The arrival in our cinemas of Meryl Streep’s potential Oscar-winning film about former UK Prime Minister Margaret Thatcher, “The Iron Lady”, inevitably pushed me towards dusting out that excellent Nicholas Ridley book of 1991, appropriately titled My Style of Government.
Britain’s then seven-year long powerful recovery was becoming the envy of the globe- John A. Consiglio
TINA (There is No Alternative), as the Soviet leadership would appropriately nickname her, must surely rank as one of the hardest headed person ever in world economic history. By 1988 she had already been pushing the supply side of economics as being the only possible solution for the British illness for some eight years.
On the eve of Nigel Lawson’s annual British Budget speech in 1988 a group of health workers gathered before 10 Downing Street to hold aloft an eight foot plaster cast emblazoned with the plea “Give us a break”. But that call for Lawson to pump more of Britain’s then remarkable $5.6 billion budget surplus into social services went unheeded. On March 15 the Chancellor made it clear in Parliament that, despite a robust economy, such domestic spending was out of the question. Instead Lawson borrowed heavily from Reaganomics to unveil $7.5 billion in tax cuts that gave new vigour to the fading notion of supply-side economics.
Britain’s then seven-year long powerful recovery was becoming the envy of the globe, and Thatcher and Lawson were betting that they could foster a new spurt of entrepreneurship and consumer spending to keep the momentum going. For 1988 a healthy three per cent expansion was being projected, and Thatcher was in fact taking over from a flagging West Germany the job of helping to keep the world economy on an even keel, even as the US was then slowing. In his 1988-89 Budget Nigel Lawson scaled back tax breaks on company cars and business entertainment, slashed the top personal income tax rate from 60 per cent to 40 per cent, and reduced Britain’s basic personal tax rate by two points to 25 per cent. Braving a chorus of opposition Labour members chanting “Rich man’s Budget!”, and “Shame, shame!”, Lawson drove home the long-standing central theme of the Thatcher administration, this being that: “There has been increasing recognition throughout the industrialised world of the importance of tax reform in improving economic performance”.
That Thatcher-Lawson plan was not without risks. British exporters, then already smarting from a double whammy of high interest rates, and a strong pound, felt left out. The then chief economist of Imperial Chemical Industries, Richard Freeman, complained that that was the most radical budget in decades, and that it was directed entirely at the consumer. Some analysts even said that Lawson’s programme could be leading Britain down the same path as the US, which, awash in foreign goods, was having to endure a painfully sharp devaluation of the dollar. Brookings Institute economist Robert Solomon observed: “They’re looking a little bit like the US in 1982-85, with a rapid growing economy, appreciating currency, and a growing current-account deficit.”
Investors and industrialists watched carefully Thatcher’s interest and exchange rate policies to see how fast she would allow the economy to expand. Barclays Bank’s deputy chairman, Christine Mandell, commented openly to Business Week magazine about how tough, on the monetary side, that Budget was. But Thatcher’s position was that, worried about manufacturing wages rising at a brisk annual rate of 8.5 per cent, she wanted to keep interest rates high to snuff out inflation fears. And whoppee how many Maltese flighted their savings there, only to years later bring them back and put them into local property when those interest rates fell ! At the same time TINA appeared to be less sure about accepting the main consequences of such a stand, viz an uncontrollable rise in the pound.
The strong pound was helping to keep inflation down by enabling British consumers and companies to buy more cheap foreign goods. In fact several days before that Budget was unveiled Thatcher ordered the Bank of England to stop trying to keep sterling down against the West German mark. In a jiffy the pound gained some one per cent against both the dollar and the mark, but then, even as Lawson was delivering the government’s message, she ordered the central bank to stop intervening.
In response the pound settled back, but only a little. The Bank of England’s move calmed currency traders who feared that Thatcher, who in public had occasionally disdained currency intervention, had lessened Britain’s commitment to help stabilise the dollar.
Now the traders were guessing that Thatcher’s move to resume intervention was designed to keep sterling no higher than 3.10 marks. Despite this Swiss foreign-exchange traders were still thinking that British growth was robust enough to push the pound as high as 3.14 marks, or $1.90, from the then 3.09 marks and $1.85.
An increase that sharp could force Thatcher into ordering a cut in interest rates to placate exporters, who now feared severe losses in continental Europe, and other markets, if the pound were to remain too high against the mark. ICI’s Freeman was openly fearful: “Business has no assurance that we are not going to be priced out of world markets again.”
The chief difference between 1988-style Thatchernomics and 1982-style Reaganomics was that Britiain’s Budget remained in healthy surplus. The danger was that Thatcher’s policies, like those of the Reagan administration, might yield too much of a good thing.
Would the pound soar out of control, muscle Briatin’s exporters aside, aggravate a trade deficit (around $7.5 billion in 1988), and bring Thatcher’s boom to an abrupt halt? And there was no shortage of economists wisely warning that the combination of strong sterling and strong demand was lethal to the balance of payments.
But TINA soldiered on. For that moment it looked as if such worries were a bit overblown. Her government was in a sound financial shape, and at an estimated rate of four per cent in 1988, inflation remained something to be feared more than vigorouasly stifled. And that was why Thatcher and Lawson thought that with some supply-side pushing and shoving – and a deft touch now and then in the curency market – they could usher Britain’s expansion into its eighth year.
For most of the 1980s most people in Britain felt much better off. The UK imported much more than it exported.
Much lower taxation for the better-off, and massive borrowing, meant that most people could live beyond their (and the nation’s) means. The proportion of GNP taken by consumption rose by some seven percentage points, and there was an enormous and unprecedented shift away from savings and investment. And if – as the old Saragat would say – il risparmio e’ alla base di ogni piano – savings is the basis of all planning, then no wonder that the tide soon turned.
Those who will be watching the brilliant Meryl Streep interpretation of TINA’s 11 and a half years of premiership years will quickly understand how by 1990 the tide had in fact turned dramatically. The woman who had taken credit for steering the Conservatives away from failed corporatist policies, which had relied on the cooperation of trade unions – a policy that had brought down her predecessor Edward Heath – was in fact slow to grasp the implications of Britain’s membership of the EU. That issue ultimately led to her downfall and replacement by John Major.
Dr Consiglio lectures in the Department of Banking and Finance at The University of Malta.