2. Economic Policy-Making under Thatcher
• During the 1980s the world economy became
increasingly interdependent and the openness
of the British economy made it more difficult to
operate an independent economic policy.
• It became impossible to operate an economic
policy running counter to the opinions of
international financial markets.
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4. Joining the European Monetary System
• Some economists and commentators argued
that the loss of control of a policy instrument,
the exchange rate, made a decision to join the
European Monetary System (EMS) unwise;
others said that international interdependence
made it impossible to run an independent
exchange rate policy in any case, and
membership of the EMS would bring security by
creating stable expectations, and generate
support from European Community
governments for sustaining a stable currency.
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5. Major shift in economic policy after 1979
• The Conservative election victory of May 1979
marked a major shift in economic policy. The
Thatcher government’s dominant aims were to
master inflation through control of the money
supply and to pull back the frontiers of the State
with an increasing emphasis on privatisation.
• These were pursued with great determination, but
often with more rhetoric than success, in
circumstances that included a second oil price shock
in 1979, an international slowdown and recession
and international economic recovery from 1984
onwards.
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6. With the election of the
Conservative Party in 1979
under the leadership of
Margaret Thatcher, a major
shift in economic policy took
place ending the post-war
policy of Keynesian economics
and ushering in full-blown
market forces. Everyone and
everything was given a price
tag and Britain became one
vast grocers shop. Thatcher’s
dad was a grocer.
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7. Britain’s economic growth was very slow 1979 - 84
• The decade 1979 – 89 can be divided into two
parts. In the first five years (1979 – 84), the
increase in total output was only 3.8% in the
United Kingdom but recovered over the next
five years (1984 – 89) to 20.4%.
• The comparable figures for the OECD countries
as a group (including the UK) are 10.5% (1979 –
84) and 18.8% (1984 – 89). Thus the UK recorded
less than half the growth in the rest of OECD in
1979 – 84 and slightly faster growth in 1984 – 89.
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8. Britain slower than others (1979 – 84); faster than
others (1984 – 89)
• To grow more slowly than other industrial countries
has been the usual experience in Britain since 1945.
What was unusual in 1979 – 84 was the very slow
growth in other countries; but Britain’s growth was
even slower – slower than any previous period since
the war.
• In 1984 – 89 Britain’s better performance was in
relation to a rate of growth in OECD countries than
was low by past standards. France and Germany,
which had experienced growth rates of 5 or 6%
annually in the 50s and 60s, averaged no more than
in the 80s than 2.1 and 1.9% respectively.
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9. From the mid-1980s Britons became shopaholics.
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10. Britain doing better than the continentals
• Britain’s performance from 1985 – 89 appeared to
augur well for the future. Growth at 3.8% annually
for five years was well above the rate across the
Channel. Even in the five years 1968 – 1973, the
nearest comparable period, growth was not fast.
• But there were grounds for caution since the high
growth rates were based upon an unsustainable
boom. The rate of expansion in 1984 – 89 was fed
on a lowering of unemployment by a million and an
increase in pressure on industrial capacity that sent
the balance of payments into enormous deficit and
pushed up the rate of inflation. By 1990 there was a
deep recession.
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12. High consumer spending
• Economic expansion was sustained by high
consumer spending. This had risen strongly in
1978 – 79 but in 1980 – 81 increased hardly at all.
From 1983, however, it rose to a more normal
level until in 1986 – 88 it was swept up into a
consumer boom on a scale never before
experienced – indeed in 1988 the increase in
consumer spending was more than the rise in
GDP.
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14. Labour had lost the ideological battle
• Labour governments in the 1970s (1974 – 79)
had to grapple with economic problems all at
once: inflation, public sector deficits, and
downward pressure on the exchange rate.
• Undoubtedly Labour lost the ideological battle
of the 1970s. Thatcher was able to capture the
Conservative Party leadership in 1975 in large
part by playing on the theme of decline, and by
linking that theme to contemporary economic
difficulties.
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15. Decline panic 1970s
• In her memoirs Thatcher wrote: ‘decline was the
starting point for the policies of the 80s: everything
we wished to do had to fit into the overall strategy
of reversing Britain’s decline, for without an end to
decline there was no hope of success for our other
objectives’.
• Declinism licensed many of Mrs Thatcher’s policy
approaches after 1979. The hostility to trade unions,
the desire to cut public spending, the privatisation
of nationalised industries all drew heavily on the
notion that Labour and Keynesian policies were to
blame.
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17. Thatcher: a product of declinism
• In an important sense, Mrs Thatcher’s capture of
the Tory leadership in 1975 and her policy
agenda of enterprise and markets were a
product of declinism in the 70s.
• By the late 1980s, and with the boom well under
way under the Chancellorship of Nigel Lawson
(the ‘Lawson boom’), the Conservatives were
arguing that decline was a thing of the past.
Britain’s relative growth performance improved
as that of other Western European countries,
most notably West Germany, worsened.
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19. Me and my mates, 1980s
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20. Fall in savings
• The high consumer spending of the Lawson
boom of the mid-1980s brought down the ratio
of savings to personal income from 8.2% in 1986
to 5.4% in 1988.
• The fall in the savings ratio – it had been 13.5%
in 1980 – had been one of the main forces
sustaining demand throughout the decade, but
by 1988 the enthusiasm of consumers for
getting into debt had overshot the mark and
was not a helpful development.
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21. No balance of payments problem
• For the whole of the 1980s until the end of the
decade there was no balance of payments problem
to impose itself on domestic policy. For that North
Sea oil was in part responsible.
• The output of North Sea oil reached its peak in 1985
– 86 and the downturn that followed coincided with
the return of a chronic external deficit.
• In addition persistent underemployment remained
which reduced the spending power of some
consumers below what would have been earned at
full employment, and hence limited the demand for
imports.
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23. A change of economic philosophy
• The new Conservative government which took
office in May 1979 was dominated by ministers with
a very different economic philosophy from that of
earlier governments. They were strongly against
state intervention in industry and wanted to abolish
state subsidies.
• They intended to cut public spending and reduce
taxation. They hoped to return an unspecified
amount of publicly owned industry to private
enterprise. Producers and consumers were to be left
as free as possible to conduct their own affairs.
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25. Full employment ended in the 1970s and has
never returned
• Full employment had ended in the 1970s when a
world in which it was politically unthinkable that
unemployment could remain above 600,000 had
given way to a world in which for years (the
1980s) unemployment remained at over twice
that level (i.e. at least 1.5 million).
• In the 1980s unemployment rose to at least five
times the highest level in the 1960s, and a level
about as high as was ever experienced in the
Great Depression of the 1930s, without any
marked political upset.
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27. Changes in the way unemployment was counted
made it difficult to gage the exact number.
• The basis of counting the numbers of
unemployed was changed repeatedly – always
in a downward direction – and eventually
related only to claimants of unemployment
benefit aged 18 or over.
• Therefore it was difficult to know the exact
numbers of unemployed people, but estimates
of up to 3.8 million have been made, and
compared with the official estimate of 3.1 million
for 1986.
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29. Contraction in manufacturing
• The steep rise in unemployment in the Thatcher
decade was almost entirely due to a contraction
in manufacturing employment.
• Employment in manufacturing had already
fallen from nearly 9 million in 1966 to less than 7
million in 1980. There was a continuous fall in
manufacturing employment until 1987. By 1990
nearly 2 million fewer workers were employed in
manufacturing than in 1980.
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31. Conservative priority: the control of inflation
• The rise in unemployment in the 1980s was the
outcome of policies designed to curb inflation.
Since the Conservative government was
determined not to embark yet again on an
incomes policy, and had little hope of carrying
the TUC with it if it had, it had to leave wages
and prices to market forces and rely on a
contraction in demand to keep prices down.
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33. The benefits of North Sea oil
• There is no doubt that North Sea oil contributed
to the very different outcome of the second oil
shock in 1979. It is estimated to have
contributed a net £6 billion in 1980 and £9
billion in 1981 compared with £3.8 billion in
1979.
• For ten years from 1977 to 1987 North Sea oil
freed Chancellors of the Exchequer from the
compulsions of a balance of payments deficit.
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34. The stars of ‘Dynasty’, the hit TV show of the 80s. Linda Evans
and Joan Collins strongly influenced ladies’ fashion.
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35. Different economic policy from previously
• The economic policy-makers of the new
Conservative government of 1979 regarded the
prime aim of macro-economic policy as the
maintenance of a stable economic environment,
with stability in the value of money enjoying top
priority.
• The level of employment on the other hand was regarded as a
matter of micro-economic policy since it was represented as
varying with the wage at which labour could be hired. If
workers insisted on ‘pricing themselves out of a job’ it was
not for the government to create more jobs at the cost of
inflation and so destabilize the economy.
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37. Macroeconomic policy, 1979 - 82
• The first phase of macroeconomic policy
was the attempt to apply a monetarist
strategy to bring down inflation.
Monetarist theory played a key role in the
rise of Thatcherism in the Conservative
party, and in the early years of the
Conservative government.
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39. Macroeconomic policy, 1979 - 82
• The Medium Term Financial Strategy (MTFS) in
1980 set out target growth ranges for the money
supply up to 1984. The theory was that decision-
makers will change their expectations of future
inflation once they become convinced that a
government will stick rigidly to a declining rate
of monetary growth, and this in turn will make it
possible to reduce inflation at a lower cost in
terms of rising unemployment.
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41. Inflation rising 1979 - 80
• The results of monetarism, the control of the
money supply, was a rising inflation rate.
Inflation was rising at the time of the 1979
general election, and it continued to rise during
1980 to 22%.
• OPEC oil price rises and the ending of the
Labour government’s incomes policies caused
inflation, but the major part of inflation was a
direct result of Conservative polices. However,
inflation fell to 4% per annum just prior to the
1983 general election.
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42. 1979 Budget of Geoffrey Howe
• Geoffrey Howe’s first budget as Chancellor took
place in June 1979 and its main feature was a
switch from direct to indirect inflation. Income
tax was lowered from 33% to 30%, the top rate
of income tax was cut from 83 to 60%, and
personal tax allowances were improved in
various ways.
• On the other hand, VAT (indirect taxation) was
raised to 15%. Public spending was cut by £1.5
billion.
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43. Geoffrey Howe, Chancellor of the Exchequer 1979 –
83. Reducing inflation was the prime objective.
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44. The return of mass unemployment
• During 1980 – 81 unemployment nearly doubled.
The collapse in employment and industrial
production was similar to the onset of the Great
Depression of the 1920s.
• Monetary policy played an important role in creating
the recession of 1980 to 1982, but it did not operate by
means of a reduction in the money supply, but rather via
the exchange rate. In 1979 Geoffrey Howe attempted to
control the money supply by rapidly driving up interest
rates.
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45. Interest rates
• The idea is that since interest rates are the price for
borrowing money, increases in base rates tend to
choke off the demand for credit, which is an
important component of broad money.
• Thus manipulation of interest rates is the main
mechanism for influencing the money supply.
• However, high interest rates also attract foreign
currency or ‘hot money’ to Britain seeking a higher
rate of return than elsewhere, which in turn drives
up the value of sterling.
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46. ‘Brideshead Revisited’, a hit TV show of 1981 –
82, based on the novel by Evelyn Waugh. The
‘Downton Abbey’ of the early 1980s.
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47. The value of sterling became too high, 1979 - 80
• High interest rates in 1980 served to increase the
already high value of sterling, and this increased
the price of exports and reduced the price of
imports.
• This damaged exports and stimulated imports,
and this increased unemployment. The high
interest rates also choked off industrial
investment, creating rapid increases in
unemployment in the capital goods and
construction industries.
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48. Large cuts in public sector investment
• Another thing that made the recession worse
were large cuts in public sector investment
designed to meet target reductions in public
spending.
• Such cuts are ultimately short-sighted because
they reduce the efficiency of essential
infrastructure, and investment in human capital
which is necessary to sustain long-run growth.
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49. In 1981 Duran Duran started their chart run in
Britain and the United States becoming one of the
most successful pop bands of the Eighties.
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50. Monetarism to fight inflation
• Overall the aim of the ‘monetarist experiment’ was
to fight inflation and establish ‘credibility’ among
bargainers that inflationary wage claims would not
be underwritten by the government.
• Gross Domestic Product fell sharply in 1980 in comparison
with the previous year and did not reach 1979 levels until
1983, four years into the Thatcher government.
• Gross Investment in machinery in constant prices, one of the
prime determinants of long-run economic growth, did not
attain 1979 levels until 1988.
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51. Output per person increased
• Output per person employed, the key measure of
productivity, responded more rapidly and exceeded pre-
Thatcher levels by 1982. But that reflected a rapid rise in
unemployment as much as a rise in competitiveness.
• The Public Sector Borrowing Requirement declined very
slowly until well into the second term of the Thatcher
government, at which point it declined rapidly.
• This rapid decline after 1985 coincided with a rise of the
balance of payments deficit.
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52. In 1983 David Bowie was top of the charts with
‘Let’s Dance’ the single, album and world tour.
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53. Weaknesses of the British economy
1) Reliance on smoke-stack industries
2) Overmanning
3) Poor productivity
4) Weak management
5) Uncooperative trade unions
6) The world was in recession in 1979 – 81 following the
second OPEC oil price rises of 1979 and the above
problems of the British economy exposed the country
to the full effects of the international economic
downturn. Unemployment rose steadily to over 3
million.
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54. In 1983 Michael Jackson’s ‘Thriller’ album was the
biggest-selling in the United States and worldwide.
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55. 1981: the return of mass unemployment
• For the first time since the Great Depression of the
1930s, mass unemployment returned to Britain in
1980 – 81.
• In the spring of 1981, with unemployment at 2.7
million and still rising and output down 5.5% in two
years, there was enormous pressure for the Budget
to reduce the squeeze on spending and taxes.
• Most in the Treasury and even supposed
monetarists like the Chancellor, Geoffrey Howe,
favoured a little relaxation.
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56. “The Lady’s Not For Turning”
• But Thatcher was convinced by Professor Alan
Walters, her personal economic adviser, to stick
with the programme of reducing public
spending and controlling inflation even at the
cost of rising unemployment.
• Walters and Thatcher felt it necessary to
convince the markets that the government was
indeed determined to reduce inflation no matter
what.
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57. ‘Economics is the method; the object is to change the
soul.’ (Margaret Thatcher, The Times, 1981)
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58. ‘Economics is the method; the object is to change
the soul.’ (Margaret Thatcher, The Times, 1981)
• Margaret Thatcher wished to reverse the ‘orderly
management of decline’ that she perceived had
taken hold of Britain in the Seventies.
• The decline narrative stated that Britain’s
withdrawal from empire after 1945 and its
decline as a global economic superpower, and
its transition to a mass democracy and modern
welfare state had caused major problems.
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59. ‘Economics is the method; the object is
to change the soul.’ (Margaret Thatcher,
The Times, 1981)
• Mrs Thatcher was a devout Christian and in 1979 Britain
elected its most religious leader since Gladstone.
Christianity maintained a lingering influence upon
Britain in the 20th century.
• All three parties – Liberal, Conservative and Labour –
could claim a Christian ethos. The post-war settlement,
which massively expanded the responsibilities of the
state in the areas of education, health, welfare and
housing was part of a moral consensus forged out of the
shared hardships of the Depression and the War.
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60. Christianity retained a lingering influence in post-war
Britain.
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61. Thatcher was the most religious prime
minister since Gladstone.
• In education, broadcasting, law and in national
ceremonies, Britain remained identifiably Christian.
Christianity still mattered and for Margaret Thatcher it
mattered a great deal.
• Thatcher was the daughter of a Methodist lay-preacher
and therefore she had a clear understanding of the
religious basis of her political values.
• The conviction politics of the Iron Lady satisfied a thirst
for certainty in an age of profound doubt and religious
decline.
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62. Thatcher: a product of provincial inter-war England
• Margaret Thatcher was very much a product of
provincial inter-war England. But, crucially, she escaped
and then benefited from the opportunities that were
opening up for women from the 1950s onwards.
• Thatcher experienced Britain’s imperial decline and
accepted the new American empire of the mid to late
20th century.
• The two defining moments that shaped the politicians of
her generation – the Great Depression of the 1930s and
the Second World War – she experienced from a
distance.
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63. Unlike Thatcher, Edward Heath experienced directly
the Depression and the Second World War. Therefore
his political outlook was fundamentally different from
that of Thatcher.
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64. Monetarism dies, 1985
• In 1985, a sterling crisis began to unfold, and the
Chancellor, Nigel Lawson, reacted by raising
interest rates to defend the value of the
currency.
• The policy dilemma Lawson faced was that a
rapid devaluation of the currency would
accelerate inflation by driving up the cost of
imports, whereas a rapid rise in interest rates
would undermine investment and ultimately
slow economic growth.
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65. Nigel Lawson, Chancellor of the Exchequer
1983 – 89, faced a sterling crisis in 1984.
Eventually monetarism was abandoned in
October 1985 by Lawson.
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66. To keep interest rates as low as possible
The essential aim of policy during this period was to keep
interest rates as low as possible consistent with a slow
devaluation of the currency.
But this proved difficult to achieve; when the pound dropped
to $1.12 in January 1985 interest rates were raised by no less
than 4.5% in the space of two weeks.
In a TV interview Thatcher was asked at this time if
she thought the economy had reached the natural
rate of unemployment, and she dismissed this key
concept of monetarist theory by saying it was not a
doctrine to which she subscribed.
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67. Monetarism died in 1985
• Thus monetarism as an ideological underpinning for
Conservative economic strategy was dead, following the TV
interview with the Prime Minister in 1985.
• Pragmatism had arrived and this enabled the Chancellor,
Nigel Lawson, to begin to stimulate growth. But essentially
the policy had returned to the traditional stop-go strategy,
characteristic of economic policy for most of the post-war
years.
• This involved the government stimulating the economy in
order to produce growth and reduce unemployment, and
following this with periodic deflations designed to deal with
the balance of payments and currency problems which
resulted from the initial stimulus.
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68. Nigel Lawson, with his wife, on a Budget Day in the
1980s
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69. Creating a pre-election boom, 1986
• With the economy in growth, conditions were
favourable for creating a pre-election boom in
1986. The Chancellor, Nigel Lawson, had
considerable political space within which to
operate.
The balance of payments surplus derived from
North Sea Oil revenues made it possible to
stimulate the economy without risking a run on
the pound.
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70. North Sea oil gave Britain favourable
economic conditions and a balance of
payments surplus in the 1980s
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71. Unemployment: the most urgent problem
• In March 1986 no less than 81% of the
electorate thought that unemployment
was the most urgent problem facing the
government.
• Thus a stimulus to the economy designed to
bring down unemployment which would have
only a small impact on inflation in the short run
was an attractive political option.
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74. Rapid rise in the money supply
• From January 1986 the government presided
over a rapid rise in the money supply, which was
well in excess of that required to support
economic growth.
• The fiscal stimulus to the economy in the period
prior to the election (1986 – 87) was defended
on the grounds that the Public Sector Borrowing
Requirement was at a historic low level in 1986
and actually went into surplus by 1987.
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