Margaret Thatcher: The Autobiography (54 page)

Michael Edwardes and the BL Board faced down the union threat. The strikers were told that unless they returned to work by Wednesday 23 April they would be dismissed. But much as I admired BL’s tenacity, I was becoming increasingly unhappy about the Board’s commercial approach.

As the summer wore on it became clear that the company’s financial position was deteriorating even further. The company lost £93.4 million before interest and tax in the first half-year compared with a profit of £47.7 million for the same period the previous year. Michael Edwardes tried to get the Government to agree to fund the new BL medium-range car – known as the LM10 – separately and in advance of the 1981 Corporate Plan. Indeed, he wanted me to announce the Government’s commitment to this at a dinner given by the Society of Motor Manufacturers and Traders (SMMT) on 6 October. I had no intention of agreeing; once again, I would not be bounced.

On 27 October BL’s trade unions decided overwhelmingly to reject the company’s offer of a pay increase of 6.8 per cent and recommended a strike. Michael Edwardes wrote to Keith Joseph to say that a strike would make it impossible to achieve the 1981 Corporate Plan submitted just a week before. To win support for the pay offer, he wanted to write to inform union officials of the key aspects of the 1981 Plan, including the funds required for 1981 and 1982 – a figure which he would put at £800 million. I reluctantly accepted his approach but only on the clear understanding that the Department of Industry would make it known that the Government was not committed in any way to finding these funds and that the matter had yet to be considered. In fact, on 18 November BL’s union representatives backed down and finally decided to accept the company’s offer. Almost the same thing had happened the previous year. The need to deal with an industrial relations crisis made it extremely difficult to avoid the impression that we were prepared to provide large amounts of extra public funding for the company. No matter how clear our disclaimers, inevitably people drew that conclusion.

On any rational commercial judgement, there were no good reasons for continuing to fund British Leyland. BL was still a high-cost, low-volume manufacturer of cars in a world where low cost and high volume were essential for success. But I knew that closure of the volume car business, with all that would mean for the West Midlands and the Oxford area, would not be politically acceptable, at least in the short term. It would also be a huge cost to the Exchequer – perhaps not very different from the sort of sums BL was now seeking. I was in favour of supporting the BL Plan – but on condition that BL disposed of its assets rapidly or arranged mergers with other companies.

But this was contentious. Michael Edwardes was not willing to sell Land Rover if BL were also required to go on trying to salvage the volume
car business. He said that the Board’s position would be quite impossible if a public deadline were to be set for its sale.

Political realities had to be faced. We agreed to accept BL’s Corporate Plan, involving the division of the company into four more or less independent businesses. We settled the contingencies which would lead to the plan being abandoned. We set out the objectives for further collaboration with other companies. And – most painfully – we provided £990 million.

This was not, of course, the end of the story for BL. In due course, it would be shown that the changes in attitude and improvements in efficiency achieved were permanent. To that extent, the account of our policy in 1979–81 towards BL is one of success. But the huge extra sums of public money that we were forced to provide came from the taxpayer, or through higher interest rates needed to finance extra borrowing, from other businesses. And every vociferous cheer for higher public spending was matched by a silent groan from those who had to pay for it.

Politics and the economy in 1980–1981

A
T 2.30 ON THE AFTERNOON
of Friday 10 October 1980 I rose to address the Conservative Party Conference in Brighton. Unemployment stood at over two million and rising; a deepening recession lay ahead; inflation was far higher than we had inherited, though falling; and we were at the end of a summer of government leaks and rifts. The Party was worried, and so was I. Our strategy was the right one, but the price of putting it into effect was proving so high, and there was such limited understanding of what we were trying to do, that we had great electoral difficulties. However, I was utterly convinced of one thing: there was no chance of achieving that fundamental change of attitudes which was required to wrench Britain out of decline if people believed that we were prepared to alter course under pressure. I made the point with a line provided by Ronnie Millar:

The message was directed as much to some of my colleagues in the Government as it was to politicians of other parties. It was in the summer of 1980 that my critics within the Cabinet first seriously attempted to frustrate the strategy which we had been elected to carry out – an attack which reached its climax and was defeated the following year. At the time that I spoke many people felt that this group had more or less prevailed.

Battle was to be joined over the next two years on three related issues: monetary policy, public spending and trade union reform.

The most bitter Cabinet arguments were over public spending. In most cases those who dissented from the line which Geoffrey Howe and I took were not merely intent on opposing our whole economic strategy as doctrinaire monetarism; they were trying to protect their departmental budgets. It had soon become clear that the public expenditure plans announced in March 1980 had been far too optimistic. Local authorities, as usual, were overspending; and the recession was proving deeper than expected, increasing spending on unemployment and other benefits. Government borrowing for the first quarter of 1980 looked like being very large. In addition, Francis Pym, Defence Secretary, was pressing for an increase in the Ministry of Defence (MoD) cash limit.

The debate continued inside and outside government. The ‘wets” central message was always the same: spend and borrow more. They used to argue that we needed extra public spending on employment and industrial schemes, over and above what we had planned and were effectively forced to spend simply as a result of the recession. But this did not escape from the fact that extra public spending – whatever it was spent on – had to come from taxes levied on private individuals and industry; or borrowing, pushing up interest rates; or printing money, setting off inflation.

These basic differences between us came out clearly at the public spending Cabinet on 10 July 1980. Some ministers argued that the PSBR should be allowed to increase to accommodate the huge new requirements of the loss-making nationalized industries. But the PSBR was already far too high and the higher it went, the greater the pressure to raise interest rates in order to persuade people to lend the Government the necessary funds. At a certain point – if pushed too far – there would be the risk of a full-scale government funding crisis – that is, when you cannot finance your borrowing from the non-banking sector. We could not risk going further in that direction.

The defence budget was a special problem. We had already accepted the NATO commitment for annual 3 per cent real increases in our defence spending. This had the obvious merit of demonstrating to the Soviets our determination to prevent their winning the arms race on which they had embarked, but in other respects it was unsatisfactory. First, it meant that the MoD had little incentive to get value for money in the hugely expensive equipment it purchased. Second, the 3 per cent commitment meant that Britain, spending a substantially higher proportion of its GDP on
defence than other European countries and going through a peculiarly deep recession, found herself bearing an unfair and increasing burden; and by the end of 1980 the MoD had overspent its cash limit because, with the depressed state of industry, suppliers had fulfilled government orders faster than expected.

As we moved into the winter of 1980 the economic difficulties accumulated and the political pressure built up. On Wednesday 3 September Geoffrey Howe and I met to discuss the monetary position. Measured in terms of £M3, the money supply had been rising much faster than the target we had set in the MTFS at the time of the March budget. It was hard to know how much of this was the result of our removing exchange controls in 1979 and our decision in June to remove the ‘corset’ – a device by which the Bank of England imposed limits on bank lending. Money analysts argued that both of these liberalizations had misleadingly bloated the £M3 figures.
*

Of course, we never just looked at monetary figures to gauge what was happening. We also looked at the real world around us. And what we saw told a somewhat different tale from the high £M3 figures. Inflation had slowed down markedly, particularly prices in the shops where competition was intense. Sterling was very strong, averaging just below $2.40 during the second half of 1980. And here the crucial issue was whether the high exchange rate was more or less an independent factor bringing down inflation, or rather a result of the monetary squeeze being tighter than we intended and than the £M3 figures suggested.

Some of my closest advisers thought the latter. Professor Douglas Hague sent me a paper in which he described our policies as ‘lopsided’: first, they were bearing down more heavily on the private than the public sector (which I knew to be true), and second, they were putting too much emphasis on controlling the money supply and too little on controlling the PSBR, with the result that interest rates were higher than they should have been. (I also came to share this view over the next year.) In the summer of 1980 I consulted Alan Walters, who was to join me at the beginning of 1981 as my economic policy adviser at No. 10. Alan’s view was that the monetary squeeze was too tight and that it was the narrowest definition of ‘money’, known as the monetary base, which was the best, indeed the only reliable, star to steer by.

If there was uncertainty about the monetary position at this time, there was none about the trend in public spending, which was inexorably upwards. In September, Geoffrey Howe sent me a note elaborating on the warning he had already given to Cabinet about public expenditure. The increases required for the nationalized industries, particularly BSC, would require larger cuts in programmes than those agreed in July in order to hold the total. To the extent that more was provided, as the Cabinet wished, for industrial support and employment, the corresponding cuts would need to be larger still. The fifth public expenditure round in sixteen months was bound to prompt squeals of indignation: and so it proved.

Geoffrey and I decided not to take the whole matter to Cabinet cold, as it were, so I called a meeting of key ministers to go into it first. The Chancellor described the position and outlined the arithmetic.

Our plan succeeded. Without too much grumbling, the Cabinet of 30 October endorsed the strategy and confirmed our objective of keeping public spending in 1981–82 and later years broadly at the levels set out in the March White Paper. This meant that it would be necessary to make cuts of the order of magnitude proposed by the Treasury – though even with these reductions we would be forced to increase taxes if we were to bring the PSBR down to a level compatible with lower interest rates.

Much stronger Cabinet opposition surfaced when we began to look at the decisions required to give effect to the strategy which had been endorsed. The ‘wets’ now claimed that they lacked sufficient information to judge whether the overall strategy was soundly based. In effect, spending ministers were trying to behave as if they were Chancellors of the Exchequer. It would be a recipe for complete absence of spending control and thus for economic chaos.