There was nothing wrong in principle with this approach: quite the contrary. It was natural for a radical Prime Minister to want activist officials who would help, not hinder or obstruct. Most of the more unconventional choices Mrs Thatcher made were excellent appointments, fully merited. But questions did arise about her judgement, particularly lower down the scale: her instant estimates of people were not always accurate or fair. Officials often felt that she made up her mind about individuals on first impression and then never changed it. She did not always appreciate that it was sometimes the civil servant’s job to raise objections. In her memoirs Lady Thatcher boasted: ‘I was never accused of thinking like a civil servant. They had to think like me.’54 But equally it was not the official’s job to think like a politician. It was only in this sense, however, that she could be accused of ‘politicising’ the service. Even after ten years, Peter Hennessy wrote, ‘the Prime Minister… would… find it hard to muster a true believer from the top three grades of the Civil Service’.55 Really what she did over the next eleven years was to personalise it. Nevertheless there is no doubt that the effect was seriously to demoralise it.
11
Signals of Intent
The economy
THE new Parliament met on Wednesday 9 May to re-elect the Speaker. But the House did not meet again for serious business until the State Opening the following Tuesday, with the formal unveiling of the Government’s legislative programme in the Queen’s Speech. It comprised a curiously modest assortment of Bills, since the radical thrust of the Government’s agenda was not primarily legislative. There was – there had to be, after the events of the previous winter – a measure of trade-union reform. There was legislation to oblige local authorities to sell council houses and slow the advance of comprehensive schools. In addition the Government announced tighter immigration controls, the deregulation of intercity coach services and the establishment of a second commercial television channel.
As usual, however, Mrs Thatcher’s language implied a good deal more than the Gracious Speech promised. Contradicting Callaghan, who complacently predicted that the period of Tory rule would be ‘a brief interruption’ before Labour resumed its forward march, and the Liberal leader David Steel, who reminded her that she had won the lowest share of the poll of any post-war Conservative Government, Mrs Thatcher hailed her victory as ‘a watershed election’ which marked a decisive rejection of ‘the all-powerful corporatist state’. In its place she promised to restore incentives and individual choice, particularly in housing, health and education. Where once she had been sceptical about selling council houses, she now saw the right to buy as one of those things ‘so fundamental that they must apply to all citizens regardless of the local authority area in which they live’. The Government was taking power to force reluctant Labour authorities to sell their housing stock because ‘we believe that the right to buy council houses should belong to everyone’. She also warned that ‘there is no such thing as a free service in the Health Service’.
Significantly, she dealt with the trade-union question under the heading of law and order. Yet she was careful – as she had been during the election – not to be provocative. She still went out of her way to stress that ‘a strong and responsible trade union movement must play a large part in our economic recovery.’1 Perhaps fearing that she had been too conciliatory, however, she emphasised her personal commitment to action on union reform. ‘I am not known for my purposes or policies being unclear,’ she assured a backbench questioner. ‘I believe that my policies on this are known.’ She believed that they were ‘overwhelmingly supported by the vast majority of people in this country, who believe that a law must be introduced to deal with certain aspects of the closed shop, picketing and the postal ballot’.2 To the disappointment of the Tory right, however, Jim Prior’s Employment Bill, when it was eventually published at the end of the year, turned out to be a very cautious measure. While she hinted at her sympathy for the hardliners behind Prior’s back, Mrs Thatcher had no wish to plunge into battle with the unions before she was ready. All the Government’s initial energy was concentrated on setting a new course for the economy. Howe’s first budget was fixed for the earliest possible date, 12 June, just five weeks after the election.
The first objective was quite clear. The Prime Minister and her inner group of economic ministers were determined to mount an immediate assault on public spending. But this was a goal easier to proclaim in opposition than to realise in government. On taking office, ministers found their room for major economies seriously constrained – partly by inescapable external factors, but also by their own political choices. On the one hand the value of sterling, already high due to the recent tripling of the price of oil (since sterling was now a petrocurrency), was boosted further by the weakness of the dollar and the markets’ satisfaction at the Government’s election. The high pound sharply increased the cost of British exports, creating unemployment, which swelled the social security budget while reducing revenue. But at the same time ministers had tied their own hands by commitments they had made during the election.
In opposition the Iron Lady had lived up to her reputation by supporting NATO’s request for an extra 3 per cent annual spending on defence. Once in office, Howe tried to row back from this pledge, but Mrs Thatcher was immovable: in her book, strong defence took precedence over everything else, even cutting public spending. Likewise she had promised substantial pay rises to the armed forces and the police; and the Tory manifesto also committed the new Government to increase old-age pensions. Finally Patrick Jenkin as Shadow Health Secretary had bounced Howe into promising that spending on the NHS would be protected for at least three years. All these undertakings left very little scope for the sort of big savings the Prime Minister and Chancellor were looking for. As Mrs Thatcher wrote in her memoirs: ‘We seemed to be boxed in.’3
In fact, Howe squeezed £1.5 billion from a variety of soft targets. Civil Service recruitment was frozen and tough limits imposed on local government spending. Prescription charges were raised for the first time in eight years, foreshadowing virtually annual increases for the next decade. Cuts were announced in the provision of school meals and rural school transport. Most significantly, though the basic old-age pension was increased in the short term, the long-term link between pensions and average earnings was broken – a major saving in the future. Another projected £1 billion was saved by imposing cash limits on departmental budgets; and a further billion by selling shares in public-sector assets, following the lead already set by Labour and condemned by the Conservatives in opposition. This saving of £3.5 billion announced in the June budget was quickly followed by a further £680 million package in October, made up of more Civil Service cuts and steep rises in gas and electricity prices.
These economies were designed to make room for dramatic tax cuts. In the end Howe was able to cut the standard rate of income tax by three pence in the pound, from 33 to 30 per cent, and reduce the top rate from Labour’s penal 83 per cent to a more moderate 60 per cent. This was a bold early signal of the new Government’s intentions. But it was made possible only by virtually doubling Value Added Tax (VAT). It had always been part of the Tories’ strategy to switch a greater proportion of the burden from direct to indirect taxation. But during the election Howe specifically denied that he planned to double VAT. In the event he could not finance the income-tax cuts he was determined on in any other way. Mrs Thatcher was very worried by the drastic impact that such a steep hike would have on prices. With inflation already rising, she had reason to be worried: however long planned, it was the worst possible moment for such a switch. In his memoirs Howe wryly noted ‘the ambivalence which Margaret often showed when the time came to move from the level of high principle and evangelism to practical politics’.4 Nigel Lawson wrote more bluntly that she was ‘fearful’ of the political fallout, ‘but Geoffrey persuaded her that if we did not grasp this nettle in the first budget it would never be grasped at all’.5 For
her part Lady Thatcher acknowledged that ‘Geoffrey stuck to his guns’ and overcame her doubts.6 But this – the first really unpopular decision the Government had to take, within three weeks of taking office – was not the last time that a cautious Prime Minister had to be hauled over the hurdle by her more resolute colleagues.
Another instance was the abolition of exchange controls. This was arguably the single most important step the Thatcher Government took to give practical effect to its belief in free markets: by doing away with the restrictions on the movement of capital which had been in place since 1939, the Government dared to expose the British economy to the judgement of the global market. It was an act of faith which might have resulted in a catastrophic run on sterling. In the event it had the opposite effect: the markets were impressed by the new Government’s show of confidence and the pound, already strong, dipped only momentarily and then went on rising. Howe later wrote that the abolition of controls was ‘the only economic decision of my life that ever caused me to lose a night’s sleep. But it was right.’7
In the long run it undoubtedly was; and it was brave to take the decision in the first few months in office. But in the short run it played havoc with the Government’s monetary policy. Controlling the money supply was supposed to be the linchpin of the Government’s new monetarist approach. The trouble was that Labour had already been controlling it very effectively before the election. Denis Healey and the Permanent Secretary of the Treasury, Douglas Wass, were not ideological monetarists like Joseph, Howe and Lawson, who had embraced monetarism with quasi-religious certainty: they were ‘reluctant monetarists’ who had pragmatically concluded – at the prompting of the International Monetary Fund (IMF) – that tight monetary targets were a necessary part of economic policy. But in practice monetary policy did not change in May 1979 so dramatically as either Labour or the Government liked to pretend. When Healey denounced Tory policies it sometimes suited Mrs Thatcher to remind the House that ‘the previous Labour Chancellor was more of a monetarist than he now cares to admit’.8
Howe’s first budget was a bold statement of intent, taking a huge gamble on early tax cuts at the risk of inflation. It was taken for granted that, though the Chancellor held up the dispatch box outside Number Eleven, the political will had come from Number Ten. ‘Either she succeeds,’ the Daily Mirror commented, ‘or we go bust.’9 Mrs Thatcher was widely reported to have insisted on a bigger tax cut than the expenditure savings warranted and on a steeper rise in VAT than her Chancellor had wanted. The reality was in fact quite the opposite.
The impact of Howe’s June budget was as damaging as its critics predicted. The virtual doubling of VAT and the cutting of subsidy to the nationalised industries, along with the ending of pay and dividend controls and John Nott’s swift abolition of the Price Commission, added 6 per cent to the Retail Price Index almost overnight, leading inevitably to large compensating pay claims, while the income-tax cuts boosted consumption and further fuelled inflation that way. For a Government that had come into office proclaiming the conquest of inflation as its first priority, this was a perverse beginning. Inflation actually doubled from 10.3 to 21.9 per cent in the first year. As industry laid off workers under the impact of the high pound, benefit payments had to keep pace with inflation, while Government revenue fell.
Set against these rising commitments, Howe’s two packages of spending cuts were insufficient to dent the inexorable rise in Government borrowing. The Government’s only other means of curbing the growth of money was raising interest rates. Howe had already raised the minimum lending rate (MLR) from 12 to 14 per cent in June. He warned that it would not fall until the money supply and public-sector borrowing were under control; but this only caused more money to flow into London. Instead of falling, £M3 – which measures the amount of money in circulation, including bank deposits – actually rose by 14 per cent in four months between June and October. In November Howe was obliged to hike the lending rate another three points to 17 per cent – an unprecedented rise to an unprecedented level. Thinking more of the effect on mortgages than of the cost to industry, Mrs Thatcher hated having to do this. ‘It bothered me enormously,’ she told Patricia Murray. ‘It really was devastating.’10 But monetarism prescribed no other remedy, so she bit the bullet. ‘We would not print money,’ she insisted at Prime Minister’s Questions; therefore ‘it was necessary to raise interest rates to conquer inflation’.11 Thus the Government got the worst of both worlds: its first actions were simultaneously too much and too little, painful enough to raise howls of fury from industry, unions, homeowners, educationists and others, yet ineffective in cutting spending and positively counterproductive with regard to inflation. Mrs Thatcher and her economic team had come into office with a doctrinaire prescription which they proceeded to apply, undeterred by the most unfavourable economic circumstances. After a few months of rising unemployment, rising inflation and record interest rates, the Government’s monetarist experiment was already widely dismissed as a dogmatic folly.
This, however, was where the composition of the Cabinet prevented any loss of purpose. The central quintet of Mrs Thatcher, Howe, Joseph, Nott and Biffen was firmly in control of economic policy. Sceptics like Prior, Ian Gilmour, Peter Walker and Michael Heseltine first learned of the abolition of exchange controls when they read it in the newspapers.12 While individual ministers fought more or less successfully to defend their own budgets, it was too soon for any concerted rebellion. The most unflinching doctrinaire was Geoffrey Howe. It is clear from the memoirs of both Howe and Lawson, and the recollections of Nott and Biffen, that if any one of the central directorate faltered in the early days it was the Prime Minister herself. Not that her sense of purpose faltered. Relentlessly every Tuesday and Thursday in the House of Commons and in radio and television interviews she reiterated the simple message that the country must learn to live within its means, that public expenditure must be cut to a level the wealth-producing taxpayer could support, that the Government must tax and spend less of the national income.13 Publicly she never weakened; but she was always vividly conscious of the political risks. It was the Chancellor, intellectually stiffened by Lawson, who stubbornly put his head down and got on with what he was determined must be done. The Prime Minister’s function, quite properly, was to be the last to be persuaded that each course of action – doubling VAT, abolishing exchange controls, scrapping the Price Commission or raising interest rates – was both necessary and politically practicable. In her memoirs, despite their later differences, she paid due tribute to Howe’s tenacity: ‘In my view these were his best political years.’14 In truth she could not have done without him. Though their relationship deteriorated later, for these first two or three years of the Thatcher Government they made a formidable combination, perhaps the most successful Prime Minister – Chancellor partnership of the twentieth century.
First steps in foreign policy
It was really after Howe moved to the Foreign Office in June 1983 that their relationship deteriorated. By that time – after the Falklands war and with the assurance of a second term in front of her – Mrs Thatcher’s self-confidence in foreign affairs had grown and she was ready to be her own Foreign Secretary. In 1979, by contrast, she was conscious of her relative lack of experience and was content to leave foreign policy largely to Lord Carrington. This was a surprising abdication, since one of her prime ambitions was to restore Britain’s ‘greatness’ in the eyes of the world. Like Churchill she had a clear view of Britain’s place as America’s foremost ally in the global battle against Communism, and she regarded the Foreign Office as a nest of appeasers. For her first sixteen years after entering Parliament in 1959 her energies had been almost exclusively diverted to domestic responsibilities: pensions, energy, transport and education. On becoming Leader of the Opposition in 1975, however, she had quickly made up this deficit, marking her arrival on the world stage by launching a series of uncompromising verbal assaults on the Soviet Union. For four years she had
avoided appointing a shadow Foreign Secretary with the authority to make the portfolio his own, but travelled tirelessly in parliamentary recesses to educate herself and meet the leaders she hoped to have to deal with in office.
Once elected, however, she recognised that she could not do everything. Her priority was the economy. Moreover, she believed that restoring British influence abroad depended essentially on restoring the economy at home. ‘A nation in debt,’ she told the House soon after becoming party leader, ‘has no self-respect and precious little influence.’15 For all these reasons she told her aides that she did not intend to waste her time on ‘all this international stuff’.16 In appointing Peter Carrington as her first Foreign Secretary, with Ian Gilmour his deputy in the Commons, she made a tacit concordat to leave the detail of foreign policy to them, while Carrington in return suppressed his doubts about her economic policy.
In fact, she soon found that there was a crowded calendar of international meetings which she was bound to attend: European councils, G7 summits (attended by the leaders of the seven leading industrial nations) and Commonwealth conferences. That first summer there was one of each, respectively in Strasbourg, Tokyo and Lusaka. She confessed to Patricia Murray in 1980 that she had been ‘surprised at the amount of time we actually have to spend on foreign affairs.The amount of summitry we have now is terrific.’17 At first she was nervous – though she was careful not to show it. Conscious of her inexperience, she felt patronised by senior European leaders like the West German Chancellor Helmut Schmidt and the French President Valéry Giscard d’Estaing, who treated her with patrician disdain which stopped barely short of outright rudeness. She did her homework more anxiously than ever, only to find that they were much less well briefed than she was. Her self-confidence visibly increased as she discovered that with the Rolls-Royce machine of the despised Foreign Office behind her, she was more than a match for any of them.18
The Iron Lady Page 18