Mrs Thatcher’s Lasting Legacy

Four years ago, on the 30th anniversary of her taking office, one of her closest colleagues explained that her great achievements still resonate today

Nigel Lawson

It is hard, even for those old enough to remember, to recall the nature of Britain when the Conservatives led by Margaret Thatcher came to power 30 years ago, and to recollect just how bad were the circumstances and how great the challenges.

To put it into perspective, it is generally agreed that the government to be formed after next year’s general election (more likely than not another Conservative government) will enjoy a singularly unattractive inheritance. It will be obliged to implement and sustain some highly unpopular policies. But the problems of 2010, although considerable, pale into insignificance compared with those of 1979.

It is true that we are in the midst of the worst world recession since the war. But although lessons need to be learned about the financial fragility that has made it as bad as it is, recessions, however difficult and unpleasant, pass. And the fact that it is a global phenomenon, while exacerbating the economic problem, saves us from a lack of national self-confidence and the political difficulties that stem from this.

It is true, too, that Britain’s public finances are in a particularly disastrous state, requiring a sustained period of public sector belt-tightening, with some tough decisions to be taken, the sooner the better. But abstracting from the cyclical deterioration caused by the recession, the underlying structural deficit today is not all that much worse than that we inherited at the peak of the (admittedly anaemic) cycle in 1979.

In every other respect, the situation in 1979 was far worse. Inflation was in double figures and rising. Everything else appeared to be in long-term decline. With the UK widely regarded as the sick man of Europe, even the normally restrained Bank of England (in its Bulletin the previous year) had warned that, “Now condemned to very slow growth, we might later have to accept, if present trends continue, declines in real living standards.”

But the problem was far more than simply economic. An unholy mixture of trade union power (beer and sandwiches in Downing Street) and trade union anarchy (the winter of discontent of 1978-79, with bodies unburied, rubbish on the streets and hospitals in chaos) had once again raised the question, first asked during the 1974 miners’ strike, of whether a chronically strike-prone Britain had become ungovernable. The country was viewed with pity abroad and mired in an all-pervasive defeatism at home. It was a dismal and daunting time.

This was the national crisis from which sprang, in the words of Andrew Marr (no closet Tory), in his History of Modern Britain, “the most extraordinary and nation-changing premiership of modern British history”. What was the nature of that premiership? What were its achievements? And has the world changed so much over the past 30 years that its values and its analysis are no longer relevant?

“Thatcherism” can probably best be described as a constellation of values and beliefs, a mixture of the rule of law, sound money, free markets, financial discipline, firm control of public spending, lower tax rates, patriotism or nationalism (the distinction is largely in the eye of the beholder), Victorian values (of the Samuel Smiles self-help variety), privatisation and a dash of populism. These were held not only by Margaret Thatcher herself, the degree of warmth depending on the extent to which she saw them as a moral rather than simply as an economic (or political) imperative, but also by her closest colleagues.

But the contribution of her strong and decisive leadership, particularly in the difficult early years, was vital. What we were clearly not was a bunch of laisser-faire (or for that matter, monetarist) ideologues. It was much more complex than that, although I make no apology for the fact that we did have firm ideas and a clear sense of direction.

Perhaps more important, in retrospect, was a willingness to extend the bounds of the politically possible. There was, for example, widespread acceptance that inflation was a major economic and social evil, that all attempts – by governments of both parties – to contain it by incomes policies had not only failed but brought significant political and economic disadvantages of other kinds and that the problem was getting worse, as inflationary expectations became embedded. But it was equally widely assumed that the alternative approach of a fierce monetary squeeze would bring levels of transitional unemployment that made it politically impossible. In the event, transitional unemployment rose rather more than we had expected, and lasted slightly longer. But it did not make the policy, which was pursued to a successful conclusion, politically impossible.

Again, there was general agreement that nationalisation of a large and important sector of the economy had failed, having brought neither business efficiency nor industrial peace (as its original architects had hoped, by ending conflict between workers and their capitalist bosses) and that this was a significant part of the explanation for Britain’s poor economic performance. But the obvious remedy of recognising this and embarking on a policy of denationalisation – or privatisation, as it came to be known – was assumed to be politically impossible: a rupture of the post-war settlement which the people did not desire and the trade unions would not permit. And, of course, it had never been done – neither in the UK nor anywhere else.

The complete abolition, within months of the Thatcher government taking office, of all controls on overseas capital flows, a liberalisation of profound consequence, also deserves a mention here. Exchange controls had been imposed on the outbreak of war in 1939 as an emergency measure and had been rigorously maintained ever since. Abolition, castigated at the time by Denis Healey, Labour’s last Chancellor, as “reckless, precipitate and doctrinaire” took the public and the markets completely by surprise. It is now taken totally for granted – as much as the existence of rigid controls was then.

To return to privatisation, it is, incidentally, a complete myth that this, the Thatcher government’s great gift to the world, was something we stumbled upon by happy accident when looking for ways to raise money to fund the massive public deficit we had inherited. The facts and the chronology are clear. In a lecture I gave in 1980, before any privatisations had actually taken place, in which I sought to explain at some length what the new Conservative government was about, I observed: “We have also embarked on a major programme of privatisation of the state-owned industries…Throughout this exercise, we are anxious to see the widest possible spread of private shareholding.”

Geoffrey Howe had made a similar point in his first, 1979, Budget. Privatisation was seen from the beginning not only as a means of exposing the sickest part of the national economy to the healthy disciplines of the market economy, but as offering millions of ordinary people a direct personal stake in the market economy. Despite Harold Macmillan’s entertaining jibe about selling the family silver, raising the wind was merely a bonus, although a useful one.

The demands of the nationalised industries were also, of course, directly responsible for a considerable part of the serious deterioration of the public finances. This in turn was a major reason why the previous Labour government had felt obliged, cap in hand, as it was said at the time, to seek a large loan from the International Monetary Fund, the only industrialised nation ever to do so. But while the immediate crisis that had led to this national humiliation had passed, the problem of excessive deficit in the public finances had not. At the same time, there was widespread agreement that the level of taxation was too high. It was clear that the only way of squaring the circle was a prolonged period of downward pressure on government spending. However, this, too, was generally seen as politically impossible (at least in the absence of an IMF diktat): the unions, in particular, whose greatest strength was in the public sector, would not tolerate it. Yet it was achieved; and at the end of the day tax rates were lower and the public finances were in surplus.

Again, could the problem of excessive trade union power, leading to the seemingly all-pervasive trade union veto over each and every policy needed to restore the nation to economic health (and, incidentally, if at first sight paradoxically, industrial peace), be confronted head-on? Both the previous governments, the Wilson/Callaghan Labour government and the Heath Conservative government, had attempted to do this, and each had failed. So this, too, although widely desired, was thought by most of the opinion-forming classes to have become politically impossible, not least because it was thought impossible for any government to withstand successfully any major and prolonged strike. Yet it was done.

How was it that the Thatcher government was able to prosecute, to a pretty successful conclusion, policies in all the key areas which had previously been considered, insofar as they had been considered at all (and most of them had been), to be politically impossible?

A number of conditions came together. The people recognised that the country was in a very bad way, and that unpopular policies might well be necessary. They had a right to expect us to explain what we were seeking to do, and why; which we did. But we did not seek their assent in advance – nor, rightly, did they expect us to. We would be judged by results.

In this, we were assisted by the nature of our democracy. Democracy is nowadays a greatly over-hyped blessing, particularly by Americans, who have no pre-democratic history to provide a perspective. It is clearly less important than freedom, the rule of law and constitutional government, which ideally it should entrench, but may well not do so.

Essentially, it is the means by which the people are provided, at regular intervals, with the opportunity peacefully and constitutionally to remove a government in which they have lost confidence. But between elections it is necessary for strong government, which is frequently required, and certainly was during the 1980s, that it has a secure parliamentary majority. That is what our electoral system (unlike proportional representation) normally assures.

It is also, incidentally, why a sensible opposition party should be more concerned with re-election than with election to office. Election will occur as and when the people lose confidence in the incumbent government. Re-election depends on results.

We were assisted, too, by the fact that the opinion-forming classes recognised that the thinking that animated the post-war consensus, the Butskellite settlement, had reached the end of the road. This was in particular true of a demoralised Whitehall. A properly sceptical mandarinate may have had little faith in the policies we proposed to implement but they had nothing better to offer and were in no position to stand in the way of a government which had done its homework in opposition and knew what it wished to do. Nor, in the Treasury, did they have any desire to do so.

And, of course, there was Margaret Thatcher’s gut hostility to the very notion of consensus – a most unusual phenomenon in British politics. Although I had considerable sympathy with this, since consensus implies a comfortable absence of fundamental challenge and debate, and all too frequently leads to sloppy thinking and false conclusions, my own hope was not only that we should challenge the failed consensus of the post-war past, but that we should establish a new and more productive one. This was not least because I was reluctant to envisage all that we had worked so hard to do being undone. A reforming government understandably wishes its reforms to endure. I do not favour permanent revolution. But there is no doubt that her contempt for consensus was at that time both important and fully justified.

The watershed event of the first Thatcher government was, however, entirely outside the field of economic policy: the recovery of the Falkland Islands from the Argentine junta after the short war of 1982. The decision to undertake this was Margaret Thatcher’s greatest gamble, all the more remarkable because she was, at that time, although decisive, notably cautious (her careless phase, which led her into the misbegotten poll tax which more than anything else caused her downfall at the hands of her own party, came much later). Defeat would have been political disaster.

It is, I believe, a myth, albeit widely held, that it was the Falklands victory which won her the 1983 election and a second term. Even before the Falklands war, the polls were indicating a recovery in the government’s fortunes, as the doom-laden predictions of the commentariat and most academic economists following the Budget of 1981 were proved to be wholly unfounded, as the economy was clearly recovering (although unemployment was still rising) and as inflation was equally clearly falling. Moreover, the Labour opposition had been gravely weakened by the defection of so many of its ablest people to the new Social Democratic Party in 1981 and was still in a state of civil war.

But although a second Thatcher term would almost certainly have been secured even if the Falklands had never been lost in the first place, the success was what made the 1983 election result a landslide. This was not for the most part because of any jingo factor. It was because it was all of a piece with the Thatcherite approach across the board: the same pushing at the bounds of the politically possible, the same resolution in the face of the most daunting challenges and the same reluctance to compromise with recognised evils. Manifest success in one exceptionally high-profile endeavour created confidence that the same approach would bring success in the much more complex domestic battles in which the government was engaged. Moreover, it at long last exorcised the ghost of Suez, which had remained a potent element, along with recurrent economic crises and the ungovernability worry, in the depressing sense of long-term national decline.

If the Falklands war was the watershed event of the first Thatcher government, that of the second Thatcher government was the successful conclusion of the year-long miners’ strike. Here again myths have grown up, not least that Margaret Thatcher came into office with the undeclared but implacable aim of smashing the National Union of Mineworkers (NUM). Nothing could be further from the truth. When she appointed me Energy Secretary in 1981, the only instruction she gave me was, “Nigel, we mustn’t have a coal strike” – and she meant it. Like the rest of the Heath government, she had been deeply scarred by the half-truth that it had been brought down by the NUM and she did not wish that to happen to her.

However, when the militant Marxist Arthur Scargill was elected NUM president a few months later, that is precisely what he intended to try to do, touring all the mining areas of the country seeking support for a strike. It was clear to me that, unless we were to surrender to his inordinate demands (which were, of course, intended to be unacceptable), a strike was sadly inevitable and the only practical course was to prepare for it by making sure that the power stations had such vast stocks of coal that even the most prolonged strike would not cause the lights to go out.

So it turned out. Those most pleased by the outcome were probably the moderates in the trade union movement and the Labour Party, for whom Scargill was anathema. This time, the polls showed no benefit at all to the Thatcher government. But it was important nonetheless. Not just because a victory for Scargill would have been highly damaging, but because, just as the Falklands victory had exorcised the ghost of Suez, so the miners’ march back to work in 1985 had exorcised the ghost of the fall of the Heath government in 1974. The threat that militant trade unionism could drive a democratically elected government from office had at long last ended.

These were the great achievements of the Thatcher years. The first duty of the state is, of course, to preserve the security, both external and internal, of its citizens: the promotion of prosperity comes second. But so far as external security is concerned, the successful ending of the Cold War and the dissolution of the Soviet Union was primarily the achievement of Reagan’s United States, and the supporting role played by Thatcher’s Britain, although not irrelevant, was minor – probably less important than that of the Polish Pope. And the threat to internal security from Islamic fanaticism had not yet emerged.Social problems did, of course, exist: they always do. But in a relatively wealthy society, and one which was getting richer, these were increasingly, in essence, problems of a degree of moral breakdown, something that governments are not well placed to address, and can make fools of themselves (if not worse) if they try. Few Prime Ministers have had a keener sense of the moral dimension than Margaret Thatcher. But she was sufficiently clear-sighted to direct her energies, and those of her government, to those problems which public policy can solve, and which only public policy can solve, rather than those which it cannot.

And in any event the current severe recession has reminded anyone who may have forgotten of the central importance of getting economic policy, in all its many aspects, broadly right. The revival of simple-minded neo-Keynesianism, which, for reasons that should be well understood, has never worked in the past, will soon pass. A more fundamental question is whether economic and financial deregulation, one of the central pillars of the Thatcher government’s economic policy, went too far – and indeed whether free-market capitalism has had its day. To declare oneself for or against regulation is as absurd as to declare oneself for or against law. It depends on what the regulations are and what they are about. Here again there has been a great deal of myth-making. The Thatcher government inherited a grotesquely over-regulated economy, covering pay, prices, dividends, the location of industry, pretty well every aspect of the labour market and much else besides. All this was swept aside, to great benefit.

But the Financial Services Act of 1986, however flawed it may have proved to be (although the greatest failure has been the way in which it has been implemented under the present government), was an act of regulation, not deregulation. It replaced a patchy and informal system which had been rendered obsolete by the rapid development of the financial services industry in an era of increasing globalisation and the internationalisation of the City of London (to the great benefit of the British economy) following the so-called “Big Bang” reforms of the London stock exchange. And I myself was sufficiently concerned at the inadequacy of the vitally important prudential regulation of the banks that, in order to strengthen it, I introduced the Banking Act of 1987 (to replace the previous Labour government’s defective Banking Act of 1979), which inter alia created a high-powered Board of Banking Supervision. The fact that this was subsequently abolished by Gordon Brown, to be replaced by a largely dysfunctional system, can scarcely be laid at the door of the Thatcher government.

Needless to say, since the days of that government, globalisation has continued apace and with it the (sometimes healthy, but sometimes unhealthy) development of the banking and financial services industry; and in the light of the current banking crisis there are important lessons to be learned and well-judged reforms to be introduced, both in the UK and around the world, about which I have written elsewhere.

But those who write gleefully of the failure of free-market capitalism, are unable to escape from two fundamental realities. The first is that the greatest single economic event of the past 25 years has been the unprecedented economic development and extraordinary success of much of the developing world – notably, but by no means exclusively, China. This has been made possible by the move towards a global market economy and by the current global financial system. And the second inescapable reality is that, for all the present system’s undoubted flaws, every other method of economic organisation has proved to be infinitely worse.

So the history of the Thatcher government is highly unlikely to be just that, the history of a long-gone era. Indeed, since economic and political history are always better guides to public policy than economic and political theory, the story of that remarkable decade, with its great (although by no means unalloyed) successes in the face of great challenges, has important lessons for today.

Margaret Thatcher and Nigel Lawson: They transformed a grossly over-regulated economy into one that was imitated around the world (PA)

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