The First Thatcher Government, 1979-1983

Contemporary Conservatism And Economic Change

Martin Holmes

• Publisher: Routledge
• Year: 2019
• eBook ISBN: 9781000301441
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: International Relations
• Index: Politics & International Relations

Originally published in 1985. This book has two aims: first, to analyse the change in economic policy formation between 1979 and 1983 and the way in which policy sources were translated into reality, and second, to analyse how the first Thatcher government has changed the nature of contemporary Conservatism. These two themes overlap so consistently

Part I
The Thatcher Government and the Conservative Context

1 The Government's Objectives

In one material respect the contrast between now and the pre-war years is markedly unfavourable. The last budgets which showed no inflationary trend were those of the late 50s, when Mr Selwyn Lloyd and Mr Heathcoat-Amory were Chancellors of the Exchequer. Ever since then, although some years have been better than others, we have signally failed to stabilize the value of money. The result has been that it has become more and more difficult for the individual or for a business to plan ahead with any confidence and the national purpose and performance has faltered.

Lord Home of the Hersel 1978

Legacy of Post-War Conservatism

Few governments that come to power espousing radical political change find they are able to cast off entirely their past policies and image. The Conservative government that began its term on 4 May 1979 was no exception. However, led by Margaret Thatcher, it was determined not to repeat the mistakes of previous Conservative governments—notably those of the 1970-74 Heath government—and was equally resolute in the presentation of its Conservatism as a radical departure from the pre-Thatcher age. The 5.2 per cent national swing which projected Mrs Thatcher into Downing Street with an overall parliamentary majority of forty-three heralded large changes in policy direction, not only away from the outgoing Callaghan administration but also from the post-war consensus—the Butskellite, Conservative middle way so favoured by Mrs Thatcher's immediate party leader predecessors.

Of all the major policy changes of the first Thatcher administration, which this book analyses, the change in the nature of the Conservative party itself is one of the most striking. Such a judgement is made with hindsight to be sure. Indeed, from the standpoint of May 1979 there were many in the Conservative party—and elsewhere in British politics—who expected that Mrs Thatcher's administration would be sidetracked into pragmatic U-turns as soon as the realities of government made themselves apparent. It is arguable that, despite well-publicised policy changes between February 1975, when Mrs Thatcher became leader, and May 1979 the new Prime Minister still presided over a government made up of stalwarts of the former Heath leadership. Moreover, the pace of change between 1975 and 1979 on specific policy commitments belied the initial difficulty the Thatcher leadership faced in maintaining party unity as well as in overhauling policy stances, some of which (e.g. incomes policy) stretched back to the late 1950s. As Lord Thorneycroft later recalled:²

During the 1975-79 period Mrs Thatcher sought to form the outlines of policy and the key changes were to get a grip of the finances, a return to free collective bargaining but only with tough union legislation after the abuses of the last 10 years. She didn't make any sensational changes in the Shadow Cabinet and she had to hold the party together in a period when she couldn't have any power to do anything anyway.

What was clear in May 1979 was not the inviolate strength of the Thatcher leadership, nor its ability to resist U-turns, but its intentions to redefine in government much that the Conservative party should be seeking to achieve. Essentially, the approach to office—declared in the 1977 policy document The Right Approach and the 1979 General Election campaign—was based on the critique of post-war Conservatism advanced by Sir Keith Joseph in the 1974-75 period when the Heath leadership was under challenge from the right. Joseph, Thatcher, John Biffen, John Nott and others on the economic right of the party had argued that the Conservative party had not reversed the advance of socialism but had merely halted it temporarily whilst in office. The 'socialist ratchet' critique saw middle-way Butskellite Conservatism as participating in a process in which Britain at successive stages descended into an East-European-style economy and society, where political freedom along with economic free enterprise would ultimately fall into dissolution.

Nor were previous Conservative governments viewed as entirely passive in this process. The pursuit of Keynesian economics, vainly aiming for full employment, was identified with the Heath government's massive increase in state spending, strict controls on prices, dividends, rents, profits and incomes and increasing government interference in industry. According to the Thatcher leadership, a return to free enterprise, sound money and the rolling back of the state was required. Fitting into the critique was the then new doctrine of monetarism advocated by Professors Hayek and Friedman, a doctrine which was naturally attractive to those disillusioned with the economic failures—and, for the Conservatives, electoral failures—of Keynesian political economy. To the Thatcher leadership the economic changes envisaged in Conservative policy were similarly matched by political changes to reverse the trend of the 1960s and the Heath leadership whereby between 1964 and 1974 Labour had won four out of five general elections. Thus, to restore the Conservatives' role, as they saw it, as the natural party of government was part of Heath's legacy to Thatcher.³ The election result on 4 May 1979 meant that this task, at least, was well under way.⁴

In short, attention was focused on the new Thatcher government both in terms of its actual performance in trying to halt Britain's economic decline and in terms of the attempt to radically change the nature of Conservatism, not only for Conservatives themselves but also for the mass of essentially apolitical electors who would have to endorse Thatcher's performance at the polls. Arguably, the task of overturning Conservative post-war Keynesian middle-way orthodoxy was a long-term one. As the new party leader in 1975, Mrs Thatcher lacked the authority for an instant purge of the Heath supporters whom she wished to carry with her rather than alienate. Nevertheless, the ideological ferment of the 1975-79 period polarised opinion in Parliament and the party leadership in an inescapable way. Many on the left of the party openly repudiated 'monetarism' and re-affirmed their support for Heath-style policies. Mr Heath's extremely frosty personal relations with the new leader—constantly highlighted by the Press—added to the ideological conflict.⁵ Discussions about the nature of 'true' Conservatism were never in short supply. As one Cabinet minister recalled, 'an enormous amount of rethinking of ideas—and restating of old truths—occurred in opposition. It was surprising how many academics in 1979 came out in support of the Conservatives. Mrs Thatcher liked the intellectual discussion—ideas are what interest her—that was developing from opposition to office'.⁶

Mrs Thatcher's attack on the Heath legacy, and the overall post-war leadership, even though moving by stealth before May 1979, represented another stage in the evolution of the Conservative party.⁷ The Thatcher revolution within the party was not the first. The party of the 'squirearchy', the gentry, the Church of England, the industrial interest, the Empire, appeasement, Churchillian defiance, had become after 1945 the party of Keynesian consensus in order to suit a modern mass democracy unwilling to tolerate unemployment and social deprivation. At first in the 1950s the middle-way approach seemed to work. Labour was in disarray, and with public spending largely under control, the excesses of Keynesian demand management were avoided. Everyone seemed capable of living with 'creeping' inflation. The Joseph-Thatcher critique, while less convincing on the subject of an East-European-style socialist ratchet, was accurate in pinpointing Keynesian economics as a long-term source of Conservative decline. The Conservatives were suffering more from the Keynesian ratchet than the socialist ratchet. Evidence from the post-war period as a whole shows that at each notch of the Keynesian ratchet Labour, not the Conservatives, benefited in electoral terms and that traditional Conservative voters found themselves disillusioned with a Conservative approach to inflation, taxation and public expenditure which was scarcely different from that of the (ruling) Labour party, ironically, and significantly, the Conservatives' only electoral success in the Wilson era came in 1970 when they offered a distinctly right-wing approach. Ian Gilmour is justified in arguing that there was not a sharp move to the left between 1951 and 1974, but he is less convincing in his denial that Conservative governments themselves moved steadily left. The leftward movement of the Heath government in its last two years of office was a culmination of the leftward-leaning 'hybrid Keynesianism', as Gilmour describes it, not an exemplification of the middle way.⁸

Central to Thatcher's attack on the post-war Conservative legacy was the issue of inflation. Mrs Thatcher was mindful that it was the Heath government that had lost control of inflation and that middle-class voters with savings were more likely to prefer a sound money policy than an expansionary 'reflationary' one. Inflation control was a major tenet in the Thatcher reform of economic policy, and the failed and discredited statutory incomes policy of the Heath period was jettisoned. Monetary controls and public spending discipline were regarded as prerequisites for the control of inflation rather than artificial, bureaucratic restraints such as pay norms, targets and relativities commissions.⁹ Relations with the unions were another legacy specifically from the Heath period, with its bitter memories of two defeats at the hands of the miners, the second of which led to the ill-fated February 1974 election debacle. Here the Thatcher approach showed all the signs of pragmatism, which according to the Conservative left was absent from the monetarist right-wing approach. A Heath-style comprehensive Industrial Relations Act was ruled out. Free collective bargaining—denied to the unions under the four stages of compulsory incomes policy under the Wilson/Callaghan government—was not regarded as economically damaging. Moreover, Shadow Employment Secretary Jim Prior was known to favour a softly, softly line over legislation to reform abuses in trade union law; Mrs Thatcher made no effort to remove him from such a crucial portfolio until 1981, two years after the election of her government. In the end it was the unions themselves who came to the Conservatives' aid by their highly unpopular industrial action of the 1978-79 Winter of Discontent, which helped to electorally undermine the Callaghan government and to validate Conservative arguments about specific reform of trade union law.¹⁰ Nevertheless, in May 1979 the key question for many Conservatives was whether the new Thatcher government could escape from the legacy of confrontation inherited from the Heath period. Indeed, one of the most common misunderstandings of the Thatcher policy changes were that because they were 'right wing' or 'monetarist' they would inevitably lead to industrial conflict with Britain's allegedly allpowerful trade union movement.

Much of Thatcher's legacy from previous leaderships was philosophical in terms of the social obligations of Conservative governments. Consequently, the ideological polarisation that occurred between 1975 and 1979 took the form of restating the objectives of Conservatism as much as the policy means to carry them out. One former Conservative minister recalled that 'the policies evolving inside the party since 1964 were widely believed to have been adopted by Heath in the late 1960s. But Heath's lurch into statutory incomes policy reversed assumptions. Mrs Thatcher personally was on the side of what Heath didn't do and when she became leader in 1975 it was as the antithesis to Heath'.¹¹ When Mrs Thatcher came to office in 1979 the emphasis had switched away from accepting welfarism as a policy objective and towards individual self-reliance and thrift. The private sector was stressed as beneficial and the public sector subject to scrutiny as to the desirability of its component parts. The notion that the size of the public sector depended not on political decisions to expand it but on the private sector's ability to sustain it,¹² had gained ground in the late 1970s and the Thatcher leadership was attracted to such an analysis. Similarly, although the Thatcher approach to the Health Service and the social welfare system was to maintain state provision, this was—in theory at least—regarded as less significant than before as a hallmark of Conservative rule. It was only later on in 1982 that the problem with 'demand led' welfare spending occasioned an actual policy reappraisal of the state's detailed financial commitments.

As with the thinking about the social services, Opposition deliberations before 1979 on public spending and taxation also usually related to a broader philosophical approach as to what Conservative governments should try to do rather than to policy panaceas. (It can be argued that this is a sensible way to conduct policy reappraisals in Opposition.) Again, the legacy of high public spending under Heath was central to the Thatcher critique and emphasis was placed on the reduction of public spending both as an aim in itself and also to facilitate the tax cuts which had strongly featured in the Conservatives' 1979 election campaigning.

In summary, Mrs Thatcher, on entering Downing Street on 4 May 1979, did have a radical approach to economic policy compared to that of post-war Conservatism; she was determined not to be caught out by U-turns and she was prepared to shift contemporary Conservatism away from Keynesian Butskellism, as much as the 1950s One Nation Group had been determined to shift Conservatism away from its 1930s connotations. However, her position to achieve such changes was not initially impregnable. The senior personnel of the Heath leadership had essentially survived intact. The Conservative left wing was predicting, and hoping for, a more pragmatic policy to emerge. The general expectations that her government, unlike most post-war governments, would stick to its economic policy guns were low.

Legacy of the Post-War Economy

Like all governments in recent British politics, the Thatcher government inherited many problems from the previous administration. In Conservative election propaganda, the 1974-79 Labour government had bequeathed an appalling economic situation; the truth was that the Wilson/Callaghan government's record was a mixed one¹³ and that many of the problems passed down to Mrs Thatcher stretched back over several governments. Arguably, the whole legacy of Keynesian post-war political economy was an underlying cause of many of the immediate economic and industrial difficulties which were obvious in May 1979. As Sir Walter Salomon has put it, with his own historical perspective:

My own experience in pre-war Germany enabled me in later years to see clearly the fallacies of post-war Keynesian policy which pretended to cure the unemployment resulting from inefficient production by 'creating' money through budget deficits (so-called 'borrowing requirements') that were all the more dangerous for giving a temporary illusion of prosperity. The fatal appeal of Keynes' theory was that it presented politicians with a respectable excuse for their natural tendency to overspend. Budget deficits seemed to offer a way of obtaining something for nothing so that the electorate could be offered more 'free' services than they were required to pay for in taxes.¹⁴

The long-term problems to confront Mrs Thatcher were more severe than the short-term legacy from the Callaghan years. The Thatcher critique had aimed to identify and then rectify the poor economic and industrial performance of the British postwar experience, and central to the analysis were a number of seemingly perpetual and intractable problems. Industrial relations and strikes was one; the strike record of British industry, while not at the top of the international league table, was lamentable. Too often trade unions had struck first rather than as a last resort and had regarded strikes as a legitimate weapon not only to pressure individual employers but also to intimidate governments and the general public. The 1978-79 Winter of Discontent had graphically illustrated the strike problem only months before Mrs Thatcher took power. The 'Who governs Britain?' question of the February 1974 election was to many—not only on the right of British politics—central to the inability of government to control Britain's economic destiny. Not surprisingly, the fact that the biggest display of trade union powers and disruption since the 1926 general strike had helped to destroy a Labour government, concentrated the minds of incoming Conservative ministers. The question (usually posed in the language of corporatist incomes policy) of whether or not the Thatcher government could 'work with' the unions was repeatedly asked as the new government took up the reins of office.

A second long-term economic legacy, also with a specific legacy from the 1974-79 Labour government, was the problem of inflation. One Cabinet minister recalled that '1 believed low inflation was possible. In Opposition we knew about Hayek and Friedman and how excessive government spending caused excessive government borrowing causing high interest rates...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Acknowledgements
• Introduction
• PART I: THE THATCHER GOVERNMENT AND THE CONSERVATIVE CONTEXT
• PART II: THE THATCHER GOVERNMENT AND ECONOMIC CHANGE
• PART III: CONCLUDING THOUGHTS
• Notes
• Select Bibliography
• Index