualities, you might have thought, were catered for. But as experience of past pay policies ought to have demonstrated, you would have been wrong.
My only direct involvement in the working of this new, detailed pay policy was when I attended from time to time the relevant Cabinet Economic Sub-Committee, usually chaired by Terence Higgins, a Treasury Minister of State. Even those attracted by the concept of incomes policy on grounds of ‘fairness’ begin to have their doubts when they see its provisions applied to individual cases. My visits to the Higgins Committee were usually necessitated by questions of teachers’ pay. But on one occasion when I found myself there with Sir William Armstrong, the Head of the civil service, it was to discuss the pay of Under-Secretaries. I knew that it was at this level in my department that the most important policy work was carried on, and I saw that with inflation running at about 10 per cent and differentials squeezed as a result of union power and government pay policy, these people needed proper motivation through a decent pay rise. Of course, the same could have been said of many groups. What struck me though was that no one doubted that this
On another sublime occasion we found ourselves debating the proper rate of pay for MPs’ secretaries. This was the last straw. I said that I hadn’t come into politics to make decisions like this, and that I would pay my secretary what was necessary to keep her. Other ministers agreed. But then, they knew their secretaries; they did not know the other people whose pay they were deciding.
In any case, reality soon started to break in. Two days after the announcement of Stage 3 the NUM rejected an NCB offer worth 16.5 per cent in return for a productivity agreement. The Government immediately took charge of the negotiations. (The days of our ‘not intervening’ had long gone.) Ted met the NUM at No. 10. But no progress was made. In early November the NUM began an overtime ban. Maurice Macmillan told us that though an early strike ballot seemed unlikely and, if held, would not give the necessary majority for a strike, an overtime ban would cut production sharply. The general feeling in Cabinet was still that the Government could not afford to acquiesce in a breach of the recently introduced pay code. Instead, we should make a special effort to demonstrate what was possible within it. The miners were not the only ones threatening trouble. The firemen, electricians and engineers were all in differing stages of dispute. It is one of the penalties of pay policy that you have to fight on too many fronts.
Similarly, it is an unavoidable weakness of the planned economy to which we were now rapidly moving that economic plans take little or no account of external events. The argument that all of us used in February 1974 (and some people continued to use long afterwards) to explain the failure of the Heath Government’s economic strategy was that the quadrupling of the oil price resulting from the Arab-Israeli war of 1973 shattered our policy when it was just beginning to work. This is plainly false. Loose monetary policy had already sown the seeds of inflation, which was to surge under the incoming Labour Government. Incomes policy, which does no more than redistribute inflation through time, could do little about this. Whatever limited successes it achieved would, like those of all other incomes policies, have unwound in the form of higher demands and settlements later. Moreover, the level of economic growth, particularly for an economy still unreformed by deregulation, privatization or reductions in trade union power, was far too high to be sustainable. Public expenditure had risen too fast as well, and we were already discussing cuts before the full implications of the oil price rise were known. We had not, in fact, ‘modernized’ British industry as we had boasted — not least because only industry, not Government, can efficiently ‘modernize’ itself. Worse, by fuelling inflation and taking too many decisions out of the hands of managers and wage bargainers we had created precisely the wrong climate for industrial success.
Yet, even ignoring all of this, the basic proposition that the oil price hike was just ‘bad luck’ is fundamentally mistaken. It is the very fact that governments
Admittedly, the threatened oil embargo and oil price rises resulting from the Arab-Israeli war that autumn made things far worse. As the effects of the miners’ industrial action bit deeper, the sense that we were no longer in control of events deepened. Somehow we had to break out. This made a quick general election increasingly attractive. Quite what we would have done if we had been re-elected is, of course, problematic. Perhaps Ted would have liked to go further towards a managed economy. Others would probably have liked to find a way to pay the miners their Danegeld and seek a quieter political life. Keith and I and a large part of the Parliamentary Conservative Party would have wanted to discard the corporatist and statist trappings with which the Government was now surrounded and try to get back to the free market approach from which we had allowed ourselves to be diverted in early 1972.
Indeed, quite apart from our exchanges about the shortcomings of economic policy, Keith and I had also been intensely irritated by the posture the Government took during the Arab-Israeli war. In the hope of securing favourable treatment from the oil-producing states — which were limiting oil supplies to Western nations — the Government refused to condemn the Arab states which had broken the 1967 ceasefire and we applied an arms embargo to both sides, depriving the Israelis of the spare parts they needed. The Government also refused to
