The Downing Street Years (7 page)

The temptation in these circumstances was to retreat to a defensive redoubt, adopting a policy of false prudence: not to cut income tax when revenues were already threatening to fall; not to remove price controls when inflation was already accelerating; not to cut industrial subsidies in the teeth of a rising recession; and not to constrain the public sector when the private sector seemed too weak to create new jobs. And, indeed, these adverse economic conditions did slow down the rate at which we could hope to regenerate Britain. But I believed that was all the more reason to redouble our efforts. We were running up the ‘Down’ escalator, and we would have to run a great deal faster if we were ever to get to the top.

Our first opportunity to demonstrate to both friends and opponents that we would not be deterred by the difficulties was the Queen’s Speech. The first Loyal Address (as it is also called) of a new government sets the tone for its whole term of office. If the opportunity to set a radical new course is not taken, it will almost certainly never recur. And the world realizes that underneath all the brave new rhetoric, it is Business As Usual. I was determined to send out a clear signal of change.

By the end of the debates on the Address it was evident that the House of Commons could expect a heavy programme, designed to reverse socialism, extend choice and widen property ownership. There would be legislation to restrict the activities of Labour’s National Enterprise Board and to begin the process of returning state-owned businesses and assets to the private sector. We would give council tenants the right to buy their homes at large discounts, with the possibility of 100 per cent mortgages. There would be partial deregulation of new private sector renting. (Decades of restrictive controls had steadily reduced the opportunities for those who wished to rent accommodation and thereby retarded labour mobility and economic progress.) We would repeal Labour’s Community Land Act — this attempt to nationalize the gains accruing from development had created a shortage of land and pushed up prices. We removed the obligation on local authorities to replace grammar schools and announced the introduction of the Assisted Places Scheme, enabling talented children from poorer backgrounds to go to private schools. These were the first of what I hoped would be many steps to ensure that children from families like my own had the chance of self-improvement. We would, finally, curb what were often the corrupt and wasteful activities of local government direct labour organizations (usually socialist controlled).

When I spoke in the Queen’s Speech debate, two points attracted particular attention: the abolition of price controls and the promise of trade union reform. Most people expected that we would keep price controls in some form, at least temporarily. After all, the regulation of prices, wages and dividends had been one of the means by which, throughout most of the western world, governments sought to extend their powers and influence and to alleviate the inflationary effects of their own financially irresponsible policies.

But there was plenty of evidence, gathered by the Confederation of British Industry (CBI), that while price controls had a minimal effect on inflation, they certainly damaged industrial profitability and investment. One of our first discussions in ‘E’ Committee — the economic strategy committee of the Cabinet, of which I was the chairman — was whether we should press ahead with early and total abolition of the Price Commission. Some ministers argued that with inflation accelerating, the coming rise in prices would be blamed on the Commission’s abolition and therefore on the government. This argument had some force. But John Nott, the Trade Secretary, was keen to act swiftly; and he was right. It would have been still more difficult to abolish the Commission later in the year when prices were already rising faster. Perhaps the first time our opponents truly realized that the
Government’s rhetorical commitment to the market would be matched by practical action was the day we announced abolition. We made public at the same time our decision to strengthen the powers of the Director-General of Fair Trading and the Monopolies and Mergers Commission to act against monopoly pricing, including prices set by nationalized industries.

I was also keen to use my speech in the debate to put an authoritative stamp on our trade union reforms. Jim Prior’s preferred strategy was one of consultation with the trade unions before introducing the limited reforms of trade union law which we had proposed in Opposition. But it was vital to show that there would be no back-tracking from the clear mandate we had received to make fundamental changes. Initially, we proposed three reforms in the Queen’s Speech. First, the right to picket — which had been so seriously abused in the strikes of the previous winter and for many years before — would be strictly limited to those in dispute with their employer at their own place of work; thus secondary picketing would become unlawful. Second, we were committed to changing the law on the closed shop, under which employees had effectively been compelled to join a union if they wished to obtain or keep a job, and which at that time covered some five million workers. Those who lost their jobs for this reason must in future be entitled to proper compensation. Third, public funds would be made available to finance postal ballots for union elections and other important union decisions: we wanted to discourage votes by show of hands — the notorious ‘car park’ votes — and the sharp practice, rigging and intimidation which had become associated with ‘trade union democracy’.

In retrospect it seems extraordinary that such a relatively modest programme was represented by most trade union leaders and the Labour Party as an outright attack on trade unionism. In fact, we would have to return — and soon — to the issue of trade union reform. As time went by, it became increasingly clear to the trade union leaders and to the Labour Party that not only did we have huge public support for our policies, but that the majority of trade unionists supported them too, because their families were being damaged by strikes which many of them had not voted for and did not want. We were the ones in touch with the popular mood.

This was my first major parliamentary performance as Prime Minister, and I emerged unscathed. Nowadays, prime ministers make relatively few speeches in the House. The most important are speeches, like this, which deal with the government’s legislative programme, speeches answering motions of censure, statements after international
summits and debates which arise at times of international tension. This may be one reason why it is often difficult — over and above the moral blow of losing an election and leaving office — for prime ministers to revert to becoming Leaders of the Opposition, a job which demands more speech-making, but with less thorough briefing. Certainly, Jim Callaghan, who had never led his party in opposition, looked uncomfortable in that role. It was no surprise to me when he decided in October 1980 to step down from a position which his own left wing was making increasingly intolerable for him.

But it is Questions to the Prime Minister every Tuesday and Thursday which are the real test of your authority in the House, your standing with your party, your grip of policy and of the facts to justify it. No head of government anywhere in the world has to face this sort of regular pressure and many go to great lengths to avoid it; no head of government, as I would sometimes remind those at summits, is as accountable as the British prime minister.

I always briefed myself very carefully for Questions. One of the private secretaries, my political secretary, my Parliamentary Private Secretary and I would go through all the likely issues which might come up without any notice. This is because the questions on the Order Paper only ask about the prime minister’s official engagements for that day. The real question is the supplementary whose subject matter may vary from some local hospital to a great international issue or to the crime statistics. Each department was, naturally, expected to provide the facts and a possible reply on points which might arise. It was a good test of the alertness and efficiency of the Cabinet minister in charge of a department whether information arrived late — or arrived at all; whether it was accurate or wrong, comprehensible or riddled with jargon. On occasion the results, judged by these criteria, were not altogether reassuring. However, little by little I came to feel more confident about these noisy ritual confrontations, and as I did so my performance became more effective. Sometimes I even enjoyed them.

The next watershed in the Government’s programme was the budget. Our general approach was well known. Firm control of the money supply was necessary to bring down inflation. Cuts in public expenditure and borrowing were needed to lift the burden on the wealth-creating
private sector. Lower income tax, combined with a shift from taxation on earning to taxation on spending, would increase incentives. However, these broad objectives would have to be pursued against a rapidly worsening economic background at home and abroad.

Britain’s rate of inflation was running at 10 per cent when we took office, and rising. (The three-month rate was 13 per cent.) This reflected the lack of financial discipline in Labour’s last years, when they broke free of the constraints imposed on them by the International Monetary Fund (IMF) in 1976. There was also a pay explosion as powerful unionized groups rode roughshod over the remains of Labour’s incomes policy. And internationally, oil prices had begun to rise sharply, and were already about 30 per cent higher than six months earlier, as a result of the continuing turmoil in Iran after the fall of the Shah in 1978. This had an increasingly damaging effect on the international economy.

The oil price rise increased worldwide inflationary pressures. But it also had a perverse and, at least in the short term, damaging effect on the domestic economy because sterling was a petro-currency and it appreciated accordingly. Sterling was strong for other reasons too. Following the election there had been a general increase in confidence in the British economy. We were also pursuing a tight monetary policy, requiring high interest rates (interest rates had to go up by two percentage points at the time of the budget), and this attracted foreign capital. As a result of all these factors, sterling continued to rise.

We were perhaps better prepared for taking the required economic decisions than any previous Opposition. We had, every year, conducted our own internal public expenditure exercises, seeking to identify cuts wherever possible and putting figures on them. We had also, through the ‘Stepping Stones’ group of Shadow ministers and advisers of which John Hoskyns had been the main inspiration, worked out how to combine our policies to achieve the overall objective of reversing Britain’s economic decline.

But no amount of advance preparation could change the unpleasant facts of finance or the budget arithmetic. The two crucial discussions on the 1979 budget took place on 22 and 24 May between me and the Chancellor. Geoffrey Howe was able to demonstrate that to reduce the top rate of income tax to 60 per cent (from 83 per cent), the basic rate to 30 per cent (from 33 per cent), and the PSBR to about £8 billion (a figure we felt we could fund and afford) would require an increase in the two rates of VAT of 8 per cent and 12.5 per cent to a unified rate of 15 per cent. (The zero rate on food and other basics would be unchanged.) I was naturally concerned that this large shift
from direct to indirect taxation would add about four percentage points onto the Retail Price Index (RPI).

This would be a once and for all addition to prices (and so it would not be ‘inflationary’ in the correct sense of the term which means a continuing rise in prices). But it would also mean that the RPI, by which people generally measured living standards and all too frequently adjusted wage demands, would double in our first year of office.
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I was also concerned that too many of the proposed public spending cuts involved higher charges for public services. These too would have a similar effect on the RPI. I recalled at my first budget meeting with Geoffrey that Rab Butler as Chancellor in 1951 had introduced his tax cuts gradually. Should we do the same? Geoffrey stuck to his guns. We went away to consider the question further.

At our second meeting we decided to go ahead. Income tax cuts were vital, even if they had to be paid for by raising VAT in this large leap. The decisive argument was that such a controversial increase in indirect taxes could only be made at the beginning of a parliament, when our mandate was fresh. If we waited, hoping that either economic growth or cuts in public expenditure would do the job for us, we might never achieve the structural shift needed to boost incentives. We must establish the direction of our strategy from the start and do it boldly. By the end of that second meeting the shape of the budget which Geoffrey Howe announced on 12 June had effectively been set.

It was generally agreed to be a dramatic reforming budget even by those opposed to us, like the
Guardian
newspaper, which described it as ‘the richest political and economic gamble in post-war parliamentary history’. Its main provisions followed closely our discussions at the end of May: a cut in the basic rate of income tax from 33 to 30 per cent (with the highest rate cut from 83 to 60 per cent), tax allowances increased by 9 per cent above the rate of inflation, and the introduction of a new, unified rate of VAT at 15 per cent.

Apart from the budget’s big income tax cuts, however, we were able to reduce or remove controls on a number of areas of economic life. Pay, price and dividend controls had gone. Industrial Development
Certificates, Office Development Permits and a range of circulars and unnecessary planning controls were also removed or modified. (Geoffrey Howe’s second budget in 1980 was to announce the creation of Enterprise Zones, where businesses could benefit from tax breaks and rate exemption to attract investment and promote employment in run-down areas.)

But I took greatest personal pleasure in the removal of exchange controls — that is the abolition of the elaborate statutory restrictions on the amount of foreign exchange British citizens could acquire. These had been introduced as an ‘emergency measure’ at the start of the Second World War and maintained by successive governments, largely in the hope of increasing industrial investment in Britain and of resisting pressures on sterling. The overwhelming evidence was that they no longer achieved either of the objectives previously expected of them (if in fact they ever had done). With sterling buoyant and Britain beginning to enjoy the economic benefits of North Sea oil, the time had come to abolish them entirely. They were duly removed in three stages — some at the time of the Budget, a few others later in July, and the remainder in October (with the temporary exception of controls relating to Rhodesia). The legislation itself stayed on the Statute Book until 1987, but no further use was made of it. Not only did the ending of exchange controls increase the freedom of individuals and businesses; it encouraged foreign investment in Britain and British investment abroad, which has subsequently provided a valuable stream of income likely to continue long after North Sea oil runs out.