Who Dares Wins

by Dominic Sandbrook

  Unfortunately, this ‘finest hour’ narrative has some striking weaknesses. To take a small but revealing example, one of the chief justifications for Howe’s measures was that they would allow him to cut interest rates. On Budget Day he duly announced that they would fall from 14 to 12 per cent. Yet far from heralding a golden age of lower rates, this turned out to be a false start. The pound had started to fall at the turn of the year, and by the early autumn it had tumbled so low, down to just $1.75, that Howe had to put interest rates back up to 14 per cent. By October he was so worried about a run on the pound that he raised them still higher, to 16 per cent. So much, then, for the Budget allowing him to get rates down! Indeed, to the ever-stringent Edmund Dell, this suggests that Alan Walters was right all along: the Budget was too weak. Only when Howe raised interest rates in the autumn, Dell argues, were the markets persuaded that he meant what he said about tackling inflation.47

  One other obvious point is that Howe would not have needed such a draconian Budget if he had made better choices in his first two years. Given the nightmarish combination of high inflation, a high pound and a chronically uncompetitive economy, probably no Chancellor could have navigated the tempest of the early 1980s without making mistakes. Even so, Howe would surely have done better to wait before cutting income tax and raising VAT. He might also have done better to tackle the budget deficit during the first year, which would have reassured the markets, dampened inflationary pressures and avoided the need for tax rises later. Finally, and most importantly, he should have relaxed his tight monetary policy much earlier, before sterling went through the roof. Many years later, when the free-market Institute for Economic Affairs (IEA) held a seminar to mark the Budget’s twenty-fifth anniversary, every speaker agreed that the government had squeezed the money supply far too tightly, pushing up the exchange rate and putting British industry under intolerable pressure. This is not to say that another Chancellor would necessarily have done a better job. But even Howe must sometimes have wished that he had given himself more room for manoeuvre.48

  As for the argument that the Budget coincided with Britain’s triumphant emergence from recession, even this is not entirely straightforward. In some parts of the country there was barely any recovery at all. Unemployment carried on rising until the first quarter of 1984, while it took output no fewer than thirteen quarters to return to the level of late 1979. To some of the 364, this proved they were right after all. Decades later, the London School of Economics’ Stephen Nickell maintained that Howe’s Budget had been completely unnecessary, because with unemployment rising so fast inflation was bound to come down eventually. A more sensible course, Nickell argued, would have been to bring inflation down gradually, which would have ensured a stronger recovery. Instead, the Chancellor piled on the misery, which ‘did indeed deepen the depression just as predicted’. To borrow Howe’s own analogy, he might well have known some women, but they might have had more fun if he had adopted a more patient technique.49

  Even so, it is easier to identify what the government got wrong than to say what it should have done instead. It is untrue that there were no alternatives. The very fact that Howe, Mrs Thatcher and their officials spent so long arguing about the details suggests that they could have chosen differently. The problem, though, is that most of the obvious alternatives had been tried before. Indeed, the Labour economist Derek Scott, who had been Denis Healey’s special adviser at the Treasury and worked for Callaghan after 1979, told the IEA seminar that it was ‘complete nonsense’ to imagine there was an easy alternative. In Scott’s words, ‘they’d all been tried, in one way or another … whether you go back to Heath or whether you go back to the Wilson and Callaghan government’.50

  The Wets, for example, always argued that Howe should have changed course, reflated the economy and introduced an incomes policy to bring inflation down. Politically this would have been a suicidal U-turn, since both Howe and Mrs Thatcher had explicitly ruled it out. And there were other drawbacks. By keeping wage increases below inflation, incomes policies drove down people’s living standards, which is why the trade unions hated them. As a result, Heath had faced two miners’ strikes, while even Callaghan’s informal pay restraint had provoked the Winter of Discontent. The chances of the trade unions meekly accepting another dose from Mrs Thatcher were non-existent. So when the Wets insisted that she could pour borrowed money into the economy and use incomes policies to handle inflation, they were living in a fantasy world.51

  The other problem with the Wets’ approach was that they never spelled out exactly how much money they were proposing to pump into the economy and to what end. In the summer of 1981, the Economist Intelligence Unit tried to predict the effects of the Wets’ approach using the Treasury’s own economic model. But when the forecasters reversed Howe’s tax rises and factored in an extra £1 billion in annual spending, they found it would make virtually no difference at all. In fact, just to get unemployment down to 2 million, a Keynesian government would probably have had to spend an extra £40 billion over four years. Whether Prior, Gilmour and their friends were prepared to contemplate such a borrowing spree seems very unlikely. In any case, such a colossal figure was too big for the economy to absorb without triggering runaway inflation and the collapse of the pound – and then they would be back in the mid-1970s all over again.52

  What about the left? Labour’s senior figures were so evasive that it is virtually impossible to work out what their approach would have been. That leaves the Bennites’ Alternative Economic Strategy, which held that, in an increasingly globalized world, Britain could only reboot its economy by retreating behind a protectionist trade wall. A Benn government would impose stringent controls on foreign imports and capital flows, while pumping borrowed money into jobs and manufacturing under the direction of a supercharged National Enterprise Board. On the right most people regarded this as utter lunacy, but when the Economist Intelligence Unit tested it using the Treasury’s model, the results were striking. A Labour government spending an extra £6 billion would probably provide an extra 300,000 public sector jobs, while a 30 per cent tariff on imports might create another 300,000 jobs in manufacturing. So by 1984, the model found, a Benn government would be signing at least half a million fewer dole cheques than a Thatcher government.

  But there were some compelling downsides. Perhaps the most obvious is that, contrary to his claims, Benn’s approach would not bring back full employment, since about 3 million people would still be out of work. With foreign goods almost a third more expensive, inflation would rise sharply. Living standards would take a severe hit, and even after three years would be some 3½ per cent lower under Benn than under Mrs Thatcher. So although fewer people would be out of work, most people would be worse off. And that was not all. Protectionism on this scale was incompatible with membership of the Common Market, so Britain would have to pull out of Europe. Since the plan also involved massive public borrowing, it is difficult to see how a Bennite government would have survived for long without a collapse of international confidence and a catastrophic run on the pound. It is hard to believe that most voters would have seen this as a price worth paying.53

  None of this means alternatives to Howe’s approach were impossible. But they all came with heavy costs of their own, usually involving higher inflation and lower living standards. Indeed, if anybody doubted the scale of the challenge, they should have looked across the Channel. On 10 May 1981, two months after Howe’s incendiary Budget, François Mitterrand won the French presidency after promising to build socialism in one country, financed by massive public borrowing. Not only did Mitterrand’s new government pump almost £1 billion into extra welfare spending, it raised the minimum wage, offered subsidies for firms that took on more workers and nationalized a range of banks, industries and utilities – a programme to make Tony Benn weep with envy.

  The results were a disaster. Inflation soared, while France’s budget and balance of payments deficits went through the roof. Even wo
rse, unemployment continued to rise, reaching 2 million in the spring of 1982. By this stage, collapsing market confidence had already forced Mitterrand to devalue the franc, and two further devaluations followed in the next twelve months. At last, after a series of humiliating political defeats, Mitterrand’s finance minister, Jacques Delors, embarked on a colossal U-turn. In coal mines and car factories, shipyards and steelworks, the French government began laying people off. And so, by 1984, a president elected on a platform that could have been written by Tony Benn was presiding over an austerity programme that could have been written by Sir Geoffrey Howe. But, for Delors, austerity was simply the recognition of economic reality. ‘The road to economic salvation’, he said, ‘can only follow a model which puts the accent on a drastic drop in inflation, maintenance of the buying power of our currency, and the ferocious search for competitiveness.’ Howe would have agreed with every word.54

  What happened in France was not unusual. In the Republic of Ireland, successive governments tried to spend their way out of recession and ended up crashing their own economy into the ditch, with inflation peaking at almost 25 per cent, youth unemployment reaching more than 20 per cent and total government debt soaring to some 65 per cent of national GDP. The basic truth is that, thanks to the rise of inflation and the decline of manufacturing, every Western government faced a choice of evils. It would be foolish to deny that Howe’s approach came at a heavy cost: as The Times pointed out in March 1982, there had already been far more job losses and factory closures in Britain than in any other major economy. And even many of his supporters conceded that in the first two years monetary discipline was far too severe. If Howe had been given a chance to turn the clock back, it seems very unlikely that he would have squeezed so tightly a second time.55

  But it would be equally foolish to deny that he had his successes. Even in the spring of 1982, it was obvious that Britain’s productivity performance had turned a corner. Above all, when Howe left the Treasury a year later he had succeeded in the one thing that had eluded his predecessors, reducing inflation to its lowest level since the 1960s. Later, when the spectre of inflation had faded into history, it was easy to forget what an enormous achievement this was. It is true, of course, that it came at a heavy price in job losses. It is true, too, that success came partly by accident, since the government never anticipated that the recession would be so deep. But would Howe have conquered inflation if he had started more tentatively, or if he had followed the Wets’ advice in 1981? Probably not. His friend Nigel Lawson freely acknowledged that in an ideal world they would have ‘squeezed inflation out of the system without the high exchange rate’. But since no such alternative existed, Lawson argued, the only way to do it was with ‘shock treatment’.

  Of course Lawson was always going to say that. It is telling, though, that Denis Healey’s former special adviser Derek Scott agreed with him. So did Healey’s former Cabinet colleague Edmund Dell, who thought Howe’s victory over inflation made him the most effective Chancellor since the war. There is no doubt that Howe made tactical mistakes. But he was surely right to ditch incomes policies, cut Britain’s budget deficit, bring down direct taxes and lift the antiquated exchange barriers. Above all, he was right to recognize that the only way to end the cycle of chronic underperformance since the Second World War was to do whatever it took to beat inflation.fn3 And although it was a tragedy that his victory came at the price of so many jobs, the fact is that no alternative strategy, not even Benn’s siege economy, would have brought unemployment down below 2 million. That tells its own story.56

  In Westminster, however, nobody cared about the long view. A Budget is nothing if not a political occasion, and in that respect Howe’s measures seemed a complete disaster. No Budget had ever been more unpopular; no Chancellor had ever seen his approval ratings fall so low. The government’s reputation was simply abysmal, with the Conservatives stuck in third place behind a putative SDP–Liberal Alliance and a very battered Labour. In the public mind, reported Bernard Ingham on 19 March, both the TUC and the CBI were ‘ranged against the Government’, while the bitter divisions within the Cabinet were ‘manifest and sharply delineated’. Against this background, there was simply ‘no basis for credible presentation of the Government’s economic policies’.57

  Perverse as it may sound, though, the chorus of condemnation actually played to Mrs Thatcher’s strengths. As John Hoskyns remarked, the Budget was seen as ‘such a courageous, almost foolhardy thing to do’ that it left a lasting mark on public opinion. The more unpopular she became, the more she bolstered her image as a radical reformer. Not yet the all-conquering juggernaut of the mid-1980s, she was still something of an underdog, defying expectations, fighting the odds. Yet again she had demonstrated her willingness to endure public disapproval in pursuit of her aims. Yet again she had shown that the lady was not for turning. ‘If you are going to achieve anything in life, you have to set your objectives and stick to them,’ she told a Conservative rally at the end of March. ‘I do not greatly care what people say about me … This is the road I am resolved to follow. This is the path I must go.’58

  But all this came at a price. After lunch in the Downing Street flat on 13 March, Ronnie Millar told Hosykns that ‘he thought MT was pinched, thinner in the face and had obviously been under a lot of strain. She needed a boost to her morale.’ But no boost came. Six days later, the Observer’s Adam Raphael warned Alan Clark ‘that he felt conspiracies to displace the Prime Minister were now becoming quite flagrant; that she has made so many powerful enemies (the Governor of the Bank of England, Chairman of the CBI, etc.) and that he regarded her as being highly vulnerable’. The very next day, Hoskyns bumped into her old media guru Gordon Reece, who had just been to see her in Number 10. ‘He had ¾ hr with her’, Hoskyns wrote grimly, and ‘warned her to be prepared, in June or July, for Macmillan, Thorneycroft and du Cann to come and visit her and tell her to stand down.’59

  In public, Mrs Thatcher never betrayed the slightest hint of strain. But in private, every now and again, there were clues. A few weeks later, an admirer called Mr Fowler sent her a ‘beautiful blue cashmere rug’. Despite all the pressures, she found the time to scribble a letter of thanks for such a ‘very special gift’:

  Not only is it exquisite in itself, and it is, but it came as a wonderful surprise and at a difficult time just when I needed a little thoughtfulness and kindliness. And you provided it.

  This task, to which I have set my hand, is the most absorbing and fascinating in the world. But sometimes it is lonely as one struggles to take the right decision.

  At such times, it is marvellous to know that one has good friends, constantly urging us on and wishing us well.

  She was human, after all.60

  19

  One in Ten

  My father had a letter that made his face go white: he has been made redundant from his job! He will be on the dole! How can we live on the pittance that the government will give us? The dog will have to go!

  Sue Townsend, The Secret Diary of Adrian Mole Aged 13¾ (1982)

  MRS MALONE: Have you any idea what no shoes on your feet means?

  JOHN: … It means the thirties, mam, and soup kitchens and hunger marches. You with your father marchin’ from the North East and my dad with his. It means people standing together and fighting. And it means another time and age.

  Boys from the Blackstuff, ‘George’s Last Ride’, 7 November 1982

  At noon on 1 May 1981 the People’s March for Jobs set off from Liverpool. At the Pier Head, bathed in spring sunlight as far as the eye could see, were hundreds of green anoraks, as well as thousands of well-wishers, roaring their encouragement as the marchers began the long journey south. Their destination was London, their mission to kindle national outrage at the plight of the unemployed. All 500 marchers had been provided with an anorak, backpack and sleeping bag by the Trades Union Congress, as well as a copy of the route, leading through Manchester, Stoke-on-Trent and Stafford to Wo
lverhampton, Birmingham and Coventry, then on through Northampton, Bedford and Luton to Watford, Wembley and Trafalgar Square. And although critics claimed the march was a ‘political stunt’, Liverpool’s churchmen offered warm support. ‘Those in the Home Counties and the capital have no real knowledge nor understanding of the extent and gravity of the plight facing the jobless,’ the city’s Catholic Archbishop, Derek Worlock, told an ecumenical service that morning. ‘Our hope and prayer today is that the People’s March for Jobs will help to remind all parts of the country of this basic principle.’

  At first, as the marchers wound their way through the struggling towns of the north-west, they encountered a warm reception. In Warrington, the journalist Louis Heren found them ‘in fine fettle, moving slightly faster than an infantry company’. The night before, the local trades council had given them a hearty dinner of Lancashire hotpot, apple pie and beer, and they were in good voice. ‘Maggie, Maggie, Maggie!’ they chanted. ‘Out, out, out!’ By now hundreds of sympathizers had joined the march: despite a few CND badges and punk hairstyles, Heren thought most were ‘middle-aged trade union stalwarts’. In Salford, the local Conservative mayor offered some polite words of support, although he felt bound to tell them that unemployment was a ‘worldwide problem’ with ‘no simple solution’. In Stockport, a ‘quietly angry old man’, disabled in the Second World War, stood for more than an hour in the pouring rain to greet what he called ‘the wounded. The lads and lasses of Britain. Bloody refugees.’ In Tunstall, they were cheered by local pottery workers; from Hanley to Stafford, they were joined by hundreds of trade unionists. When Heren caught up with them again a couple of days later, he found them in great spirits; they had dined on roast pork, pudding and cheese, and one man had even gone ballroom dancing.1