Margaret Thatcher: The Autobiography (55 page)

The Autumn Statement on 24 November 1980, therefore, contained some highly unpopular measures. Employees’ National Insurance Contributions had to go up. Retirement pensions and other social security benefits would be increased by 1 per cent less than the rate of inflation next year if they turned out to have risen by 1 per cent more in the present year. There were cuts in defence and local government spending. It was announced that a new supplementary tax would be introduced on North Sea oil profits. However, there was some good news: further employment measures – and a 2 percentage point cut in the MLR.

Few members of the public are experts in the finer matters of economics – though most have a shrewd sense when promises do not add up. By the end of 1980 I began to feel that we risked forfeiting the public’s confidence in our economic strategy. Unpopularity I could live with. But loss of confidence in our capacity to deliver our economic programme was far more dangerous. And the very last thing I could afford was well-publicized dissent from within the Cabinet itself. Yet this was what I now had to face.

The economic and public expenditure discussions of 1980 repeatedly found their way into the press; decisions came to be seen as victories by one side or the other and Bernard Ingham told me that it was proving quite impossible to convey a sense of unity and purpose in this climate. During 1980 the public was treated to a series of speeches and lectures by Ian Gilmour and Norman St John Stevas on the shortcomings of monetarism, which, according to them, was deeply un-Tory – though they usually took care to cover themselves against charges of disloyalty by including some fulsome remarks praising me and the Government’s approach.

Industrial leaders helped worsen the general impression of disarray: in the same month the new Director-General of the CBI was promising ‘a bare knuckle fight’ over government policies, though when I met the CBI shortly afterwards I am glad to say that knuckles were not in evidence. Then in December Jim Prior was reported as urging us not to use the language of the ‘academic seminar’. But perhaps the most astonishing remark was John Biffen’s widely reported admission to the Conservative Party Parliamentary Finance Committee that he did not share the enthusiasm for the MTFS, which he – the Chief Secretary to the Treasury – was trying, with singularly little success, to apply in the field of public expenditure.

I decided that it was time to reshuffle the Cabinet. On Monday 5 January I made the changes, beginning with Norman St John Stevas, who left the Government. I was sorry to lose Norman. He had a first-class brain and a ready wit, but he turned indiscretion into a political principle. The other departure, Angus Maude, had employed his own sharp wit in my support but he felt that it was time to give up the job as Paymaster-General to return to writing. I moved John Nott to Defence to replace Francis Pym, convinced that someone with real understanding of finance and a commitment to efficiency was needed in this department. I moved John Biffen to replace John Nott at Trade, and at Geoffrey Howe’s request
appointed Leon Brittan as Chief Secretary. Leon was enormously intelligent and hard-working and he had impressed me with the sharpness of his mind. Two very talented new Ministers of State came into the Department of Industry to support Keith Joseph: Norman Tebbit and Kenneth Baker. Norman was totally committed to our policies, shared much of my own outlook and was a devastating Commons in-fighter. Ken was given special responsibility for Information Technology, a task in which he showed his talents as a brilliant presenter of policy. Francis Pym took over the task of disseminating government information, which he combined with the position of Leader of the House of Commons. But the first half of this appointment was to prove a source of some difficulty in the months ahead.

I shall never forget the weeks leading up to the 1981 budget. Hardly a day seemed to go by without the financial scene deteriorating in some way. Alan Walters, who had now joined me at No. 10, argued for a larger cut in the PSBR than Geoffrey Howe was proposing. He also believed that the way in which the monetary policy was conducted was defective. But the Treasury were not prepared to move to the system of monetary base control which Alan favoured and to which I was attracted.

And this was much more than a technical disagreement. Alan Walters, John Hoskyns and Alfred Sherman had suggested that Professor Jurg Niehans, a distinguished Swiss monetary economist, should prepare a study on our monetary policy for me. Professor Niehans’s report had a clear message. It was that North Sea oil had probably not been a major factor in sterling’s appreciation; rather, tight monetary policy had caused the pound to rise so high, imposing such pressure on British industry and deepening the recession. The report argued that we should use the monetary base rather than £M3 as the main monetary measure and suggested that we should allow it to rise in the first half of 1981. In short, Professor Niehans thought monetary policy was too tight and should quickly be loosened. Alan emphatically agreed with him.

My doubts at this time about the Treasury’s conduct of monetary policy, however, were more than matched by the concern I felt at the steady growth in its estimates of the PSBR – the target by which we steered our fiscal policy. The trend of PSBR forecasts was upwards. The likelihood was that we would budget for too low a reduction in the PSBR, as we had in 1980–81. To repeat that mistake would either force us to introduce an additional budget in late summer or autumn, or put great
strains on the funding of Government borrowing. In the last resort it might lead to a funding crisis, and it would certainly force us to increase interest rates, keeping sterling high and increasing the already severe squeeze on the private sector. We had to avoid such an outcome. What we needed was a budget for employment.

On Friday 13 February I had a further meeting with Geoffrey Howe. Alan Walters was also present. The latest forecast for the PSBR was between £13.5 billion and £13.75 billion. The tax increases Geoffrey was proposing would reduce it to something between £11.25 billion and £11.5 billion, but he did not believe it was politically possible to go below £11 billion. But Alan argued strongly that the PSBR should be lower still. He told us that a PSBR of, say, £10 billion would be no more deflationary than one of £11 billion because the latter would actually be worse for City expectations and for interest rates. Alan concluded by arguing that we had no alternative but to raise the basic rates of income tax by 1 or 2 per cent.

Alan was the economist. But Geoffrey and I were politicians. Geoffrey rightly observed that introducing what would be represented as a deflationary budget at the time of the deepest recession since the 1930s, via an increase in the basic rate, would make it a political nightmare. I went along with Geoffrey’s judgement about the problems of raising income tax, but without much conviction, and as the days went by my unease grew.

When Geoffrey and I had our next budget meeting on 17 February, he said that he was now prepared to contemplate a basic rate increase. But his concern was whether it might not be better to raise the basic rate of income tax by 1 per cent and personal allowances by about 10 per cent, thus reducing the burden on people below average earnings. I confirmed that I was prepared to contemplate this, but I also told him that I was coming to the view that it was essential to get the PSBR below £11 billion.

My advisers – Alan Walters, John Hoskyns and David Wolfson – continued to argue for this much lower PSBR with great passion. Keith Joseph also strongly backed this view. Alan, who knew that he could always have access to me more or less when he wished – as in my view any really close adviser should if a Prime Minister is not to be the prisoner of his (or her) in-tray – came in to my study to have one last attempt to get me to change my mind about the budget. I know today that he went away still believing that I was not persuaded. Yet I knew in my heart of hearts that there was only one right decision, and that it now had to be made.

Geoffrey Howe and I, with Douglas Wass, the Treasury’s Permanent Secretary, met for a further discussion of the budget on the afternoon of Tuesday 24 February. Geoffrey still envisaged a PSBR for 1981–82 of £11.25 billion. I said that I was dismayed by such a figure and that I doubted whether it would be possible to cut interest rates, which we badly needed to do, unless Government borrowing was reduced to a figure around £10.5 billion. I said that I was even prepared to accept a penny on the standard rate.

Geoffrey argued against a penny on income tax – on which I was not too difficult to persuade for I was horrified at the thought of reversing even some of the progress we had made on bringing down Labour’s tax rates. But he also argued against the need to bring down the PSBR further, and on this last point I was not persuaded at all.

Early the following morning, Alan came in to see me. I told him that I had insisted on the lower PSBR he wanted. But I still did not know quite how Geoffrey would react. Then Geoffrey came in to see me. Having consulted his ministerial colleagues in the Treasury he had accepted that we should have a smaller PSBR, below £11 billion. Rather than increase the basic rate of income tax he proposed the less unpopular course of withholding any increase in tax thresholds – though this was still an extraordinarily bold move when inflation remained at 13 per cent. Our budget strategy was now set. And it looked as if we would be able to announce a reduction of 2 per cent in MLR in the budget the following Tuesday.

Unsurprisingly, the budget was very unpopular. In the eyes of our critics, the strategy was fundamentally wrong. If you believed, as they did, that increased Government borrowing was the way to get out of recession, then our approach was inexplicable. If, on the other hand, you thought, as we did, that the way to get industry moving again was above all to get down interest rates, then you had to reduce Government borrowing. Far from being deflationary, our budget would have the reverse effect: by cutting government borrowing and over time easing the monetary squeeze, it would allow interest rates and the exchange rate to fall, both of which had created severe difficulties for industry. I doubt that there has ever been a clearer test of two fundamentally different approaches to economic management.

The dissenters in the Cabinet had been stunned by the budget when they learned its contents at the traditional morning Cabinet on budget day. The press was soon full of leaks expressing their fury and frustration. They knew that the budget gave them a political opportunity. Because it
departed so radically from post-war economic orthodoxy even some of our supporters would not wholly believe in the strategy until it started to yield results. That might not be for some time.

Thankfully, strikes occupied far less of our time during 1981 than they had in 1980, and the number of working days lost due to strike action was only a third of that in the previous year. But two disputes – one in the coal industry, which did not in the end result in a strike, and another in the civil service, which did
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– were of great importance, both to budget decisions and to the overall political climate.

A foreigner unaware of the extraordinary legacy of state socialism in Britain would probably have found the threatened miners’ strike in January 1981 quite incomprehensible: £2.5 billion of taxpayers’ money had been invested in the coal industry since 1974; productivity at some of the new pits was high, and a slimmed-down and competitive coal industry could have provided employees with good, well-paid jobs. But this was possible only if uneconomic pits were closed. Moreover, the pits which the NCB was intent on closing were not just uneconomic but more or less exhausted. On 27 January the Energy Secretary, David Howell, told me about the closure plans. The following afternoon Sir Derek Ezra, NCB Chairman, visited Downing Street and briefed me in person. I agreed with him that with coal stocks piling up there was no alternative to speeding up the closure of uneconomic pits.

As in the cases of BSC and BL, it was the management which had to implement the agreed approach. The press was soon full of NCB plans to close 50 pits and a bitter conflict was predicted. The National Union of Mineworkers was pledged to fight closures and although Joe Gormley, its President, was a moderate, the powerful left-wing faction of the union was bound to exploit the situation and Arthur Scargill, the hard-left leader, was likely to succeed Mr Gormley as President in the near future.

At a meeting with the NUM on 11 February the NCB Board resisted pressure to publish a list of pits it was proposing to close and denied the
figure of 50. However, the Board failed to mention the idea of improved redundancy terms, which was already being discussed by the Government, and instead undertook to join the NUM in an approach to us seeking a lower level of coal imports, the maintenance of a high level of public investment and subsidies comparable to those allegedly being paid by other governments to coal industries abroad. The NCB Board was behaving as if it entirely shared the interests of the union representing its employees. The situation quickly deteriorated further.