Margaret Thatcher reversed our painful national decline

Andrew Lilico
IN 1978, West German Chancellor Helmut Schmidt declared: “England is no longer a developed country.” Just as Spain had, in its decline from Empire, ceased to be part of the developed world, and Argentina followed in the mid-twentieth century, many expected that Britain would go the same way.

Following the 1967 devaluation, we were bailed out by the International Monetary Fund in 1968 and again in 1976. As the government lost control of spending, the deficit and inflation, and Parliament’s credibility plummeted, folk naturally turned to alternative sources of political authority in the form of the trade unions. Politically-motivated union action brought down Edward Heath’s government, which after the Three Day Week sought a General Election on the question: “Who governs Britain?” The despairing electorate answered: “Not you.” James Callaghan fared little better, brought low by the unions in the Winter of Discontent. The dead were not buried; the rubbish not collected. Even bread rationing was briefly introduced in November 1978. Britain was the “sick man of Europe”.

When Margaret Thatcher came to power, the country was widely considered ungovernable. Though in her General Election victory address Thatcher declared “where there is discord, may we bring harmony”, what she actually brought – had to bring – was the sword of division.

The Thatcher government proclaimed itself “monetarist”: money supply constraint would control inflation and public spending, and the deficit would be kept from rising too fast. But most expected the Thatcher government would U-turn, as Harold Wilson and Heath had before. Early signs encouraged this view, as Thatcher increased the public sector wage bill 50 per cent (in cash terms) from 1978-9 to 1980-1, honouring commitments arising from the collapse of Callaghan’s incomes policy.

In 1980, despite severe recession and unemployment reaching levels not seen since the 1930s, interest rates were 16 to 17 per cent. By October, high interest rates had driven sterling up from the $2.05 of 1979 to above $2.40, making life particularly difficult for exporters, including manufacturers. The government came under strong pressure to change tack, including from within the Conservative Party.

Inflation fell from 21.9 per cent in May 1980 to 15.4 per cent in October, but expectations of a U-turn were widespread, with average earnings growth peaking in October 1980 at 22.6 per cent. Fiscal policy seemed to be failing: the deficit in 1980-1 was 5.7 per cent of GDP, versus the 3.85 per cent per cent target, while monetary growth was 18 per cent, compared with a target of 7 to 11 per cent.

At the Conservative Party Conference on 10 October 1980, with “Right to work” demonstrators protesting outside, Thatcher gave a famous speech, including the following widely-quoted passage: “To those waiting with bated breath for that favourite media catchphrase, the U-turn, I have only one thing to say: You turn if you want to. The lady’s not for turning!”

Nonetheless, interest rates were shortly cut to 14 per cent and Thatcher’s economic adviser Sir Alan Walters urged that a way must be found to cut them further, while still retaining credibility.

That way was the (in)famous 1981 Budget of chancellor Geoffrey Howe, when the government reacted to slippage in its plans not by U-turning but by raising taxes and cutting spending plans further, to general infamy and the condemnation of 364 economists in a letter to The Times. This emboldened Thatcher’s team to believe interest rates could be cut further without imperilling credibility, which they did.

The combination of the refusal to U-turn and the sheer ferocity of the recession, with unemployment rising above 3m, broke the back of inflation expectations. By October 1981, wages were a below-inflation 11.4 per cent, and would fall below 8 per cent by October 1982. Inflation itself fell rapidly, to below 10 per cent in April 1982, troughing at 3.7 per cent in May and June 1983.

Thus Thatcher’s first term re-established the credibility of Parliament as economic policy-maker rather than the unions, in the process restoring control over the public finances and inflation. Unemployment soared as workers priced themselves out of the market, in the not-unreasonable belief that Thatcher’s promises to get inflation down would prove as empty as her predecessors’. Because she did not back down, as they thought she would, inflation fell and workers that had secured 7 per cent real terms rises in 1980 were stranded on pay levels their productivity could not justify. The inevitable consequence was mass unemployment – the fruits of the lost credibility of the previous decade; Thatcher’s “fault” only inasmuch as, unlike others, she kept her promises. But mass unemployment would be her legacy in the minds of many nonetheless.

With control restored, the mid-1980s saw the “Thatcher economic miracle”, as growth returned – though it was a painfully long 51 months that unemployment stayed above 3m. Her second term started the main privatisations that transformed the efficiency of British utilities. British Airways, British Petroleum, British Aerospace, British Gas, Rover Group, British Steel, British Telecom, Sealink ferries, Rolls-Royce and the regional water authorities – who can now imagine that these were once nationalised industries? Public spending was kept under remarkable control, still lower in real terms in 1990-1 than its 1984-5 peak. The unions were finally tamed in the miners’ strike of 1984-5, and have never seriously challenged a government’s political authority since.

All was not straightforward. Inflation returned late in her term, with recession following and unemployment rising back above 3m in the early 1990s. What seemed for so long a macroeconomic consensus in British politics has collapsed almost entirely since 2007, as high spending, high deficits, and lax inflation control have returned as mainstream policy.

But hers is the model of what can be done. In 1979 she said: “The Old Testament prophets did not say ‘Brothers I want a consensus’. They said:‘This is my faith, this is what I passionately believe. If you believe it too, then come with me.” We did.

Andrew Lilico is a fellow of the Institute of Economic Affairs and a columnist for ConservativeHome.