It is, therefore, as important to understand what went right in these years as what went wrong. Provided that the benefits are not reversed by a combination of imprudent management of the public finances and Euro-regulation, the fundamental improvements in the British economy in the 1980s will endure. Where the problem arose was on the ‘demand side’ as money and credit expanded too rapidly and sent the prices of assets soaring, particularly non-internationally traded goods like houses. This spiral was clearly unsustainable and had to break or be broken. By contrast the ‘supply side’ reforms were highly successful. These were the changes which made for greater efficiency and flexibility and so enabled British business to meet the demands of foreign and domestic markets. Without them, the economy would not have been able to grow so fast and deliver such improvements in profits, living standards and employment: in short, the country would have been poorer.
Trade union reform was crucial. The most important changes were those made between 1982 and 1984, which have already been described in some detail. But the process continued right up to the time I left office. The 1988 Employment Act, based on our manifesto pledges, strengthened rights of individual trade unionists against industrial action organized by their unions without a ballot and against the unions’ attempts to ‘discipline’ them if they refused to go out on strike. It also instituted a special commissioner to help individual union members exercise their rights and opened up trade union accounts for inspection. The 1990 Employment Act concluded the long process of whittling away at the closed shop, which had held so many in its vicious thrall in the 1970s. It now became unlawful to deny someone a job because they were — or were not — a member of a trade union. These reductions in trade union power, together with the reinforcements of individual trade unionist’s rights and responsibilities, were crucial to a properly functioning labour market, in which restrictive practices were overcome and unit labour costs kept down below the levels they would otherwise have reached. The abolition of that monument to modern Luddism — the National Dock Labour Scheme* — was another blow to restrictive practices.
Such reforms had a continuing and beneficial effect. It was not just that they allowed management once more to manage and so ensured that investment was once again regarded as the first call on profits rather than the last; they also helped change the attitudes of employees to the businesses for which they worked, and in which they increasingly held shares. So in my last year in office there were fewer industrial stoppages than in any year since 1935: under two million working days were lost in this way, compared with approaching thirteen million a year on average during the 1970s. Still too many, by the way.
But there were other changes aimed at improving the quality of the workforce by helping people to obtain the right qualifications and experience for the jobs now available. In my last year as Prime Minister some two and a half times as much — in real terms — was being spent by government on training as under the last Labour Government. Of course, there is always a danger that ‘training’ becomes an end in itself, with its own bureaucracy and momentum, particularly when public funds on this scale are involved. So I was keen that as much as possible of the administration and decision-taking in these great state-funded programmes should be decentralized. Training and Enterprise Councils (TECs) were set up from 1988 to take over responsibility for the delivery of these programmes. They consisted of groups of local employers, who knew more than any ‘expert’ what skills were actually going to be needed.
Another innovation in which I took a keen interest was the use of Training Vouchers — which because of the corporatist sensibilities of the training establishment I was always being urged to describe as ‘Credits’. Under this scheme, school leavers were given the choice of where they would use their voucher to purchase a certain amount of training from an employer, a local further education college or other approved body. The basic psychology was that of any voucher: when someone can exercise power over his own future he will take a closer interest in it than under any system of central direction. And there is absolutely no reason why those who are in receipt of state funding should be deprived of choice or responsibility. This idea was at the heart of the ‘empowerment’ approach of our 1987 manifesto reforms and is, perhaps, of even more pressing relevance today when the threat of welfare dependency is widely recognized.
Housing is vital to a properly working labour market.* If people cannot move to regions where there are jobs — ‘getting on their bike’, to quote Norman Tebbit’s immortal phrase — there will remain pockets of intractable unemployment. And the less willing or able they are to move, the greater call there will be for state intervention to force or bribe firms to go to commercially unsuitable locations to provide the jobs. The private rented sector of housing would be the ideal source of cheap, often temporary, accommodation of the sort that those seeking work are likely to want. After decades of rent control, however, private landlordism — almost uniquely in Britain — is popularly associated with exploitation and bad conditions. This meant that it was never possible to take the radical action needed to reverse the shrinkage in rented housing which has got steadily worse since the First World War.
In our 1987 manifesto we promised — and subsequently in our 1988 Housing Act introduced — some measures to revive the private rented sector. We further developed the two schemes — originally introduced in 1980 — of the shorthold tenancy (short lets at market rents, after which the landlord can regain possession) and the assured tenancy (also market rents but with security of tenure). These measures had some effect, at least halting the shrinkage in private rented housing; but there will need to be a sea change in attitudes if it is ever to grow to make a major contribution to labour mobility.
By contrast, council housing is the worst source of immobility. Many large council estates bring together people who are out of work but enjoy security of tenure at subsidized rents. They not only have every incentive to stay where they are: they mutually reinforce each other’s passivity and undermine each other’s initiative. Thus a culture grows up in which the unemployed are content to remain living mainly on the state with little will to move and find work.
So the great increase in private home ownership in my years as Prime Minister and the corresponding reduction of the public sector’s share of the housing stock was an important benefit to the economy. Attempts were made to deny this on narrow financial grounds. In particular, it was said that through mortgage tax relief too much of the nation’s saving has been channelled into bricks and mortar, too little into industry. This I never found convincing. First, it overlooks the fact that many people whose main means of saving is by buying their house on a mortgage would probably not otherwise invest their money in shares or set up businesses: however pervasive an enterprise culture is, most people are not born entrepreneurs. Indeed, buying a house is for many people the gateway to other investments. Second, the idea that British industry has fallen behind in recent decades because of a lack of investment is at best a half-truth. The fact is that much of the investment has been of the wrong sort and wrongly directed. What Britain lacked in the past was the right opportunities to make use of the investment available — because of low productivity, poor labour relations, low profits and bad management. What is true is that a high level of home ownership does need to be complemented by a sufficiently large private rented sector, as ours is not. On this score we were only half successful and the private rented sector is an area in which, given time, I would have liked to do more.
It was a different story with deregulation of business. Year after year — and with a further boost from David Young when he went to the Department of Trade and Industry in June 1987 — unnecessary regulations on business were identified and duly scrapped. David Young also shifted the emphasis of the assistance received from the DTI towards job creation, small firms and innovation. It was not just a piece of gimmickry when what had principally been a sponsoring Department for state-owned industries and he
avy manufacturing was rechristened the ‘Department for Enterprise’. The importance of a continuing drive for deregulation is that otherwise reregulation is never far behind. All the pressures of modern living (or at least of modern politics) are for more controls — to protect consumers, to protect investors, to protect the environment and, increasingly, to protect powerful lobbies in the European Community. But the general truth gets lost that more regulation means higher costs, less competitiveness, fewer jobs and thus less wealth to raise the real quality of life in the long run.
All of these areas — trade union power, training, housing and business regulation — were ones in which in varying degrees we made progress in strengthening the ‘supply side’ of the economy. But the most important and far-reaching changes were in tax reform and privatization. Tax cuts increased incentives for the shop floor as well as the board room. Privatization shifted the balance away from the less efficient state to more efficient private business. They were the pillars on which the rest of our economic policy rested.
TAX CUTS AND TAX REFORMS
Nigel Lawson’s tax reforms mark him out as a Chancellor of rare technical grasp and constructive imagination. We had some differences — not least about mortgage tax relief which he would probably have liked to abolish and whose threshold I would certainly have liked to raise. But Nigel did not generally like to seek or take advice. Doubtless he felt he did not need to. His was precisely the opposite of the collegiate style which Geoffrey Howe before him practised. Nigel preferred to take me through his budget proposals when he already had them well worked out and without any private secretary present to take notes. He liked to do this over dinner at No. 11 one Sunday towards the end of January. Had I restricted informing myself of his plans to these formal occasions it would have been difficult for me to have any real influence; for to digest issues of such complexity over after-dinner coffee would put a strain on anyone’s system. But in fact, Treasury spies, realizing that this was an impossibly secretive way of proceeding with someone who after all was ‘First Lord of the Treasury’, furtively filled me in — with the strictest instructions not to divulge what I knew — before Nigel proudly announced to me his budget strategy. This at least put me in a better position to question the proposed fiscal stance or to object to individual measures.
But the fact remains that Nigel’s budgets were essentially his. And just as I hold him largely responsible for the errors of policy which threw away our success on inflation, so I have no hesitation in giving him the lion’s share of the credit for the ingenious measures in his budgets.
The distinctive marks of Nigel’s budgets were clarity and cleverness. Whereas Geoffrey Howe was instinctively a Chancellor who liked well-balanced packages of measures, Nigel Lawson liked a budget with everything based on one central theme and purpose. Geoffrey was always one to go for the prudent course, even if the effect was un-dramatic, whereas Nigel’s search for the brilliant solution to a fiscal problem could lead him to risk all on a winning streak. He was, indeed, a natural gambler.
But the 1984 budget showed Nigel at his brilliant best. He abolished the Investment Income Surcharge, which was a grossly unfair charge on often elderly savers, and finally got rid of the National Insurance Surcharge, which Geoffrey had already cut. But his most important reform was the phasing out of tax reliefs for business at the same time as he cut Corporation Tax rates, so improving the direction and quality of business investment and greatly increasing incentives for business success. Nineteen eighty-five was a less remarkable budget, but like that of 1984 raised personal income tax allowances well above inflation. In 1986 he made what I considered just the right political judgement by cutting the basic rate of income tax by one penny, which was in effect a statement that we would not ignore the basic rate in future budgets when there was more fiscal leeway. He also introduced Personal Equity Plans (PEPs) to encourage personal investment in shares as a way of encouraging popular capitalism. In 1987 he cut two pence more off the basic rate, but balanced what might have seemed a pre-election ‘give away’ with the incorporation within the MTFS of the objective of a PSBR of 1 per cent of GDP, as a standard of fiscal prudence.
More controversial was Nigel’s 1988 budget. I certainly had my doubts at the time. I felt — rightly — that the overall financial conditions had become too loose. Although it is monetary not fiscal policy which has the decisive role in controlling inflation it is right to look at taxes and borrowing too. Not only does the level of government borrowing influence the level of interest rates needed to exert monetary control; there is also an argument that if the private sector is borrowing too much and saving too little — which is what happened in 1988 and 1989 as the savings ratio fell to 5.6 and 6.6 per cent — you should make up for this by raising taxes and cutting government borrowing (or increasing government debt repayment).
I began by questioning the size — though not the kind — of tax cuts Nigel now proposed, partly for these reasons and partly because I felt — again rightly — that big income tax cuts in a climate of excessive consumer and business confidence may have a psychological effect, not directly predictable by the dubious science of economics, but real nonetheless. They might fire up what already seemed to be overheating. In fact, the figures which I saw on the eve of the budget for the very large public sector debt repayment (PSDR) or budget surplus — forecast in the budget at £3 billion (though the figure was distorted by privatization proceeds) — considerably reassured me. Moreover the budget surplus out-turn for 1988–9 was some £14 billion. I therefore believe that — with one apparently technical but in fact significant qualification — Nigel’s 1988 budget was a success. The cuts in the basic rate of income tax to 25 pence and the top rates to 40 pence provided a huge boost to incentives, particularly for those talented, internationally mobile people so essential to economic success.
The technical point which had such practical consequences was a change in the system of mortgage tax relief, by which the £30,000 limit would no longer apply to each individual purchasing a property but rather to the house itself. This removed the discrimination in favour of unmarried cohabiting couples. Though announced in April, however, it only took effect from August. This gave a huge immediate boost to the housing market as people took out mortgages before the loophole ended, and it happened at just the wrong time, when the housing market was already overheating. That said, the overall tax changes in the 1988 budget were of the right size and direction. If they had not been accompanied by a loose monetary policy, all would have been well.
By 1989 even Nigel’s usual apparently limitless confidence about our economic prospects had become dented. Monetary policy had been tightened sharply to cut back inflation. But what about fiscal policy? It was clear that the budget surplus was a reflection at least as much of the runaway pace of economic growth raising tax revenues as of underlying financial soundness; even so it was difficult to argue that such a large budget surplus should be increased still further.
And indeed when I saw Nigel for our usual discussion on Sunday 12 February, I found less difficulty than usual in persuading him to see things my way. I urged him to revise his Cabinet paper, to be less complacent, to drop the idea of a further one-penny cut in income tax (which I said would look wrong psychologically), to forget his proposal to remove the tax on the basic retirement pensions and to scrap the earnings rule instead.* I also said that there must be no loosening of monetary policy. He went along with all this: he then used some of the revenue in hand to make sensible changes in the structure of employees’ national insurance contributions.
But Nigel decided not to raise the excise duties with inflation, giving an artificial downward twist to the inflation figure, which enabled him to predict that inflation would rise to about 8 per cent before falling back in the second half of the year to 5.5 per cent and perhaps 4.5 per cent in the second quarter of 1990. However, by the second quarter of 1990 it was to reach not 4.5 per cent but approaching 10 per cent. The degree of i
nflation that shadowing the deutschmark had injected into the system was greater than anyone, including Nigel, had realized. But by 1990 Mr 10 per cent had departed and others were left to deal with the consequences.*
John Major was in some ways all too different from Nigel Lawson as Chancellor. It seemed strange to me that, having been a competent Chief Secretary, he did not feel more at home with tackling the difficult issues he now faced when he returned to the Treasury. But probably Nigel had made all the important decisions and John had not had much of a look in. As preparation for the 1990 budget, we had a seminar attended by John and me, Richard Ryder, the Economic Secretary to the Treasury, and officials. (Nigel would never have dreamed of such a thing before a budget.) It did not get us very far, which was not John’s fault: the problem was that by now none of us had any faith in the forecasts. I found myself in disagreement with John on only one issue: I stopped consideration being given to a new tax on credit. I had a good deal of sympathy with the proposition that banks and building societies had made credit too easily available and that this was leading feckless or just inexperienced borrowers into debt. But I never doubted that if we once tried to stop this by imposing a tax on it, all that general support which puritanical policies evoke in principle would soon turn into a hedonistic outcry as video recorders, expensive lunches, sports cars and foreign holidays moved out of financial reach. The tax would also have put up the RPI, though this would have been a once-and-for-all effect only. In fact, within the little room for maneouvre available in these circumstances, John Major’s only budget was a modest success, containing several eye-catching proposals to boost the woefully low level of savings. But by then it would take more than a sound budget — more even than a Prime Minister and Chancellor who subscribed to the same policies — to avert the political and economic consequences of allowing inflation to rise.
The Downing Street Years Page 89