Instead, I delivered a rather different and possibly less welcome message to the motor industry. I acknowledged that some of the problems they faced were caused by the world recession. But that was not the real reason for the industry’s difficulties. I said:
This year we have the lowest car production for twenty years. Not because home sales are the lowest — far from it. But because people are buying foreign cars rather than our own. And some of those come from high-wage, high-exchange-rate economies. The world recession may have exacerbated our problems, but it is not the root cause in the motor industry. What has happened to the motor industry since the 1950s exemplifies what has been going wrong in too many other parts of British industry: higher pay not matched by higher productivity; low profits, so low investment; too little going into R & D and new design… and why haven’t we had the productivity? Overmanning. Resistance to change. Too many strikes and stoppages.
The last part of that message seemed to fall on deaf ears. On 27 October BL’s trade unions decided overwhelmingly to reject the company’s offer of a pay increase of 6.8 per cent and recommended a strike. Michael Edwardes wrote to Keith Joseph to say that a strike would make it impossible to achieve the 1981 Corporate Plan submitted just a week before. To win support for the pay offer, he wanted to write to inform union officials of the key aspects of the 1981 Plan, including the funds required for 1981 and 1982 — a figure which he would put at £800 million. I reluctantly accepted Michael Edwardes’s approach but only on the clear understanding that the Department of Industry would make it known that the Government was not committed in any way to finding these funds and that the matter had yet to be considered. In fact, on 18 November BL’s union representatives backed down and finally decided to accept the company’s offer. History repeated itself: almost the same thing had happened the previous year. The need to deal with an industrial relations crisis made it extremely difficult to avoid the impression that we were prepared to provide large amounts of extra public funding for the company. No matter how clear our disclaimers, inevitably people drew that conclusion.
On any rational commercial judgement, there were no good reasons for continuing to fund British Leyland. The 1980 Corporate Plan had foreseen the need for about £130 million of new government equity in the period of 1981 and beyond. In the 1981 Plan which we were now asked to approve that sum had grown by £1 billion. Meanwhile, the outlook for profits was worse. The predictions for market share in successive Plans had grown ever gloomier. Many of BL’s models were uncompetitive. The Metro and the BL/Honda Bounty would help, but neither would yield much in profits. BL was still a high-cost, low-volume manufacturer of cars in a world where low cost and high volume were essential for success.
On 12 January I held a meeting at No. 10 to discuss the Corporate Plan with Keith Joseph, Geoffrey Howe, Norman Tebbit and others. I continued to argue that we should try to find some middle way between total closure and fully funding the Corporate Plan.
I knew that closure of the volume car business, with all that would mean for the West Midlands and the Oxford area, would not be politically acceptable to the Cabinet or the Party, at least in the short term. It would also be a huge cost to the Exchequer — perhaps not very different to the sort of sums BL was now seeking. I told a meeting of ministers on 16 January that the Government must get rid of its financial liability for the volume car business in a way which was both humane and politically acceptable. We might need to pay a ‘dowry’ to make the car business attractive to a buyer: ultimately, of course, it might mean closure — the market, not government, would ultimately determine BL’s future. I said that I was in favour of supporting the BL Plan — but on condition that BL disposed of its assets rapidly or arranged mergers with other companies.
This last point was still extremely contentious. Michael Edwardes told Geoffrey Howe and Keith Joseph that the BL Board would be willing to sell Land Rover and such other parts of the business as they could and close down the volume car business: but they were not willing to sell Land Rover if they were also required to go on trying to salvage the volume car business. He said that the Board’s position would be quite impossible if a public deadline were to be set for its sale.
This attitude, of course, put us in a very difficult position — as it was doubtless intended to do. It irritated one or two ministers to the point of turning them against the whole Plan. Moreover, it had not been possible for us to find the ‘middle way’ which I had sought and which would have involved progressive sale of the business without a total and immediate shut-down. But the political realities had to be faced. BL had to be supported. We agreed to accept BL’s Corporate Plan, involving the division of the company into four more or less independent businesses. We settled the contingencies which would lead to the Plan being abandoned. We set out the objectives for further collaboration with other companies. And — most painfully — we provided £990 million.
This was not, of course, the end of the story for BL, any more than it was for BSC. In due course, it would be shown that the changes in attitude and improvements in efficiency achieved in these years were permanent.[31] To that extent, the account of our policy in 1979–81 towards BL is one of success — at a cost. But the huge extra sums of public money that we were forced to provide came from the taxpayer or, through higher interest rates needed to finance extra borrowing, from other businesses. And every vociferous cheer for higher public spending was matched by a silent groan from those who had to pay for it.
CHAPTER V
Not for Turning
Politics and the economy in 1980–1981
NO U-TURNS
At 2.30 on the afternoon of Friday 10 October 1980 I rose to address the Conservative Party Conference in Brighton. Unemployment stood at over two million and rising; a deepening recession lay ahead; inflation was far higher than we had inherited, though falling; and we were at the end of a summer of government leaks and rifts. The Party was worried, and so was I. Our strategy was the right one, but the price of putting it into effect was proving so high, and there was such limited understanding of what we were trying to do, that we had great electoral difficulties. However, I was utterly convinced of one thing: there was no chance of achieving that fundamental change of attitudes which was required to wrench Britain out of decline if people believed that we were prepared to alter course under pressure. I made the point with a line provided by Ronnie Millar:
To those waiting with bated breath for that favourite media catchphrase, the ‘U-turn’, I have only one thing to say. ‘You turn if you want to. The lady’s not for turning.’ I say that not only to you, but to our friends overseas — and also to those who are not our friends.
The message was directed as much to some of my colleagues in the Government as it was to politicians of other parties. It was in the summer of 1980 that my critics within the Cabinet first seriously attempted to frustrate the strategy which we had been elected to carry out — an attack which reached its climax and was defeated the following year. At the time that I spoke, many people felt that this group had more or less prevailed.
ARGUMENTS ABOUT PUBLIC EXPENDITURE
Battle was to be joined over the next two years on three related issues: monetary policy, public spending and trade union reform. The ‘wets’ argued that because we had embraced a dogmatic monetary theory that inflation could only be brought down by a fierce monetary squeeze, we were squeezing the economy in the middle of a recession. Such dogmatism, they argued, similary prevented our using practical tools of economic policy like prices and incomes control and forced us to cut public spending when, as Keynes had argued, public spending should be increased to lift an economy suffering from lack of demand.
The most bitter Cabinet arguments were over public spending. In most cases those who dissented from the line which Geoffrey Howe and I took were not merely intent on opposing our whole economic strategy as doctrinaire monetarism; they were trying to protect their departmental budgets. It had soon become c
lear that the public expenditure plans announced in March 1980 had been far too optimistic. In particular, the large turn round from losses towards profitability in the nationalized industries was not going to come about; local authorities, as usual, were overspending; and the recession was proving deeper than expected, increasing spending on unemployment and other benefits. Government borrowing for the first quarter of 1980 looked like being very large. In addition, Francis Pym, Defence Secretary, was pressing for an increase in the Ministry of Defence (MoD) cash limit.
We had decided to have a general economic discussion in Cabinet on 3 July 1980, before our first collective discussion of the 1981–2 public expenditure round on 10 July. Our aim was to confront spending ministers with the full implications for taxation of a failure to control spending, and to smoke out the arguments for reflation, which were almost daily to be found in the newspapers and in the mouths of pressure groups. But I had no illusions that it would be easy to subject my colleagues’ aspirations to a salutary dose of realism.
Geoffrey spelt out to Cabinet how difficult the economic situation at home and abroad had now become. Inflation in the major economies had risen sharply, oil prices had doubled, and the world was moving further into recession — led in this direction by Jimmy Carter’s United States. Although output in the UK had fallen rather less than predicted in 1980, it was likely in consequence to fall faster than expected in 1981. Inflation was slowing, but less rapidly than we had hoped. The background to the public spending round and to next year’s budget was, therefore, bleak. Then the discussion began. Some ministers argued for large increases in spending to stave off unemployment; others argued for prudence. I summed up by reaffirming the present strategy and noting the need to maintain public spending constraints, to reduce public sector pay increases and so to allow government borrowing and interest rates to fall — although within spending totals I was keen to see a higher priority given to dealing with unemployment, especially among young people. Round one went to Geoffrey and me.
But the debate continued inside and outside government. The “wets” arguments came in different forms of varying sophistication, though their central message was always the same: spend and borrow more. They used to argue that we needed extra public spending on employment and industrial schemes, over and above what we had planned and were effectively forced to spend simply as a result of the recession. But this did not escape from the fact that extra public spending — whatever it was spent on — had to come from somewhere. And ‘somewhere’ meant either taxes levied on private individuals and industry; or borrowing, pushing up interest rates; or printing money, setting off inflation. There was also a feeling, which I equally knew I had to resist, that the refunds which I had secured from the European Community budget should be used to finance extra spending. But why should it be assumed that public spending was better than private spending? Why should the fruits of my efforts to rein in the appetite of the European Community automatically be consumed by an almost as insatiable British public sector? I was, therefore, determined to ensure that the Cabinet endorsed the 1981–2 public expenditure total announced in the previous white paper, as reduced by the European budget receipts.
These basic differences between us came out clearly at the public spending Cabinet on 10 July. Some ministers argued that the PSBR should be allowed to increase to accommodate the huge new requirements of the loss-making nationalized industries. But the PSBR was already far too high, whatever the theoretical merits or otherwise of letting public borrowing rise in a recession. The higher it went, the greater the pressure to raise interest rates in order to persuade people to lend the Government the necessary funds. And at a certain point — if pushed too far — there would be the risk of a full-scale government funding crisis — that is, when you cannot finance your borrowing from the non-banking sector. We could not risk going further in that direction. So I emphasized once again the need to stay within the public spending plans — though within them there could be more priority given to assistance for jobs.
The defence budget was a special problem. We had already accepted the NATO commitment for annual 3 per cent real increases in our defence spending. This had the obvious merit of demonstrating to the Soviets our determination to prevent their winning the arms race on which they had embarked, but in two other respects it was unsatisfactory. First, it meant that the MoD had little incentive to get value for money in the hugely expensive equipment it purchased. Second, the 3 per cent commitment meant that Britain, spending a substantially higher proportion of its GDP on defence than other European countries and going through a peculiarly deep recession, found herself bearing an unfair and increasing burden. There were also problems relating to management of the MoD budget. By the end of 1980 the MoD had overspent its cash limit because, with the depressed state of industry, suppliers had fulfilled government orders faster than expected.
As we moved into the winter of 1980 the economic difficulties accumulated and the political pressure built up. It might have been easier to gain support in the battle for tight control of public spending if the second element of the strategy — the money supply — had been behaving predictably. But it had not. On Wednesday 3 September Geoffrey Howe and I met to discuss the monetary position. What did the figures really mean? Measured in terms of £M3, the money supply had been rising much faster than the target we had set in the MTFS at the time of the March budget. It was hard to know how much of this was the result of our removing exchange controls in 1979 and our decision in June to remove the ‘corset’ — a device by which the Bank of England imposed limits on bank lending. Money analysts argued that both of these liberalizations had misleadingly bloated the £M3 figures.[32] As I put it to Brian Waiden in an interview on Sunday 1 February:
a corset is there to conceal the underlying bulges, not to deal with them, and when you take it off you might see that the bulges are worse.
By contrast, some of the other monetary measures were undershooting their targets. The ‘wets’ found the wayward behaviour of £M3 a suitable subject for mockery at dinner parties. But for Geoffrey and me it was no such diversion. The arguments about which was the most accurate measure of the money supply were highly technical, but they were of great significance.
Of course, we never just looked at monetary figures to gauge what was happening. We also looked at the real world around us. And what we saw told a somewhat different tale from the high £M3 figures. Inflation had slowed down markedly, particularly prices in the shops where competition was intense. Sterling was very strong, averaging just below $2.40 during the second half of 1980. And here the crucial issue was whether the high exchange rate was more or less an independent factor bringing down inflation, or rather a result of the monetary squeeze being tighter than we intended and than the £M3 figures suggested.
Some of my closest advisers thought the latter. Professor Douglas Hague sent me a paper in which he described our policies as ‘lopsided’ in two respects: first, they were bearing down more heavily on the private than the public sector (which I knew to be true), and second, they were putting too much emphasis on controlling the money supply and too little on controlling the PSBR, with the result that interest rates were higher than they should have been. (I also came to share this view over the next year.) In the summer of 1980 I consulted Alan Walters, who was to join me at the beginning of 1981 as my economic policy adviser at No. 10 and upon whose judgement I came more and more to rely. Alan’s view was that the monetary squeeze was too tight and that it was the narrowest definition of ‘money’, known as the monetary base, which was the best, indeed the only reliable, star to steer by. Certainly, during the autumn of 1980 the narrowest definitions of money suggested that we were pursuing a very severe monetary policy.
If there was uncertainty about the monetary position at this time, there was none at all about the trend in public spending, which was inexorably upwards. Public sector pay was one of the worst problems: the bills we received were largely the
legacy of Labour’s failed incomes policy, but they had to be paid all the same, and they set a higher base for future settlements as well. The other main culprit for the enormous increase in public spending was, as I have said, the nationalized industries. Looking at the disappointing figures emerging from the public expenditure round, I wrote at the time that they ‘had undermined the Government’s whole public expenditure strategy’. But there was worse to come.
In September, Geoffrey Howe sent me a note elaborating on the warning he had already given to Cabinet about public expenditure. The increases required for the nationalized industries, particularly BSC, would require larger cuts in programmes than those agreed in July in order to hold the total. To the extent that more was provided, as the Cabinet wished, for industrial support and employment, the corresponding cuts would need to be larger still. The fifth public expenditure round in sixteen months was bound to prompt squeals of indignation: and so it proved.
Indeed, a further note from Geoffrey in early October confirmed that the position was, if anything, deteriorating: the figures were worse than suggested the previous month. The latest forecast of the PSBR for 1981–2 approached £11 billion, far higher than planned. The Treasury had already begun to examine ways in which it might be reduced and were looking at the possibility of increasing taxes on the profits from North Sea oil and gas, raising employees’ national insurance contributions and not fully indexing personal income tax allowances in line with inflation. All of these unpalatable tax options reinforced the necessity for further public spending cuts: we needed a cash limits squeeze on all programmes and a cut in local authority current spending, and we would have to look again at defence spending and at the even more politically sensitive social security budget. (The social security budget accounted for a quarter of total public spending, of which the cost of retirement pensions was by far the largest element. But I had pledged publicly that the latter would be raised in line with inflation during the Parliament.) We were entering perilous waters.
The Downing Street Years, 1979-1990 Page 16