In retrospect it seems extraordinary that such a relatively modest programme was represented by most trade union leaders and the Labour Party as an outright attack on trade unionism. In fact, we would have to return — and soon — to the issue of trade union reform. As time went by, it became increasingly clear to the trade union leaders and to the Labour Party that not only did we have huge public support for our policies, but that the majority of trade unionists supported them too, because their families were being damaged by strikes which many of them had not voted for and did not want. We were the ones in touch with the popular mood.
This was my first major parliamentary performance as Prime Minister, and I emerged unscathed. Nowadays, prime ministers make relatively few speeches in the House. The most important are speeches, like this, which deal with the government’s legislative programme, speeches answering motions of censure, statements after international summits and debates which arise at times of international tension. This may be one reason why it is often difficult — over and above the moral blow of losing an election and leaving office — for prime ministers to revert to becoming Leaders of the Opposition, a job which demands more speech-making, but with less thorough briefing. Certainly, Jim Callaghan, who had never led his party in opposition, looked uncomfortable in that role. It was no surprise to me when he decided in October 1980 to step down from a position which his own left wing was making increasingly intolerable for him.
But it is Questions to the Prime Minister every Tuesday and Thursday which are the real test of your authority in the House, your standing with your party, your grip of policy and of the facts to justify it. No head of government anywhere in the world has to face this sort of regular pressure and many go to great lengths to avoid it; no head of government, as I would sometimes remind those at summits, is as accountable as the British prime minister.
I always briefed myself very carefully for Questions. One of the private secretaries, my political secretary, my Parliamentary Private Secretary and I would go through all the likely issues which might come up without any notice. This is because the questions on the Order Paper only ask about the prime minister’s official engagements for that day. The real question is the supplementary whose subject matter may vary from some local hospital to a great international issue or to the crime statistics. Each department was, naturally, expected to provide the facts and a possible reply on points which might arise. It was a good test of the alertness and efficiency of the Cabinet minister in charge of a department whether information arrived late — or arrived at all; whether it was accurate or wrong, comprehensible or riddled with jargon. On occasion the results, judged by these criteria, were not altogether reassuring. However, little by little I came to feel more confident about these noisy ritual confrontations, and as I did so my performance became more effective. Sometimes I even enjoyed them.
THE 1979 BUDGET
The next watershed in the Government’s programme was the budget. Our general approach was well known. Firm control of the money supply was necessary to bring down inflation. Cuts in public expenditure and borrowing were needed to lift the burden on the wealth-creating private sector. Lower income tax, combined with a shift from taxation on earning to taxation on spending, would increase incentives. However, these broad objectives would have to be pursued against a rapidly worsening economic background at home and abroad.
Britain’s rate of inflation was running at 10 per cent when we took office, and rising. (The three-month rate was 13 per cent.) This reflected the lack of financial discipline in Labour’s last years, when they broke free of the constraints imposed on them by the International Monetary Fund (IMF) in 1976. There was also a pay explosion as powerful unionized groups rode roughshod over the remains of Labour’s incomes policy. And internationally, oil prices had begun to rise sharply, and were already about 30 per cent higher than six months earlier, as a result of the continuing turmoil in Iran after the fall of the Shah in 1978. This had an increasingly damaging effect on the international economy.
The oil price rise increased worldwide inflationary pressures. But it also had a perverse and, at least in the short term, damaging effect on the domestic economy because sterling was a petro-currency and it appreciated accordingly. Sterling was strong for other reasons too. Following the election there had been a general increase in confidence in the British economy. We were also pursuing a tight monetary policy, requiring high interest rates (interest rates had to go up by two percentage points at the time of the budget), and this attracted foreign capital. As a result of all these factors, sterling continued to rise.
We were perhaps better prepared for taking the required economic decisions than any previous Opposition. We had, every year, conducted our own internal public expenditure exercises, seeking to identify cuts wherever possible and putting figures on them. We had also, through the ‘Stepping Stones’ group of Shadow ministers and advisers of which John Hoskyns had been the main inspiration, worked out how to combine our policies to achieve the overall objective of reversing Britain’s economic decline.
But no amount of advance preparation could change the unpleasant facts of finance or the budget arithmetic. The two crucial discussions on the 1979 budget took place on 22 and 24 May between me and the Chancellor. Geoffrey Howe was able to demonstrate that to reduce the top rate of income tax to 60 per cent (from 83 per cent), the basic rate to 30 per cent (from 33 per cent), and the PSBR to about £8 billion (a figure we felt we could fund and afford) would require an increase in the two rates of VAT of 8 per cent and 12.5 per cent to a unified rate of 15 per cent. (The zero rate on food and other basics would be unchanged.) I was naturally concerned that this large shift from direct to indirect taxation would add about four percentage points onto the Retail Price Index (RPI).
This would be a once and for all addition to prices (and so it would not be ‘inflationary’ in the correct sense of the term which means a continuing rise in prices). But it would also mean that the RPI, by which people generally measured living standards and all too frequently adjusted wage demands, would double in our first year of office.* I was also concerned that too many of the proposed public spending cuts involved higher charges for public services. These too would have a similar effect on the RPI. I recalled at my first budget meeting with Geoffrey that Rab Butler as Chancellor in 1951 had introduced his tax cuts gradually. Should we do the same? Geoffrey stuck to his guns. We went away to consider the question further.
At our second meeting we decided to go ahead. Income tax cuts were vital, even if they had to be paid for by raising VAT in this large leap. The decisive argument was that such a controversial increase in indirect taxes could only be made at the beginning of a parliament, when our mandate was fresh. If we waited, hoping that either economic growth or cuts in public expenditure would do the job for us, we might never achieve the structural shift needed to boost incentives. We must establish the direction of our strategy from the start and do it boldly. By the end of that second meeting the shape of the budget which Geoffrey Howe announced on 12 June had effectively been set.
It was generally agreed to be a dramatic reforming budget even by those opposed to us, like the Guardian newspaper, which described it as ‘the richest political and economic gamble in post-war parliamentary history’. Its main provisions followed closely our discussions at the end of May: a cut in the basic rate of income tax from 33 to 30 per cent (with the highest rate cut from 83 to 60 per cent), tax allowances increased by 9 per cent above the rate of inflation, and the introduction of a new, unified rate of VAT at 15 per cent.
Apart from the budget’s big income tax cuts, however, we were able to reduce or remove controls on a number of areas of economic life. Pay, price and dividend controls had gone. Industrial Development Certificates, Office Development Permits and a range of circulars and unnecessary planning controls were also removed or modified. (Geoffrey Howe’s second budget in 1980 was to announce the creation of Enterprise Zones, where businesses
could benefit from tax breaks and rate exemption to attract investment and promote employment in run-down areas.)
But I took greatest personal pleasure in the removal of exchange controls — that is the abolition of the elaborate statutory restrictions on the amount of foreign exchange British citizens could acquire. These had been introduced as an ‘emergency measure’ at the start of the Second World War and maintained by successive governments, largely in the hope of increasing industrial investment in Britain and of resisting pressures on sterling. The overwhelming evidence was that they no longer achieved either of the objectives previously expected of them (if in fact they ever had done). With sterling buoyant and Britain beginning to enjoy the economic benefits of North Sea oil, the time had come to abolish them entirely. They were duly removed in three stages — some at the time of the Budget, a few others later in July, and the remainder in October (with the temporary exception of controls relating to Rhodesia). The legislation itself stayed on the Statute Book until 1987, but no further use was made of it. Not only did the ending of exchange controls increase the freedom of individuals and businesses; it encouraged foreign investment in Britain and British investment abroad, which has subsequently provided a valuable stream of income likely to continue long after North Sea oil runs out.
But not every capitalist had my confidence in capitalism. I remember a meeting in Opposition with City experts who were clearly taken aback at my desire to free their market. ‘Steady on!’, I was told. Clearly, a world without exchange controls in which markets rather than governments determined the movement of capital left them distinctly uneasy. They might have to take risks.
We had also been distracted throughout our budget discussions by the worrying level of public sector pay rises. Here we had limited freedom of manoeuvre. Hard, if distasteful, political calculations had led us to commit ourselves during the election campaign to honour the decisions of the Clegg Commission on those claims which had already been formally referred to it. The issue was now whether to refer the unsettled claims of other groups to Clegg, or to seek some new method of dealing with the problem.
It was quite clear to me that in the longer run there were only two criteria which could apply to pay in the public as in the private sector. The first was affordability: ultimately, it was the taxpayer and ratepayer who had to pay public sector wage bills, and if that burden passed beyond a certain limit, the country’s economy would suffer. The second was recruitment: pay had to be sufficient to attract and retain people of the right ability and professional qualifications. However, the whole bureaucratic apparatus designed to achieve ‘comparability’ between public and private sector pay — not just the Clegg Commission but the Civil Service Pay Research Unit and other bodies — obscured these simple criteria.
We decided to submit evidence to the Commission about the necessity of keeping departmental budgets within reasonable limits and what that meant for public sector pay. But we also decided to keep the Commission in existence for the time being, and indeed refer new claims to it on an ad hoc basis. We thought at the time that the Commission might actually make lower pay awards than ministers themselves might have had to concede. But that turned out to be a highly optimistic assessment and, as a result, we underestimated the public expenditure cost of Clegg.
In retrospect, we made a mistake. Even at the time, the warning signs were evident. Geoffrey Howe told me that, allowing for some success in buying out restrictive practices, average pay could well be at least two to three percentage points higher than the recent June Forecast had assumed. In the end, it was not until August 1980 that we announced that Clegg would be abolished after its existing work had been completed. Its last report was in March 1981. The fact remains, however, that the momentum of public sector pay claims created by inflation, powerful trade unions and an over-large public sector was not going to be halted, let alone reversed, all at once.
CIVIL SERVICE REFORM
Whatever the short-term difficulties, I was determined at least to begin work on long-term reforms of government itself. If we were to channel more of the nation’s talent into wealth-creating private business, this would inevitably mean reducing employment in the public sector. Since the early 1960s, the public sector had grown steadily, accounting for an increased proportion of the total workforce.* Unlike the private sector, it actually tended to grow during recessions while maintaining its size during periods of economic growth. In short, it was shielded from the normal economic disciplines which affect the outside world.
The size of the civil service reflected this. In 1961 the numbers in the civil service had reached a post-war low of 640,000; by 1979 they had grown to 732,000. This trend had to be reversed. Within days of taking office, as I have noted, we imposed a freeze in recruitment to help reduce the Government’s pay bill by some 3 per cent. Departments came up with a range of ingenious reasons why this principle should not apply to them. But one by one they were overruled. By 13 May 1980 I was able to lay before the House our long-term targets for reducing civil service numbers. The total had already fallen to 705,000. We would seek to reduce it to around 630,000 over the next four years. Since some 80,000 left the civil service by retirement or resignation every year, it seemed likely that our target could be achieved without compulsory redundancies. We were, in fact, able to do it.
But the corollary of this was that we should reward outstanding ability within the civil service appropriately. The difficulties of introducing pay rates related to merit proved immense; we made progress, but it took several years and a great deal of pushing and shoving.
Similarly, I took a close interest in senior appointments in the civil service from the first, because they could affect the morale and efficiency of whole departments. I was determined to change the mentality exemplified in the early 1970s by a remark attributed to the then head of the civil service, that the best that the British could hope for was the ‘orderly management of decline’. The country and the civil service itself were sold short by such attitudes. They also threatened a waste of scarce talent.
I was enormously impressed by the ability and energy of the members of my private office at No. 10. I usually held personal interviews with the candidates for private secretary for my own office. Those who came were some of the very brightest young men and women in the civil service, ambitious and excited to be at the heart of decision-making in government. I wanted to see people of the same calibre, with lively minds and a commitment to good administration, promoted to hold the senior posts in the departments. Indeed, during my time in government, many of my former private secretaries went on to head departments. In all these decisions, however, ability, drive and enthusiasm were what mattered; political allegiance was not something I took into account.
Over the years, finally, certain attitudes and work habits had crept in that were an obstacle to good administration. I had to overcome, for instance, the greater power of the civil service unions (which in addition were increasingly politicized). The pursuit of new and more efficient working practices — such as the application of information technology — was being held up by union obstruction. In a department like Health and Social Security where we needed to get the figures quickly to pay out benefits, these practices were disgraceful. But eventually we overcame them. There was even a problem at the very top. Some Permanent Secretaries had come to think of themselves mainly as policy advisers, forgetting that they were also responsible for the efficient management of their departments.
To see for myself, I decided to visit the main government departments to meet as many people as possible and discuss how they were tackling their priorities. I devoted most of a day to each department. In September 1979, for instance, I had a useful discussion with civil servants at the Department of Health and Social Security. I brought up the urgent need to dispose of surplus land held by the public sector. I was keen that where hospitals had land which they did not need they should be able to sell it and retain the proceeds to spend on improvi
ng patient care. There were arguments for and against this, but one argument advanced on this occasion, which was all too symptomatic of what had gone seriously wrong, was that this was somehow unfair on those hospitals which did not have the good fortune to have surplus land. We clearly had a long way to go before all the resources of the Health Service would be used efficiently for the benefit of patients. But this visit planted seeds that later grew into the Griffiths* reforms of NHS management and, later still, the internal market reforms of the Health Service in 1990.
Similarly, on 11 January the following year, I visited the Civil Service Department (CSD). This was an enlightening, if not an encouraging, experience. The CSD was set up in 1968, following publication of the Fulton Committee Report, with responsibility for the management and pay of the civil service. To the nucleus of the Pay and Management Divisions of the Treasury were added the Civil Service Commission and the newly established Civil Service College. The CSD employed 5000 people, headed by Sir Ian Bancroft, the senior Permanent Secretary. Although as Prime Minister I was in overall charge of the civil service, the duties were exercised by a Minister of State and the CSD had always lacked credibility and power in Whitehall.
Not without cause. When I arrived at the CSD, many of my worst fears about the civil service were confirmed. I met able and conscientious people attempting to manage and monitor the activities of civil servants in departments of which they knew little, in policy areas of which they knew even less. Because the staff of other departments were aware of the disadvantages under which the CSD worked, they took scant notice of the recommendations they received from it. After this visit, the only real question in my mind was whether responsibility for the CSD’s work should be redistributed to the Treasury or the Cabinet Office.
The Downing Street Years Page 6