The Downing Street Years (116 page)

More controversial was Nigel’s 1988 budget. I certainly had my doubts at the time. I felt — rightly — that the overall financial conditions had become too loose. Although it is monetary not fiscal policy which has the decisive role in controlling inflation it is right to look at taxes and borrowing too. Not only does the level of government borrowing influence the level of interest rates needed to exert monetary control; there is also an argument that if the private sector is borrowing too
much and saving too little — which is what happened in 1988 and 1989 as the savings ratio fell to 5.6 and 6.6 per cent — you should make up for this by raising taxes and cutting government borrowing (or increasing government debt repayment).

I began by questioning the size — though not the kind — of tax cuts Nigel now proposed, partly for these reasons and partly because I felt — again rightly — that big income tax cuts in a climate of excessive consumer and business confidence may have a psychological effect, not directly predictable by the dubious science of economics, but real nonetheless. They might fire up what already seemed to be overheating. In fact, the figures which I saw on the eve of the budget for the very large public sector debt repayment (PSDR) or budget surplus — forecast in the budget at £3 billion (though the figure was distorted by privatization proceeds) — considerably reassured me. Moreover the budget surplus out-turn for 1988–9 was some £14 billion. I therefore believe that — with one apparently technical but in fact significant qualification — Nigel’s 1988 budget was a success. The cuts in the basic rate of income tax to 25 pence and the top rates to 40 pence provided a huge boost to incentives, particularly for those talented, internationally mobile people so essential to economic success.

The technical point which had such practical consequences was a change in the system of mortgage tax relief, by which the £30,000 limit would no longer apply to each individual purchasing a property but rather to the house itself. This removed the discrimination in favour of unmarried cohabiting couples. Though announced in April, however, it only took effect from August. This gave a huge immediate boost to the housing market as people took out mortgages before the loophole ended, and it happened at just the wrong time, when the housing market was already overheating. That said, the overall tax changes in the 1988 budget were of the right size and direction. If they had not been accompanied by a loose monetary policy, all would have been well.

By 1989 even Nigel’s usual apparently limitless confidence about our economic prospects had become dented. Monetary policy had been tightened sharply to cut back inflation. But what about fiscal policy? It was clear that the budget surplus was a reflection at least as much of the runaway pace of economic growth raising tax revenues as of underlying financial soundness; even so it was difficult to argue that such a large budget surplus should be increased still further.

And indeed when I saw Nigel for our usual discussion on Sunday 12 February, I found less difficulty than usual in persuading him to see things my way. I urged him to revise his Cabinet paper, to be less
complacent, to drop the idea of a further one-penny cut in income tax (which I said would look wrong psychologically), to forget his proposal to remove the tax on the basic retirement pensions and to scrap the earnings rule instead.
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I also said that there must be no loosening of monetary policy. He went along with all this: he then used some of the revenue in hand to make sensible changes in the structure of employees’ national insurance contributions.

But Nigel decided not to raise the excise duties with inflation, giving an artificial downward twist to the inflation figure, which enabled him to predict that inflation would rise to about 8 per cent before falling back in the second half of the year to 5.5 per cent and perhaps 4.5 per cent in the second quarter of 1990. However, by the second quarter of 1990 it was to reach not 4.5 per cent but approaching 10 per cent. The degree of inflation that shadowing the deutschmark had injected into the system was greater than anyone, including Nigel, had realized. But by 1990 Mr 10 per cent had departed and others were left to deal with the consequences.
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John Major was in some ways all too different from Nigel Lawson as Chancellor. It seemed strange to me that, having been a competent Chief Secretary, he did not feel more at home with tackling the difficult issues he now faced when he returned to the Treasury. But probably Nigel had made all the important decisions and John had not had much of a look in. As preparation for the 1990 budget, we had a seminar attended by John and me, Richard Ryder, the Economic Secretary to the Treasury, and officials. (Nigel would never have dreamed of such a thing before a budget.) It did not get us very far, which was not John’s fault: the problem was that by now none of us had any faith in the forecasts. I found myself in disagreement with John on only one issue: I stopped consideration being given to a new tax on credit. I had a good deal of sympathy with the proposition that banks and building societies had made credit too easily available and that this was leading feckless or just inexperienced borrowers into debt. But I never doubted that if we once tried to stop this by imposing a tax on it, all that general support which puritanical policies evoke in principle would soon turn into a hedonistic outcry as video recorders, expensive lunches, sports cars and foreign holidays moved out of financial reach. The tax would also have put up the RPI, though this would have been a once-and-for-all effect only. In fact, within the little
room for maneouvre available in these circumstances, John Major’s only budget was a modest success, containing several eye-catching proposals to boost the woefully low level of savings. But by then it would take more than a sound budget — more even than a Prime Minister and Chancellor who subscribed to the same policies — to avert the political and economic consequences of allowing inflation to rise.

The fact that the return of inflation and then recession obscured the benefits of the tax changes Nigel Lawson’s budgets made does not mean that those benefits had evaporated. Inflation distorts; but, once tamed again, it turns out not to have destroyed the improvements in economic performance which lower and simpler taxes bring. Only one thing can undermine these supply side benefits: that is letting public expenditure get out of control, which puts up borrowing and which eventually requires tax increases that destroy incentives. When I left office both public spending and borrowing were under tight control. Indeed, we were still budgeting for a surplus. And during my period of office public spending fell as a share of GDP from 44 per cent in 1979–80 to 40.5 per cent in 1990–91. It has since risen to 45.5 per cent of GDP (1993–4) and public sector borrowing to around £50 billion, some 8 per cent of GDP. These figures bring strange echoes of the past. In politics there are no final victories.

Privatization, no less than the tax structure, was fundamental to improving Britain’s economic performance. But for me it was also far more than that: it was one of the central means of reversing the corrosive and corrupting effects of socialism. Ownership by the state is just that — ownership by an impersonal legal entity: it amounts to control by politicians and civil servants; and it is a misnomer to describe nationalization, as the Labour Party did, as ‘public ownership’. But through privatization — particularly the kind of privatization which leads to the widest possible share ownership by members of the public — the state’s power is reduced and the power of the people enhanced. Just as nationalization was at the heart of the collectivist programme by which Labour Governments sought to remodel British society, so privatization is at the centre of any programme of reclaiming territory for freedom. Whatever arguments there may — and should — be about means of sale, the competitive structures or the regulatory frameworks
adopted in different cases, this fundamental purpose of privatization must not be overlooked. That consideration was of practical relevance. For it meant that in some cases if it was a choice between having the ideal circumstances for privatization, which might take years to achieve, and going for a sale within a particular politically determined timescale, the second was the preferable option.

But, of course, the narrower economic arguments for privatization were also overwhelming. The state should not be in business. State ownership effectively removes — or at least radically reduces — the threat of bankruptcy which is a discipline on privately owned firms. Investment in state-owned industries is regarded as just another call on the Exchequer, competing for money with schools or roads. As a result, decisions about investment are made according to criteria quite different from those which would apply to a business in the private sector. Nor, in spite of valiant attempts to do so (not least under Conservative governments) can one find an even moderately satisfactory framework for making decisions about the future of state-owned industries. Targets can be set; warnings given; performance monitored; new chairmen appointed. These things help. But state-owned businesses can never function as proper businesses. The very fact that the state is ultimately accountable for them to Parliament rather than management to the shareholders means that they cannot be. The spur is just not there.

Privatization itself does not solve every problem; though, as I shall show, it certainly exposed hidden problems which could thus be tackled. Monopolies or quasi-monopolies which are transferred to the private sector need careful regulation to ensure against abuses of market power, whether at the expense of competitors (if there are such) or of customers. But on regulatory grounds there are good arguments for private ownership as well: regulation which had, when in the public sector, been covert now had to be overt and specific. This provides a clearer and better discipline. And more generally, of course, the evidence of the lamentable performance of government in running any business — or indeed administering any service — is so overwhelming that the onus should always be on statists to demonstrate why government should perform a particular function rather than why the private sector should not.

Now that almost universal lip service is paid to the case for privatization it is difficult to recall just how revolutionary — how all but unthinkable — it seemed at the end of the 1970s. Our 1979 manifesto had been quite cautious on the subject, promising: ‘to sell back to private ownership the recently nationalized aerospace and
shipbuilding concerns, giving their employees the opportunity to purchase shares’ and selling ‘shares in the National Freight Corporation to the general public’.

The depth of the recession meant that there was not much prospect of successful privatization in the early years, due to low market confidence and large nationalized industry losses. But, for all that, by the time of the 1983 election British Aerospace and the (now) National Freight Consortium were flourishing in the private sector, the latter after a spectacularly successful management and worker buy-out; Cable and Wireless, Associated British Ports, Britoil (a nationalized North Sea oil exploration and production company set up by Labour in 1975), British Rail Hotels and Amersham International (which manufactured radioactive materials for industrial, medical and research uses) had also in whole or in part been moved back to private ownership.

The huge losses of British Shipbuilding and the massive restructuring required of British Airways prevented their sale for the moment; though in both cases the prospect of privatization was an important factor in asserting tighter financial discipline and attracting good management. The British Telecom Bill — to privatize BT — had only fallen with the old Parliament and would be introduced with the new. The 1983 manifesto mentioned all of these as candidates for privatization as well as Rolls-Royce, substantial parts of British Steel and of British Leyland and Britain’s airports. Substantial private capital would also be introduced into the National Bus Company. And there was the repeated promise of shares offered to employees in the companies concerned. Perhaps the most far-reaching pledge, though, was that we would seek to ‘increase competition in, and [attract] private capital into the gas and electricity industries’. Gas was indeed privatized in 1986. The more complicated and ambitious privatization of electricity had to wait for the next Parliament.
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In the 1987 manifesto both electricity and the water industry were the main candidates for privatization. So over these years privatization had leapt from fairly low down to somewhere near the top of our political and economic agenda. This continued to be so for the rest of my time in office. Why?

One reason I have already touched upon. Economic conditions improved and the prospects for privatization improved with them. But there is a further reason. Our privatization programme was constantly breaking new ground. Each industry posed its own special problems. Each flotation or trade sale raised separate issues. It is one of the
disadvantages of being in the vanguard of reform — as the British who pioneered the industrial revolution know well — that the only experience you can learn from is your own. Gradually, the general emphasis switched from privatization of industries whose nationalization was justified only by socialist dogma, to that of public utilities where the arguments were more complex.

I was always especially pleased to see businesses which had absorbed huge sums of taxpayers’ money and been regarded as synonyms for Britain’s industrial failure pass out of state ownership and thrive in the private sector. The very prospect of privatization compelled such companies to make themselves competitive and profitable. Lord King turned round British Airways by a bold policy of slimming it down, improving its service to the customer and giving its employees a stake in success. It was sold as a thriving concern in 1987. British Steel, which had absorbed vast subsidies in the 1970s and early ’80s, re-entered the private sector as a profitable company in 1988. But it was perhaps BL (now known as the Rover Group) whose return to private ownership caused me most satisfaction — in spite of the almost endless arguments about how much its private sector purchaser, the once state-owned British Aerospace, had received.