The tactics in handling the new public expenditure discussions were obviously very important. Geoffrey and I decided not to take the whole matter to Cabinet cold, as it were, so I called a meeting of key ministers to go into it first. The Chancellor described the position and outlined the arithmetic.
Our plan succeeded. Without too much grumbling, the Cabinet of 30 October endorsed the strategy and confirmed our objective of keeping public spending in 1981–2 and later years broadly at the levels set out in the March white paper. This meant that it would be necessary to make cuts of the order of magnitude proposed by the Treasury — though even with these reductions we would be forced to increase taxes if we were to bring the PSBR down to a level compatible with lower interest rates.
Much stronger Cabinet opposition surfaced when we began to look at the decisions required to give effect to the strategy which had been endorsed. The ‘wets’ now discovered a new approach. They claimed that they lacked sufficient information to judge whether the overall strategy was soundly based. Without this, they said, they were in no position to weigh the economic, political and social consequences of all the various means of achieving it, including changes in taxation and reductions in public spending. The ploy was transparent. In effect, spending ministers were trying to behave as if they were Chancellors of the Exchequer. It would be a recipe for complete absence of spending control and thus for economic chaos.
The three most important areas of discussion at our meeting on Tuesday 4 November were the Health Service and defence budgets, and the special employment measures which Jim Prior wanted. On Health, we decided that the NHS element in the National Insurance Contribution should be raised rather than the health programme itself reduced — so continuing to honour our manifesto pledge. On defence, the Cabinet accepted that the reductions would have to fall somewhere between what the Treasury demanded and the MoD was then offering. Finally, we agreed on the special employment measures, which I later announced in my speech on the Address, and which provided for 440,000 places on the Youth Opportunities Programme — 180,000 more than in the current year.
Two days later, Cabinet met again to continue the discussion. The financial position of the nationalized industries had worsened even in the short time since we had begun our spending review. Public sector pay was still a headache. If we managed to hold future public service pay increases to 6 per cent, as we wished, we could still expect a PSBR of £12 billion in 1981–2, compared with the £7.5 billion implied by the MTFS. It would not be possible to finance a PSBR of this size and reduce interest rates at the same time. Therefore, in order to avoid high interest rates substantial tax increases would be needed. In my summing up I noted that the position would be still worse, if reductions still under discussion — including defence, social security and education — were not actually agreed. In fact, Cabinet made the final decisions about the package the following week.
The Autumn Statement on 24 November 1980, therefore, contained some highly unpopular measures. Employees’ National Insurance Contributions had to go up. Retirement pensions and other social security benefits would be increased by 1 per cent less than the rate of inflation next year if they turned out to have risen by 1 per cent more in the present year. There were cuts in defence and local government spending. It was announced that a new supplementary tax would be introduced on North Sea oil profits. However, there was some good news: the further employment measures — and a 2 percentage point cut in MLR.
DISSENT BY LEAKS
Few members of the public are experts in the finer matters of economics — though most have a shrewd sense when promises do not add up. By the end of 1980 I began to feel that we risked forfeiting the public’s confidence in our economic strategy. Unpopularity I could live with. But loss of confidence in our capacity to deliver our economic programme was far more dangerous. We were now spending more when we believed in spending less; inflation was high when we proclaimed the primacy of bringing it down; and private industry was faltering when we had been saying for years that only successful free enterprise could make a country wealthy. Of course, we could point to factors over which we had little or no control, and above all to the world recession; and on inflation and pay settlements there was movement in the right direction. But our credibility was at stake. And the very last thing I could afford was well-publicized dissent from within the Cabinet itself. Yet this was what I now had to face.
Public dissent from the ‘wets’ was phrased in what was obviously intended to be a highly sophisticated code, in which each phrase had a half-hidden meaning and philosophical abstractions were woven together to condemn practical policies by innuendo. This cloaked and indirect approach has never been my style and I felt contempt for it. I thrive on honest argument. I am interested in practical options. And I prefer to debate my opponents rather than to undermine them with leaks. I do not believe that collective responsibility is an interesting fiction, but a point of principle. My experience is that a number of the men I have dealt with in politics demonstrate precisely those characteristics which they attribute to women — vanity and an inability to make tough decisions. There are also certain kinds of men who simply cannot abide working for a woman. They are quite prepared to make every allowance for ‘the weaker sex’: but if a woman asks no special privileges and expects to be judged solely by what she is and does, this is found gravely and unforgivably disorienting. Of course, in the eyes of the ‘wet’ Tory establishment I was not only a woman, but ‘that woman’, someone not just of a different sex, but of a different class, a person with an alarming conviction that the values and virtues of middle England should be brought to bear on the problems which the establishment consensus had created. I offended on many counts.
The economic and public expenditure discussions of 1980 repeatedly found their way into the press; decisions came to be seen as victories by one side or the other and Bernard Ingham told me that it was proving quite impossible to convey a sense of unity and purpose in this climate. During 1980 the public was treated to a series of speeches and lectures by Ian Gilmour and Norman St John Stevas on the shortcomings of monetarism, which, according to them, was deeply un-Tory, a kind of alien dogma — though they usually took care to cover themselves against charges of disloyalty by including some fulsome remarks praising me and the Government’s approach. Speaking in Cambridge in November, Ian Gilmour claimed that Britain risked ‘the creation of a “Clockwork Orange” society with all its attendant alienation and misery’, which sounded remarkably like Britain in the ‘winter of discontent’.
Industrial leaders helped worsen the general impression of disarray: in the same month the new Director-General of the CBI was promising ‘a bare knuckle fight’ over Government policies, though when I met the CBI shortly afterwards I am glad to say that knuckles were not in evidence. Then in December Jim Prior was reported as urging us not to use the language of the ‘academic seminar’. But perhaps the most astonishing remark — not his last — was John Biffen’s widely reported admission to the Conservative Party Parliamentary Finance Committee that he did not share the enthusiasm for the MTFS, which he — the Chief Secretary to the Treasury — was trying, with singularly little success, to apply in the field of public expenditure. Not surprisingly, when I met the executive of the ‘22 Committee later that month I found that they had a low view of ministerial efforts at presentation. I most certainly agreed. But it was not simply a question of presentation: some ministers were trying to discredit the strategy itself. This could not be allowed to continue.
I had the Christmas holiday to consider what should be done. I decided that it was time to reshuffle the Cabinet. The only question was whether a limited reshuffle would serve to change the balance sufficiently in favour of our economic strategy, or whether much more far-reaching changes were required. I decided on the former.
On Monday 5 January I made the changes, beginning with Norman St John Stevas, who left the Government. I was sorry to lose Norman but he made his own
departure inevitable. He had a first-class brain and a ready wit. But he turned indiscretion into a political principle. His jokes at the expense of government policy moved smoothly from private conversation to Commons gossip to the front page of newspapers. The other departure, Angus Maude, had employed his own sharp wit in my support but he felt that it was time to give up the job as Paymaster-General, in charge of government information, in order to return to writing. I moved John Nott to Defence to replace Francis Pym. I was convinced that someone with real understanding of finance and a commitment to efficiency was needed in this department. I moved John Biffen to replace John Nott at Trade, and at Geoffrey Howe’s request appointed Leon Brittan as Chief Secretary. Leon Brittan was a close friend of Geoffrey’s. He was enormously intelligent and hard-working and he had impressed me with the sharpness of his mind, particularly in Opposition when he had been one of the Party’s spokesmen on the then vexed issue of Devolution. Two very talented new Ministers of State came into the Department of Industry to support Keith Joseph: Norman Tebbit and Kenneth Baker. Norman had worked closely with me in Opposition. I knew that he was totally committed to our policies, shared much of my own outlook and was a devastating Commons in-fighter. Ken was given special responsibility for Information Technology, a task in which he showed his talents as a brilliant presenter of policy. Francis Pym took over the task of disseminating government information, which he combined with the position of Leader of the House of Commons. But the first half of this appointment was to prove a source of some difficulty in the months ahead.
With this moderate Cabinet reshuffle, I had hoped that we would be able to face our economic difficulties with greater unity and determination. Certainly, both qualities were needed: the criticisms of our strategy were mounting. I counter-attacked. Both in my Weekend World interview on 1 February and a few days later in my speech in the Commons economic debate I replied to the arguments of those who believed that the real problem in Britain was lack of economic demand and who argued that we should remedy it by reflation. I told the House:
As governments tried to stimulate employment by pumping money into the economy they caused inflation. The inflation led to higher costs. The higher costs meant loss of ability to compete. The few jobs that we had gained were soon lost; and so were a lot more with them. And then, from a higher level of unemployment and inflation, the process was started all over again, and each time around both inflation and unemployment rose.
But the other side had important allies in the media. A leading article in the Sunday Times, usually a Conservative paper, carried the headline ‘Wrong, Mrs Thatcher, Wrong, Wrong, Wrong’. Indeed, the press was full of hostile comment. And that hit the morale of my supporters. On 27 February I received a memorandum from Ian Gow:
Prime Minister
1. I am sorry to say that there has been a noticeable deterioration in the morale of our back-benchers.
2. I attribute this to:-
(a) Increasing concern about the extent of the recession and unemployment.
(b) The perceived defeats for the Government on Coal and, to a lesser extent, in the pay settlement for the water workers.
(c) The size of the PSBR and the slowness with which interest rates are falling.
(d) The insatiable appetite of the Public Sector — notably BL, BSC, NCB.
(e) The Rate Support Grant.
Many of the critics inside and outside the Conservative Party felt that they had detected weakness, were determined to exploit it and saw their chance coming with the 1981 budget.
THE 1981 BUDGET
I shall never forget the weeks leading up to the 1981 budget. Hardly a day seemed to go by without the financial scene deteriorating in some way. At the end of January Geoffrey Howe was still hoping to make serious cuts in capital taxation and to provide substantial assistance for industry, but by the beginning of February the Treasury was already becoming more cautious and pessimistic about the outlook. The PSBR for the current year seemed likely to turn out between £4 and £6 billion more than the figure forecast in the 1980 budget. The current Treasury forecast, which assumed indexation of personal tax allowances and of specific duties and took account of the measures announced in November 1980, showed a PSBR for 1981–2 in the region of £11 billion (nearly 4.5 per cent of GDP), compared with a figure implied by the MTFS of around £7.5 billion (some 3 per cent of GDP). At this point the Treasury believed that we should aim for a PSBR somewhat below £10 billion. There was, therefore, a gap of £1 billion to £1.5 billion.
Personal incomes had been increasing while company profits had been shrinking, so it was clear that any extra taxation should be borne by the personal rather than the corporate sector. The Treasury were talking of raising personal allowances by a minimum of 6.5 per cent — they hoped for 9 or 10 per cent — rather than the full 1.5 per cent required to take account of inflation. They were planning to raise the specific duties on alcohol, tobacco and petrol by one and three-quarters or perhaps twice the rate necessary to take account of inflation. Business — especially the CBI — was pressing hard for a reduction in the National Insurance Surcharge (NIS), but there were problems with this proposal: the full year cost of each percentage point reduction was very large, the relief was indiscriminate and there was the risk that some of it might go quickly into wages. Other possible ways of helping industry — each of which had its own disadvantages — included a cut in Corporation Tax or in the Heavy Fuel Oil Duty. We had in November announced extra taxation on North Sea oil and gas profits. The question now was whether to levy a windfall tax on bank profits. Naturally, the banks strongly opposed this; but the fact remained that they had made their large profits as a result of our policy of high interest rates rather than because of increased efficiency or better service to the customer.
Yet these were essentially secondary issues — and on larger issues there were legitimate disagreements inside the ‘dry’ section of the Government. The main problem was to determine how tight the fiscal stance of the budget should be and the monetary policy which it would be supporting. On this question Alan Walters, who had now joined me at No. 10, had his own strong views. He argued for a larger cut in the PSBR than Geoffrey Howe was proposing. He also believed that the way in which the monetary policy was conducted was defective. But the Treasury were not prepared to move to the system of monetary base control which Alan favoured and to which I was attracted by his clear and persuasive analysis.
And this was much more than a technical disagreement. Alan Walters, John Hoskyns and Alfred Sherman had suggested that Professor Jurg Niehans, a distinguished Swiss monetary economist, should prepare a study on our monetary policy for me. Professor Niehans’s report which I read in early February, though framed in highly technical language, had a clear message. It was that North Sea oil had probably not been a major factor in sterling’s appreciation; rather, tight monetary policy had caused the pound to rise so high, imposing such pressure on British industry and deepening the recession. The report argued that we should use the monetary base rather than £M3 as the main monetary measure and suggested that we should allow it to rise in the first half of 1981. In short, Professor Niehans thought monetary policy was too tight and should quickly be loosened. Alan emphatically agreed with him.
My doubts at this time about the Treasury’s conduct of monetary policy, however, were more than matched by the concern I felt at the steady growth in its estimates of the PSBR — the target by which we steered our fiscal policy. On 10 February 1981 Geoffrey Howe and I met to discuss the budget strategy. Geoffrey now told me that the forecast for the PSBR had been updated and showed not £11 billion but £13 billion. He was now talking about raising income tax allowances by only 6 per cent rather than the 10 per cent he had earlier envisaged — though he still wanted a substantial enterprise package. I told him that our primary concern must be to boost industry and that this meant giving priority to a reduction in interest rates, which would also help get down the exchange rate. If there were t
o be a choice between cutting the NIS and a lower PSBR I preferred the latter.
I was worried by the prospect of a 2 per cent addition to the RPI as a result of the indirect tax increases which were being proposed. I was sure it would be better to achieve further public expenditure cuts. But I had to agree that the chance of achieving these, given Cabinet attitudes, was very slim indeed.
At this meeting Alan Walters continued to press the view that we should allow the monetary base to grow more quickly. We also discussed the timing of any interest rate cuts which we would be able to make.
The starkness of the choices before us was now becoming clear. Later that day Alan sent me a note which summed up the problem with the PSBR. We were confronted with rapid and huge changes in the figures which made the strategic planning of the budget very difficult. But one thing was clear. The trend of PSBR forecasts was upwards. The likelihood was that we would budget for too low a reduction in the PSBR, as we had in 1980–81. To repeat that mistake would either force us to introduce an additional budget in late summer or autumn, or put great strains on the funding of government borrowing. In the last resort it might lead to a funding crisis, and it would certainly force us to increase interest rates, keeping sterling high and increasing the already severe squeeze on the private sector. We had to avoid such an outcome. We might still get things right in time — but only if we made painful decisions now, and presented them effectively, as the only possible response to the costs of the last wage round and nationalized industry losses. What we needed was a budget for employment.
The Downing Street Years, 1979-1990 Page 17