The Downing Street Years (21 page)

On any rational commercial judgement, there were no good reasons for continuing to fund British Leyland. The 1980 Corporate Plan had foreseen the need for about £130 million of new government equity in the period of 1981 and beyond. In the 1981 Plan which we were now asked to approve that sum had grown by £1 billion. Meanwhile, the outlook for profits was worse. The predictions for market share in successive Plans had grown ever gloomier. Many of BL’s models were uncompetitive. The Metro and the BL/Honda Bounty would help, but neither would yield much in profits. BL was still a high-cost, low-volume manufacturer of cars in a world where low cost and high volume were essential for success.

On 12 January I held a meeting at No. 10 to discuss the Corporate Plan with Keith Joseph, Geoffrey Howe, Norman Tebbit and others. I continued to argue that we should try to find some middle way between total closure and fully funding the Corporate Plan.

I knew that closure of the volume car business, with all that would mean for the West Midlands and the Oxford area, would not be politically acceptable to the Cabinet or the Party, at least in the short term. It would also be a huge cost to the Exchequer — perhaps not very different to the sort of sums BL was now seeking. I told a meeting of ministers on 16 January that the Government must get rid of its financial liability for the volume car business in a way which was both humane and politically acceptable. We might need to pay a ‘dowry’ to make the car business attractive to a buyer: ultimately, of course, it might mean closure — the market, not government, would ultimately determine BL’s future. I said that I was in favour of supporting the BL Plan — but on condition that BL disposed of its assets rapidly or arranged mergers with other companies.

This last point was still extremely contentious. Michael Edwardes
told Geoffrey Howe and Keith Joseph that the BL Board would be willing to sell Land Rover and such other parts of the business as they could and close down the volume car business: but they were not willing to sell Land Rover if they were also required to go on trying to salvage the volume car business. He said that the Board’s position would be quite impossible if a public deadline were to be set for its sale.

This attitude, of course, put us in a very difficult position — as it was doubtless intended to do. It irritated one or two ministers to the point of turning them against the whole Plan. Moreover, it had not been possible for us to find the ‘middle way’ which I had sought and which would have involved progressive sale of the business without a total and immediate shut-down. But the political realities had to be faced. BL had to be supported. We agreed to accept BL’s Corporate Plan, involving the division of the company into four more or less independent businesses. We settled the contingencies which would lead to the Plan being abandoned. We set out the objectives for further collaboration with other companies. And — most painfully — we provided £990 million.

This was not, of course, the end of the story for BL, any more than it was for BSC. In due course, it would be shown that the changes in attitude and improvements in efficiency achieved in these years were permanent.
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To that extent, the account of our policy in 1979–81 towards BL is one of success — at a cost. But the huge extra sums of public money that we were forced to provide came from the taxpayer or, through higher interest rates needed to finance extra borrowing, from other businesses. And every vociferous cheer for higher public spending was matched by a silent groan from those who had to pay for it.

CHAPTER V

At 2.30 on the afternoon of Friday 10 October 1980 I rose to address the Conservative Party Conference in Brighton. Unemployment stood at over two million and rising; a deepening recession lay ahead; inflation was far higher than we had inherited, though falling; and we were at the end of a summer of government leaks and rifts. The Party was worried, and so was I. Our strategy was the right one, but the price of putting it into effect was proving so high, and there was such limited understanding of what we were trying to do, that we had great electoral difficulties. However, I was utterly convinced of one thing: there was no chance of achieving that fundamental change of attitudes which was required to wrench Britain out of decline if people believed that we were prepared to alter course under pressure. I made the point with a line provided by Ronnie Millar:

The message was directed as much to some of my colleagues in the Government as it was to politicians of other parties. It was in the summer of 1980 that my critics within the Cabinet first seriously attempted to frustrate the strategy which we had been elected to carry out — an attack which reached its climax and was defeated the following year. At the time that I spoke, many people felt that this group had more or less prevailed.

Battle was to be joined over the next two years on three related issues: monetary policy, public spending and trade union reform. The ‘wets’ argued that because we had embraced a dogmatic monetary theory that inflation could only be brought down by a fierce monetary squeeze, we were squeezing the economy in the middle of a recession. Such dogmatism, they argued, similary prevented our using practical tools of economic policy like prices and incomes control and forced us to cut public spending when, as Keynes had argued, public spending should be increased to lift an economy suffering from lack of demand.

The most bitter Cabinet arguments were over public spending. In most cases those who dissented from the line which Geoffrey Howe and I took were not merely intent on opposing our whole economic strategy as doctrinaire monetarism; they were trying to protect their departmental budgets. It had soon become clear that the public expenditure plans announced in March 1980 had been far too optimistic. In particular, the large turn round from losses towards profitability in the nationalized industries was not going to come about; local authorities, as usual, were overspending; and the recession was proving deeper than expected, increasing spending on unemployment and other benefits. Government borrowing for the first quarter of 1980 looked like being very large. In addition, Francis Pym, Defence Secretary, was pressing for an increase in the Ministry of Defence (MoD) cash limit.

We had decided to have a general economic discussion in Cabinet on 3 July 1980, before our first collective discussion of the 1981–2 public expenditure round on 10 July. Our aim was to confront spending ministers with the full implications for taxation of a failure to control spending, and to smoke out the arguments for reflation, which were almost daily to be found in the newspapers and in the mouths of pressure groups. But I had no illusions that it would be easy to subject my colleagues’ aspirations to a salutary dose of realism.

Geoffrey spelt out to Cabinet how difficult the economic situation at home and abroad had now become. Inflation in the major economies had risen sharply, oil prices had doubled, and the world was moving further into recession — led in this direction by Jimmy Carter’s United States. Although output in the UK had fallen rather less than predicted in 1980, it was likely in consequence to fall faster than
expected in 1981. Inflation was slowing, but less rapidly than we had hoped. The background to the public spending round and to next year’s budget was, therefore, bleak. Then the discussion began. Some ministers argued for large increases in spending to stave off unemployment; others argued for prudence. I summed up by reaffirming the present strategy and noting the need to maintain public spending constraints, to reduce public sector pay increases and so to allow government borrowing and interest rates to fall — although within spending totals I was keen to see a higher priority given to dealing with unemployment, especially among young people. Round one went to Geoffrey and me.

But the debate continued inside and outside government. The “wets” arguments came in different forms of varying sophistication, though their central message was always the same: spend and borrow more. They used to argue that we needed extra public spending on employment and industrial schemes, over and above what we had planned and were effectively forced to spend simply as a result of the recession. But this did not escape from the fact that extra public spending — whatever it was spent on — had to come from somewhere. And ‘somewhere’ meant either taxes levied on private individuals and industry; or borrowing, pushing up interest rates; or printing money, setting off inflation. There was also a feeling, which I equally knew I had to resist, that the refunds which I had secured from the European Community budget should be used to finance extra spending. But why should it be assumed that public spending was better than private spending? Why should the fruits of my efforts to rein in the appetite of the European Community automatically be consumed by an almost as insatiable British public sector? I was, therefore, determined to ensure that the Cabinet endorsed the 1981–2 public expenditure total announced in the previous white paper, as reduced by the European budget receipts.

These basic differences between us came out clearly at the public spending Cabinet on 10 July. Some ministers argued that the PSBR should be allowed to increase to accommodate the huge new requirements of the loss-making nationalized industries. But the PSBR was already far too high, whatever the theoretical merits or otherwise of letting public borrowing rise in a recession. The higher it went, the greater the pressure to raise interest rates in order to persuade people to lend the Government the necessary funds. And at a certain point — if pushed too far — there would be the risk of a full-scale government funding crisis — that is, when you cannot finance your borrowing from the non-banking sector. We could not risk going further in that
direction. So I emphasized once again the need to stay within the public spending plans — though within them there could be more priority given to assistance for jobs.

The defence budget was a special problem. We had already accepted the NATO commitment for annual 3 per cent real increases in our defence spending. This had the obvious merit of demonstrating to the Soviets our determination to prevent their winning the arms race on which they had embarked, but in two other respects it was unsatisfactory. First, it meant that the MoD had little incentive to get value for money in the hugely expensive equipment it purchased. Second, the 3 per cent commitment meant that Britain, spending a substantially higher proportion of its GDP on defence than other European countries and going through a peculiarly deep recession, found herself bearing an unfair and increasing burden. There were also problems relating to management of the MoD budget. By the end of 1980 the MoD had overspent its cash limit because, with the depressed state of industry, suppliers had fulfilled government orders faster than expected.