Margaret Thatcher: The Autobiography (47 page)

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.

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 Public Sector Borrowing Requirement (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. 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 would double in our first year of office.
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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. Rab Butler as Chancellor in 1951 had introduced his tax cuts gradually. Should we do the same? 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. 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.

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.

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 their objectives – 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 though 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.

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.

Whatever the short-term difficulties, I was determined at least to begin work on long-term reforms of government itself. Since the early 1960s, the public sector had grown steadily.
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Unlike the private sector, it actually tended to grow during recessions while maintaining its size during periods of economic growth; 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. 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 and 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; 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 enormously impressed by the ability and energy of the members of my Private Office at No. 10. 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, 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. And 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 and 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 improving 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
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reforms of NHS management and, later still, the internal market reforms of the Health Service in 1990.

Inevitably, my visits to government departments were not as long as I would have liked. There were other limits too on what I could learn on those occasions – particularly that senior civil servants might feel inhibited from speaking freely when their ministers were present. Consequently, I invited the Permanent Secretaries to dinner at No. 10 on the evening of Tuesday 6 May 1980. There were twenty-three Permanent Secretaries, Robin Ibbs (Head of the CPRS), Clive Whitmore, my principal
private secretary, David Wolfson and myself around the dining table.

I enjoy frank and open discussion, even a clash of temperaments and ideas, but such a menu of complaints and negative attitudes as was served up that evening was enough to dull any appetite I may have had for this kind of occasion in the future. The dinner took place a few days before I announced the programme of civil service cuts to the Commons, and that was presumably the basis for complaints that ministers had damaged civil service ‘morale’.

What lay still further behind this, I felt, was desire for no change. But the idea that the civil service could be insulated from a reforming zeal that would transform Britain’s public and private institutions over the next decade was a pipe dream. I preferred disorderly resistance to decline rather than comfortable accommodation to it. And I knew that the more able of the younger generation of civil servants agreed with me. So, to be fair, did a few of the Permanent Secretaries present that night. They were as appalled as I was. It became clear to me that it was only by encouraging or appointing individuals, rather than trying to change attitudes
en bloc
, that progress would be made. And that was to be the method I employed.
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Such an approach, however, would take years. We were dealing with crises on a weekly basis during the second half of 1979 as we scanned the figures on public spending and borrowing, against the background of an international economy slipping faster and faster into recession. Our first task was to make whatever reductions we could for the current financial year, 1979–80. Ordinarily, public spending decisions were made by Government during the summer and autumn of the previous year and announced in November. Even though we were several months into the current financial year, we had to begin by reopening the public expenditure plans we had inherited from the Labour Government. We would announce our new public expenditure plans with the budget. The scope for cuts was limited, partly because of this, partly because of our own
election pledges, and partly because some changes we wanted to make required legislation.

But I was determined that we should make as vigorous a start as possible and in the end we were able to announce £3.5 billion of economies along with Geoffrey’s budget.

No sooner had we agreed savings for the current year, 1979–80, than the still more difficult task was upon us of planning public expenditure for 1980–81 and subsequent years. In July 1979, when the crucial decisions were being hammered out, we had a series of particularly testing (and testy) Cabinet discussions on the issue. Our goal was what it had been in Opposition, that is to bring public expenditure back to the 1977–78 level in real terms. But in spite of the reductions we had made, public expenditure was already threatening to run out of control.

Nonetheless there was strong opposition from some ministers to the cuts. Geoffrey Howe was superbly stolid in resisting this pressure. Later in July he set out for colleagues the precise implications of a failure to agree the £6.5 billion reductions he was proposing. He also dispelled some of the misunderstandings. Ministers had to recognize that we were not cutting to the bone, but merely reining in the increases planned by Labour and compensating for other increases that the deepening recession had made almost inevitable.

Labour’s plans would have involved expenditure of a further £5 billion in 1980–81 to be financed out of growth that was not happening. Moreover, this overshoot had been aggravated by a rate of pay increase in the public sector which would cost another £4.5 billion. To offset these increasing obligations we had to make reductions of £6.5 billion in the expenditure plans for 1980–81, just to hold the PSBR in that year down to £9 billion. That figure was in itself too high. But the ‘wets’
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continued to oppose the cuts both in Cabinet and in the indecent obscurity of leaks to the
Guardian.

Over the summer the economic situation worsened. In September we again returned to public spending. We not only had to publish the conclusions we had agreed in July, but also our plans for the years up to
1983–84. And that meant more economies. We decided on a renewed drive to cut waste and reduce civil service numbers. We also agreed sharp increases in the price of electricity and gas (which had been artificially held down by Labour) that would come into effect in October 1980. Electricity would rise by 5 per cent, and gas by 10 per cent, over and above inflation.

The 1980–81 Public Expenditure White Paper was duly published on 1 November. These public spending plans honoured our pledges to provide more resources for defence, law and order and social security. They would also hold the public spending total for 1980–81 at the same level as 1979–80. In spite of the fact that this reduction of some £3.5 billion from Labour’s plans was denounced as draconian, it really was not large enough. That was evident not only to me, but also to the financial markets, already concerned about excess monetary growth.