GOVERNMENTAL RESPONSES TO BUDGET SCARCITY: GREAT BRITAIN

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GOVERNMENTAL RESPONSES TO BUDGET SCARCrTY:GREAT BRITAIN

Anthony King, University of Essex

INTRODUCTIONIssues of "big government" have lain at the heart of British politics

for at least a decade. In particular, since 1979 Britain has been governed bya person, Margaret Thatcher, and a party, the Conservatives, determined tocut taxes, to cut public expenditure, to reduce the size of the public sectorand to limit severely the extent to which government intervenes in theworkings of the free market. This paper describes how these issues of biggovernment came to be on the British political agenda, the political ma-chinery through which they have been processed and the results that havebeen achieved (if "achieved" is the right word) so far.

One point needs to be made straightaway. In most liberal democra-cies, economic issues compete for the attention of voters and policy-makers with large numbers of other issues: social issues, foreign-policyissues and so on. In Britain, by contrast, it is scarcely an exaggeration tosay that the economy has been the political issue for more than a genera-tion. Voters, asked to name the most important problems facing the coun-try, almost invariably cite economic problems. The most important mem-bers of the government are those who deal with economic matters. News-papers and news bulletins are dominated month after month by stories ofinflation, strikes, unemployment, trade figures, investment decisions, themoney supply and so on. Foreigners are often amazed by the British politi-cal community's near-obsession with economic questions. Not surprisinglyunder the circumstances, the volume of writing about the British economyand about processes of economic policy-making in Britain is vast, much ofit of high quality. This paper in consequence should be regarded as merelya sketch. Others have painted on larger canvasses (among many others, seeKeegan and Pennant-Rea, 1979; Heclo and Wildavsky, 1981; Pliatzky, 1982;Wright, 1980; Hood and Wright, 1981).

WHO DEFINED THE PROBLEM OF BIG GOVERNMENT, AND HOW?In one sense, the debate over big versus limited government in Britain

is as old as the debate between the Conservative party and the more social-istically inclined Labour party; the Conservatives have long advocated thecause of the free market and of a limited economic role for government,the Labour party a planned economy and higher levels of public spending.But the debate began to take on a new form in the late 1960s, when aLabour Chancellor of the Exchequer, Roy Jenkins, identified the rate ofgrowth of public expenditure as an important contributory cause of Bri-tain's economic difficulties. Jenkins reduced public spending and increasedtaxes to such a degree that, when the Labour party left office in 1970, itbequeathed to its Conservative successors a budget surplus of 500 millionpounds sterling (Keegan and Pennant-Rea, 1979).

It turned out, however, that Jenkins' period in office was somethingof an interlude. The Conservative government of Edward Heath came topower in 1970 pledged to cutting taxes and public spending and also to apolicy of refusing "to bail out lame ducks"; but, confronted in 1971-1972

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with a sluggish growth rate and rapidly rising unemployment, the Heathgovernment abruptly changed course. It bailed out the bankrupt Rolls-Royce aeroengine company, it increased public spending, and it paid for theincreased spending, not by raising taxes but primarily by borrowing. Thebudget deficit and the rate of growth of money supply both soared. Despitethe first oil shock in 1973-1974 and despite a rapidly accelerating domesticinflation rate, the Heath government's policies were at first continued bythe Labour government that replaced it in March 1974. Harold Wilson'ssecond government was, at first, a high-spending, high^^orrowing, high-inflation administration. But then in 1975 the course of policy changed onceagain. Between 1975 and 1979, tight cash limits on public spending wereintroduced, public spending as a proportion of gross domestic product wasmade to faU sharply, public borrowing was likewise reduced, and monetaryaggregates for the first time began to play an important part in a postwargovernment's economic thinking. Contrary to widespread belief in Britainand elsewhere, a restrictionist view of public spending, and of the govern-ment's economic role more generally, began not under Margaret Thatcherand the Conservatives in 1979 but four years earlier under Jenkins's succes-sor as Labour Chancellor, Denis Healey. For better or worse, profoundsuspicion of high levels of government expenditure and big governmentdeficits has been a hallmark of the British political scene ever since.

Who and what brought about this change? Objective economic cir-cumstances played some part. In Britain, as in other industrial countries,inflatiOTi loomed larger than unemployment as an economic problem fromthe late 1960s onwards, especially after 1973-1974; and no one has everclaimed that governments can spend their way out of inflation. In addition,British governments, again like governments in other countries, were grad-ually consuming a larger and larger share of their country's nationed in-come. Public spending as a proportion of GDP increased from under 40% inthe 1950s to 40.3% by 1965, to 51.0% by 1975 (Heclo and Wildavsky, 1981).Increases on this scale threatened to fuel inflation. They also, in so far asthey were paid for by h i^er taxation and not by borrowing, encounteredincreasing voter resistance. Conservative claims that they would cut taxesplayed a considerably part in their victories in 1970 and again in 1979.

But a number of other factors, more specific to Britain, were also im-portant. One was related to the fact that Britain's economic problems wereof far lcmger standing, and were evidently much deeper seated, than thoseof other countries. Keynesianism had been Britain's dominant economicphilosophy for thirty years. Britain had, in relative terms, been going downhUl economically for the better part of those thirty years. It was verytempting to attribute the latter phenomenon to the former, especiallysince, in the 1970s, Keynesian remedies no longer seemed appropriate tothe solution of the country's short-term problems, let alone its long-termones. Keynesianism apart, it was also the case the successive Britishgovernments. Conservative as well as Labour, had tried to cure Britain'seconomic ills by highly interventionist means: nationalising, subsidising,encouraging, exhorting, planning, warning. But these means had signallyfailed to work. Perhaps it would be a good idea to try non-interventionismfor a change. Sometime in the years after 1970 Keynesians and proponentsof active government intervention lost their nerve (Heald, 1983; Keeganand Pennant-Rea, 1979).

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This change of mood in the political community — among politicians,civil servants, academics and journalists — was facilitated by the fact thatBritain is a country in which changes of mood can easily occur. Policy-makers and policy-influencers know each other personally to a far greaterdegree than in countries that are either much larger than Britain, like theUnited States, or lack a single metropolitan center, like Italy or Germany.Moreover, Britain has genuinely national media of communication, so thatthe same televisicxi programmes and the same newspaper articles can beabsorbed in a single day by almost the whole of the political community. Agood, if extreme, example was the publication in 1976 of a book by twoOxford economists, Robert Bacon and Walter Eltis, Britain's EconomicProblem: Too Few Producers. The book argued that too many of Britain'seconomic resources were being diverted into the "non-market sector" ofthe economy, a sector in which economic discipline was slack and whichfailed to produce goods and services that could be traded internationally.Within days, literally, of the book's serialisation in the London Sundaytimes, its language and ideas were on the lips of politicians of all parties,including those of the Labour Chancellor Denis Healey.

The change of mood in the early 1970s might have proceeded moreslowly but for the additional fact, largely fortuitous, that two of Britain'sleading economic commentators, Samuel Brittan of the Financial Times andPeter Jay of the London Times, were converted at about this time to neo-classical economics. They became monetarists; and they used their regularnewspaper columns to expound monetarist views — the first time since thewar that such ideas had been expounded by people who could not be dis-missed as cranks — and also to argue that in the new economic circum-stances of the 1970s a country that sought to achieve rapid growth, fullemployment and stable prices all at the same time ran the risk of economicand political collapse. Brittan and Jay were listened to. As it happened.Jay was the son-in-law of Wilson's successor as Labour Prime Minister,James Callaghan. After decades of Keynesian intellectual hegemony, neo-classical economists also began to be more numerous and assertive in theuniversities. As the Keynesians lost their nerve, the neo-classicists andmonetarists regained theirs. The conventional wisdom was changing.

These new intellectual fashions were important, but they did notop«*ate on tl^ir own. Britain's economic weakness, and the openness of theBritish economy to world trade and world currency movements, meant thatBritish governments had to take decisions, not just on the basis of their ownjudgments but on the basis of predictions about how the financial marketswould respond to those judgments. Labour governments as well as Conser-vative became aware that they had to "please the markets." In the words ofa senior Treasury official:

If markets take the view that the policies pursued by a par-ticular country are likely to damage assets held in that coun-try or in that country's currency, they are likely to behave inways which can actually enforce a policy change. Market be-haviour has become a significant input in policy making.^

Moreover, in the 1970s those who operated in the world's financial markets,always conservative in their economic outlook, were themselves increasing-ly influenced by monetarist ideas and by the belief that government spend-ing should be cut. The opinions of bankers, stockbrokers and currency


dealers m i ^ t be right, or they might be wrong; but fw governments, espe-cially British governments, the opinions of such people were facts, and hadto be accommodated as such. Britain's dependence on the opinions of othersabout the issues of big government was underlined in 1976 when, after thepound sterling had lost more than a fifth of its external value in ninemonths, the Callaghan government was forced to arrange a massive loanfrom the International Monetary Fund. Predictably, the IMF's conditionswere strict. (On the 1976 crisis, which many regard as the climacteric inpostwar economic policy making, see Keegan and Pennant-Rea, 1979;Pliatzky, 1982; Barnett, 1982.)

Economic ministers in the Callaghan government were responding tothe hard economic data put before them; they were responding to a changein the intellectual climate; they were responding to external pressures. Buttheir changes of policy also reflected a genuine shift in their own thinking.If a single moment had to be identified when the postwar Keynesian econo-mic hegemony in Britain came to an end, it would have to be on the day ofPrime Minister Callaghan's speech to the 1976 Labour party conference,when he said:

We used to think that you could just spend your way out of arecession and increase employment by cutting taxes andboosting government spending. I tell you in all candour thatoption no lcmger exists, and that in so far as it ever did exist,it worked by injectii^ inflation into the economy. And eachtime that haK>ened the average level of unemployment hasrisen. High inflation, followed by higher unemployment. Thatis the history of the last twenty years (Keegan and Pennant-Rea, 1979).

Callaghan was speaking in the midst of the negotiations with the IMF, andhis remarks were undoubtedly intended to make a favourable impression onthe international business community; but there can be no doubt that hemeant what he said. (The speech is said to have been influenced by his son-in-law Peter Jay.) Callaghan and Healey welcomed the conditions impededby the IMF because they forced the Labour government to go in a directionin which Callaghan and Healey wanted it to go anyway.

That said,the extent of the change in Callaghan's and Hesiley's econo-mic views shouid not be exaggerated. They had become suspicious of old-fashioned Keynesianism. They had come to believe that there was a pointat which increased iHiblic spending became economically unproductive.They were ready to accept that control of the money supply had an impor-tant part to play in overall economic management. But they had not be-come monetarists. They were stiU in favour of high levels of public spend-ing if the country could afford it, and they still believed that governmenthad a positive role to play in bringing about the necessary restructuring ofthe British economy. It was left to Margaret Thatcher and the Conserva-tives to bring about a fundamental reorientation of British policy.

Thatcher, offended by the "U-turns" of the Heath administration, per-suaded that those U-turns had brought about the collapse of the Heath gov-ernment and increasingly convinced that big government was the root causeof aU Britain's economic difficulties, had developed by the time she tookoffice in 1979 a set of economic views far more radical than anything thatCallaghan and Healey had in mind. Many Conservatives agreed with her


diagnosis, and by the time of the 1983 election Thatcherites were installedin aU of the important economic positions in the government. Nevertheless,unusually in British politics, it is not an exaggeration to see the strategypursued by the Conservative administration since 1979 as her strategy andits policies as her policies. The present British government is the Thatchergovernment more than just in name. (On the economics and politics of theThatcher period, see King, 1985; King, forthcoming; Riddell, 1983; Stephen-son, 1980; Keegan, 1984).

Thatcher's approach was by no means purely fiscal; she was not inter-ested in cutting public expenditure merely in order to bring it more in linewith revenue. Hers was a much larger vision, containing moral as well aseconomic elements. At the risk of some simplification, it can be set out inthe form of twelve related propositions. Many of them are, of course,familiar from the politics of other countries, not least the United States(though American "supply-side" economics found scarcely any echo in Brit-ish Thatcherite circles). All twelve will be used later to help assess thesuccess of Thatcher's experiment.1. Inflation is the main single problem facing the western industrial

nations. Combating it should therefore be given priority over maintain-ing fuU employment, especially since inflation is itself the enemy offull employment. Inflation is an evil because it is economicallydestructive, but also because it discourages people from taking thoughtfor the future.

2. The main single cause of inflation, possibly the sole cause, is increasesin a country's money supply in excess of increases in that country's realproductive capacity. The rate of growth of money supply should there-fore be kept within strict limits.

3. As a principal cause of excessive increases in a country's money supplyis government borrowing. The size of a country's budget deficit, its"public sector borrowing requirement," should be kept as small aspossible.

4. One effective way of cutting a country's budget deficit is to cut publicspending. Cuts in public spending are desirable in any case becausepublic-sector spending is likely to be less efficient than private-sectorspending and also because high levels of public spending make toomany people dependent on the beneficence of the state.

5. Government borrowing should certainly not be reduced by increasingtaxes. On the contrary, taxes, too, should t>e reduced. High taxes en-courage governments to spend more than they should. They also reduceincentives to save, to work and to take risks. A dynamic economyrequires low rates of taxation, especially marginal rates of personaltaxation.

6. If an economy is to be dynamic, it must also be as open as possible tothe free play of market forces. Government spending is, as a generalproposition, bad because so much of it is not subject to market disci-plines, but in the private sector, too, competition needs to be activelyencouraged. Competition is desirable on economic grounds, but also onmoral grounds. It ensures that victory in the economic race goes tothose who deserve to win, and it forces both individuals and businessesto be outward- rather than inward-looking.

7. If market forces are to operate effectively, then governments must

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not interfere with them. They must not bail out firms and industriesthat find themselves in difficultly. They must not subsidise inefficientfirms and industries and those with no hope of a profitable future.

8. In particular, governments must not interfere with the workings of thelabour market. They must not introduce "incomes policies." Incomespolicies distort the market. They never succeed for long. Even whenthey are claimed to be succeeding, they are actually masking the prob-lem of inflation rather than solvir^ it since the causes of inflation donot lie in excessive wage rises as such . In any case, incomes policies,in default of other policies, always result in renewed inflationarypressures when they ultimately break down, as they always do.

9. As a corollary of the last three propositions, governments should es-chew "corporatism." The market should take economic decisions, notpoliticians, business men and union leaders sitting around a table mak-ing cozy little deals. The market, in the end, will make the decisionsanyway.

10. The canons set out above have been violated, to their cost, by almostaH western governments in recent years. But they have been violatedby British governments more than most. Hence Britain's relative eco-nomic decline. Hence the need to pursue monetarist and free-marketpolicies even more vigorously in Britain thcui elsewhere.

11. British governments have been especially remiss in permitting largerand larger sections of the British economy to be taken into public own-ership. Irrespective of a firm's place in the market, it is almost cer-tain to t>e managed less well in the public sector than in the private.Managers and workers in public-sector firms have few incentives tomaximise efficiency, and their commercial judgments are almc»t cer-tain to be overridden by the political judgments of their politicalmasters. Also, they do not face the ultimate threat of bankruptcy. Asmuch of the public sector as possible should therefore be sold off tothe private sector.

12. Finally, Britain's whole culture is too genteel, too hierarchical and toolittle concerned with profit-maximisation and business efficiency. Wehave altogether too many "gentlemen" eiround here, not nearly enough"players."^

Such was Thatcher's vision. Others shared it. What distinguished Thatcherwas her determination to turn her vision into reality. How did she set aboutit?

WHAT WERE THE MAIN SOLUTIONS PROPOSED?The economic proposals of the incoming Thatcher administration in

1979 were implicit in the twelve propositions already outlined: cut taxes,public spending, public borrowing and the rate of growth of money supply;encourage competition; reduce subsidies; allow failing firms and industriesto go to the wall; eschew incomes policies entirely; talk to organised busi-ness and the trade unions as seldom as possible; sell off chunks of the publicsector to private enterprise; reward the entrepreneur, denigrate the publicservant. The new government was, needless to say, committed to reducingthe size of the civil service. It was not initially committed to the large-scale "privatisation" of public-sector firms, but this soon became an impor-tant feature of its policy.


Thatcher did not have many institutional backers for her new enter-prise. The City was broadly in favour; so was the Institute of Directors; so,in so far as it expressed opinions on these matters, was the Confederationof British Industry (though the CBTs collective voice was somewhat mutedby the fact that many of its members were in the public sector). Mostwealthy donors to the Tory party undoubtedly liked what Thatcher was do-ing. But these groups were not members of some American-style "winningcoalition." That<^er did not need a winning coalition: she needed the sup-port, first, of her cabinet and, second, of the Conservative majority in theHouse of Commons. The support of these two groups she got (though notwithout difficulty, as we shall see). The British political system haschanged a great deal in recent years, but in this case it functioned largelytrue to form. The prime minister and the cabinet led; the Conservativeparty, with varying degrees of enthusiasm, followed.

Opposition to the government's programme came, predictably, frommany of the public-sector trade unions. None welcomed public spendingcuts and privatisation; many were vehemently OK>c»ed to them. In a fewcases, the government gave way to union opposition; a plan to sell off GasBoard showrooms was shelved when the gas workers' union threatened anall-out strike in the industry, and in 1981 Thatcher herself ordered thekeefang open of twenty-three uneconomic coal mines rather them face anaticMial strike. But, in general, union opposition both to cuts and to fwivat-isation was ineffective. The Trades Union Congress could pass resolutions,but there was no way in which it could persuade workers in one industry totake industrial action to prevent the privatisation of some other industry.^The trade unions were demoralised by the knowledge that the strikes theyhad organised in the winter of 1978-1979 had helped to bring Thatcher topower and also by rapidly rising unemployment (the number out of workrose from 1,220,000 in May 1979 to 3,050,000 in May 1983).^ Individualunions were restrained from taking acti<Mi by their members' fears for theirjobs and by the fact that their members often had considerable sympathywith the causes of privatisation and greater industrial efficiency. As thoughall this were not enough, Thatcher demonstrated by her actions that shew€is much readier than her Labour (and, it must be said. Conservative) pre-decessors simply to ignore the unions and sit out anti-government strikes.

If union opposition was ineffective, so, to an even greater degree, wasthat of the opposition parties. Labour objected officially to almost everyitem in the Thatcher goverment's programme, but few senior Labourmembers of parliament had an alternative programme that they genuinelybelieved in and, in any case, the Labour party during most of Thatcher'sfirst term was riven by internal controversy. Labour was not a well-OTganised oppositicm in the House of Commons; even if it had been, there islittle that opposition parties can do in the British system in the face of agovernment majority determined to get its way. The other opposition par-ties, the Liberals and (from March 1981) the Social Democrats, were almostas critical of the government's policies as Labour, but there was even lessthat they could do about them. British government during this period func-tioned strictly as "party government" — which meant, among other things,that the parties not in power were, in practice, powerless. (On the idea ofparty government, see Rose, 1974.)

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A somewhat une^^ected source of oi^osition was that of businessmen, especially in manufacturing industry. Owners and managers of manyfirms objected, not to the Thatcher government's ideology, but to the prac-tical consequences of its policies. Spending cuts and deflation at a time ofworld recessicMi meant more bankruptcies, more short order-books and low-er profits than there would have been in any case. In the words of onenorthern business man, "The trouble with this lot, they think they can cutyour balls off and they'll grow again" (quoted in King, forthcomii^). Manu-facturers objected particularly to the damage being done to e3q>orts by thesharp rise in the value of the pound, b r o i ^ t about by h i ^ interest ratesand the rise in world oil prices which increased the value of Britain's NorthSea oil. Criticisms like these were expressed, often vehemently; but theyhad little effect on a government as determined as Thatcher's. Businessmen could talk; there was not much they could actually do.

Thatcher and her economic colleagues similarly outfaced a publicopinion that, for a time, was also hostile. Broadly, a majority of Britishvoters were sympathetic to the Conservatives' desire to reduce the scopeof government, to cut spending and taxes eind to sell off parts of the publicsector; but most voters did not at all like mounting unemployment and cuts,or even hints of cuts, in such government services as health, education andwelfare. Crudely, most voters did not have a view about "big government"as such; rather, they were suspicious of the civil service and doubtedwhether the government was much good at running industry, but theystrongly approved of the traditional institutions of the welfare state (a pollin 1979, at the time of the Conservatives' victory, showed that 70% of vot-ers were not in favour of tax cuts if they would result in cuts in the Na-tional Health Service, education and so on).^ The electorate responded tothe rise in unemployment in 1980-1981 by turning against the governmentin massive numbers; the standings of both Margaret Thatcher as prime min-ister and the Conservatives as party fell to all-time lows. The Conserva-tives might weU not have won the 1983 election but for the Falklands War.Even when she and her government were at the nadir of their fortunes,however, Thatcher refused to change course. Downward pressure continuedto be exerted on all of public spending, public borrowing and public-sectorpay. "There is," Thatcher said, "no alternative." In only one field didpublic opinion have a significant impact. The Conservative government,whatever its rhetoric, declined to make deep inroads into the country's tra-ditional welfare services. The National Health Service was, on the whole,protected; pensions continued to increase in value; most cuts in education(though not in higher education) were at the margin. To have launched afrontal assault on the welfare state would have been electorally ruinous:Thatcher might be an ardent warrior, but she was not a kamikaze pilot.

From Thatcher's point of view, a more worrying source of oppositionto many of her policies was not the unions, the parliamentary opposition,public opinion or even business men, but a group of dissidents inside herown party. Most Conservatives agreed with Thatcher about the desirabilityof cutting taxes and wasteful public spending and also about the need tomake British industry more efficient; but many of them would have refusedto assent to anything like all twelve of the propositions listed above. Theybelieved that maintaining fuU or near-full employment was just as impor-tant as fighting inflation; they were sceptical about the claims of mone-


tarism; they were not too bothered about budget deficits, provided theywere kept within limits; they were by no means critical of aU forms ofIMiblic spending. Many, in addition, were not very keen on Thatcherpersonally. In the specific circumstances of 1979-1981, they believed thatthe government was being too harsh in imposing its deflationary policiesand, moreover, that the policies themselves were inappropriate given theseverity of the world recession. Since many of Thatcher's Conservativecritics were memt>ers of her cabinet, debates in the cabinet were oftenheated and leaks were frequent. But on the main issues Thatcher got herway. As was remarked earlier, she installed her own supporters in all ofthe main economic positions. She also adopted the simple expedient ofsacking from the government those of her critics, the majority, whom shefelt could not do her serious political damage. Most of the leading "wets,"as her critics came to be called, returned to the back benches. Their revoltgradually petered out. *

By contrast, another revolt tended to become, if anything, more seri-ous as time went on. Local authorities in Britain — county councils, districtcoimcils, etc. — are legally the creatures of central government, just aslocal government units in the United States are legally the creatures ofstate governments. Local authorities in Britain levy their own propertytaxes, called "rates"; txit they also receive a substantial proportion of theirirKiome from central government, mainly in the form of "rate supportgrant." Since the Thatcher government was determined to hold down publicexpenditure as a whole, it had no choice but to try to hold down the spend-ing of local authOTities. It did so first by cutting the level of rate supportgremt, then by making additional cuts in the rate support grant of those lo-cal authorities that exceeded spending targets laid down in Whitehall, thanby taking powers to prevent high-spending local authorities from increasingtheir rates above a centrally determined level. Traditionally British localgovernment has functiaied on the basis of cooperaticm and mutual toler-ance between central government and local authorities; but the Thatchergovernment's moves to cut local government spending, involving the placingof tight restrictions on local government autonomy, outraged many of theauthorities. It particularly outraged those local authorities, mosf of themLabour-controlled, that stood to suffer most from the government's finan-cial penalties. Led by the city council in Liverpool, a number of Labourauthwities threatened in 1984 either to introduce unbalsmced (and there-fore illegal) budgets or, since they could not levy a rate as large as theywanted, simply to refuse to levy a rate at all. In the summer of 1984,Thatdher and her colleagues faced the prospect, unprecedented in Britishhistory, of large metropolitan areas refusing, in effect, to be responsiblefor their own self-government. Under such circumstances, ministers mightfind tl^y had no opticm tmt to send in centrally a^winted civil commission-ers — a move that would not only be seen as an affront to local democracybut would almost certainly, if it led to cuts in services, encounter fierceresistance from the local authority unions. The minister responsible forlocal government admitted privately in mid-1984 that, because of the dis-pute with Liverpool and other rebel authorities, he was, for the first timein his political life, beginning to lose sleep. (On the Thatcher government'srelations with local authorities, see Hood and Wright, 1981; Rhodes, 1984.)

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One other group was unhapy about many of Thatcher's economic poli-cies: the senior civil service. Most senior civil servants, sceptical bynature, doubted whether Thatcher's radical policies would produce thedramatic and beneficent results claimed for them. Many were committedto the programmes they were currently administering. And the civil serviceas a whole deeply resented Thatcherite attacks on its integrity and compe-tence. But British civil servants accept that, in the end, it is their job todo what their political masters tell them to 60. Thatcher and her colleaguestold them what to do. They did it.

WHAT STRATEGIES FOR REDUCING BIG GOVERNMENTWERE ADOPTED?

Partly because the civil service could be counted on to do ministers'bidding, the Thatcher government was able to be radical cm policy termswithout being radical in institutional terms. On the whole, she and hercolleagues left the structure of government as they found it, certainly asregards the making of economic poUcy.

The crucial department was the Treasury, the crucial minister theChancellor of the Exchequer. The Prime Minister worked closely with bothof her Chancellors, Sir Geoffrey Howe and Nigel Lawson. She met them aUtftit daily, stiffened their resistance to the claims of the spending depart-ments and invariably backed them in the cabinet. More than most of herpredecessors, she was herself, in effect, an economics minister. The Trea-sury and the nationalised Bank of England together controlled all aspects ofmonetary policy, and tradition dictated that in this connectiOTi the chancel-lor could decide policy on his own without reference to the rest of the cabi-net. The Treasury also controlled taxation policy, and here again traditionlaid down that the chancellor was in sole charge and had no need to consult,or even inform, his cabinet colleagues.^ On matters of both monetary andfiscal policy, if the Prime Minister and Chancellor held together, as theyalways did in Thatcher's time, they were an unbeatable combination.

But there were many other matters on which the cabinet as a collec-tivity had to decide. Chief among these was public expenditure in bothaggregate and detail. The Chancellor had the power to determine the taxstructure and tax rates; but he did not have the power to decide how muchgovernment money should be spent and on what. In other words, he con-trolled the budget in the British sense, but not in the American.^ Althoughthe Treasury had formal responsibility for public expenditure, and althoughthe Chancellor had the support in the cabinet of the Chief Secretary to theTreasury, the minister specifically responsible for public expenditure, alldecisions on public spending were taken on a bilateral or multilateral basis.Each department informed the Treasury of how much it hoped to spend inthe next fiscal year and on what; the Chief Secretary tried to persuadethem to make cuts; the department came back with a new bid; and so itwent. If the Chief Secretary, the Chancellor and the department could notagree, the matter would be referred to the full cabinet or to a specialcommittee of senior ministers set up to referee disputes. Thatcher madeconsiderable use of such a committee. It was called "the star chamber" (seeWapshott and Brock, 1983).

In the early years of the Thatcher administration, before the wets hadfinally been overcome, many bloody battles were fought over public expen-

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diture. The Prime Minister and the Chancellor won some and lost some.The balance of opinion in the cabinet varied from issue to issue. On theone hand, all ministers were pledged to cutting public spending and knewthat the Prime Minister was awarding merit badges on the basis of minis-ters' enthusiasm for cuts; on the other, the wets were as determined as shewas, and many individual ministers found themselves persuaded by thestrength of their own department's case. On one famous occasion, theChancellor of the Exchequer propc«ed in cabinet that social security bene-fits be increased by an amount less than the increase in the cost of living.The Secretary of State for the Social Services killed that idea by readingfrom the transcript of a television interview in which the Prime Ministerhad pledged her government never to cut old age pensions (Wapshott andBrock, 1983). Other issues, concerning privatisation, subsidies tonationalised industri^ and controls cm local authority spending, werelikewise fought out in cabinet committees or the fuU cabinet. Sometimesthe Prime Minister herself took decisicais in conjunction with the relevantdepartmental ministers; but usually in mattere of this kind the normfid pro-cedures were gone through. As time went on, with the dismissal of most ofthe wets from the government and with Thatcher's authority augmented bythe success of the Falklands campaign, the arguments in the cabinet gra-dually became less heated and the number of occasions on which the PrimeMinister got her way increased.

Although Thatcher was little interested in institutional change assuch, her interest in efficiency and the elimination of waste in governmentcaused her to create one new piece of administrative apparatus, the "Ray-ner Unit," named after its founder Sir Derek Rayner (late Lord Rayner), themanaging director of a chain of retail clothing stores. Rayner's remit wasto improve the quality of management within government, and to this endhe conducted detailed "scrutinies" of specific blocks of work in a series ofgovernment departments. His scrutineers asked of each block of work,"What is it for? What does it cost? What value does it add?" By the timeRayner returned to the private sector, his scrutinies had identified 274 mil-lion pounds sterling in potential savings. After his departure, the RaynerUnit, located in the Cabinet Office but reporting directly to the PrimeMinfeter, was established to carry on his work. Its new head was a careercivil servant.

Few instituticms were created, but it is worth noting that a number ofinstitutions — or at least institutionalised patterns of behaviour — wereabandoned. It was mentioned earlier that Thatcher had a deep dislike of in-come policies and, more generally, of "corporatism," the practice of tri-partite discussicms among ministers, business men and trade unionists thathad characterised British government more or less continuously since thetime of Harold Macmillan. In the event, Thatcher retained the best knownof the various tripartite institutions, the National Economic DevelopmentCouncil, tHit she abandoned incomes policy, and she abandoned any pretenceof talking on equal terms, or indeed any terms, with the Confederation ofBritish Industry or the Trades Union Congress. Even the NEDC was reducedto a monthly fcrum in which business and union leaders had the privilege oflistening to statements of government policy by the Chancellor. Thatcherherself saw CBI and TUC representatives as seldom as possible and gavethe impressiOT that she would not mind if she never say them at all. Where-

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as earlier prime ministers said, "We must talk to the unions," this one said,"We must decide what we are going to do." The unions, in particular, weredismayed by tt^ir exclusion from power, but there was little they could doabout it.

Against that background, what strategies did the Thatcher adminis-tration employ for reducing the economic and social role of the govern-ment? This question needs to be answered at two levels. At one level,Thatcher and her economic colleagues did have a strategy, indeed probablya clearer strategy than any administration since Clement Attlee's Labourgovernment after the war. Their strategy was contained in the twelve pro-positions above, which thanks to Thatcher gave the Conservatives under heran unusually clear sense of directiOTi and an unusually clear set of priori-ties. As must be evident by now, the Thatcher government, unlike thegovernments in some other countries, was not merely "responding to budgetscarcity." It was responding to what it saw as thirty years of bad govern-ment resulting in relative economic failure. Whatever else it was doing,the Thatdier government after 1979 was not engaging in a mere budget-cutting exercise. Its aims and plans went far wider than that.

At another level, however, Thatcher and her colleagues had only theoutlines of a strategy. They knew, for example, that they wanted to cutpublic spending; but they had no very specific ideas about which publicspending ought to be cut. They knew that they wanted to reduce govern-ment subsidies to the nationalised industries; but they had not decided inadvance which industries should have their subsidies cut and by how much.They knew that they wanted to encourage competition; but they lackedvery precise plans for working towards that goal. They knew that theywanted to privatise some nationalised industries; but at the time they cameto power they had not decided which industries nor how precisely the pro-cess of privatisaticm was to proceed. And so on. In other words, the govern-ment had a sense of direction and a compass but no (or at least few) maps.

That being so, the government's specific decisions were largely takenad hoc and ad hominem. Given sufficient information, each of them couldundoubtedly be explained, but, even given such information, it is doubtfulwhether any clear general pattern would emerge. Ideology ruled in thegeneral; pragmatism ruled in the particular; each triumphed over the otherfrom time to time. After all, the Thatcher government, like any other, hadgoals other than strictly economic ones. It found, like any other, that someof its goals, even in the strictly economic sphere, conflicted with echother. It had often, like any other, to respond to outside pressures. Alsolike any other, it tiad its own internal inertias, tensions and personaldynamics. Allison's (1971) Model I (the "rational actor") is more applicableto the Thatcher government than most, but his Model n ("organisationalprocess") and his Model ni ("governmental politics") are applicable as well.

Thus, Thatcher believed as a general proposition that governmentcould not successflly foster innovation in industry; but she also believed inthe vital importance to Britain of information technology. The result was amassive government-funded programme to promote training in informationtechnology and to encourage private firms to make full use of computers,microchips and so on. Similarly, Thatcher deplored the pouring of tax-payers' money into loss-making state companies; but her government, for avariety of political and social reasons, made grants and loans on a vast

488 Policy Studies Joistial

scale to the British Steel Corporation, British Shipbuilders, the NationalCoal Board and the state-owned car company, BL. Such examples could bemultiplied almost indefinitely. They drove Thatcher's more doctrinaireright-wing critics to distraction. No one else was especially surprised.

WHAT HAVE BEEN THE RESULTS?Thatdier's vision was large, her government's programme ambitious.

The visionary is still prime minister, and her government has by no meansfuUy implemented its programme. What, nevertheless, have been theresults so far? They can be considered under headings suggested by thevarious propc^itions listed earlier.

inflation and Unemployiii^itThe government made the fight against inflation one of its main

priOTities, and the inflation rate, after a sharp initial rise, has fallensubstantially since the Thatcher government came to power. In May 1979,the last month of the Callaghan government, the annual rate of inflationwas 10.3%. Four years later, it was 3.7% (Riddell, 1983).^^ At the sametime, however, unemployment in Britain is now at a higher level than atany time since the 1930s. It nearly trebled during Thatcher's first term.How much of this increase in unemployment was the result of the govern-ment's policies is disputed.^^

fn with, the government had only limited success in controllingthe rate of growth of money suK>ly; between 1979 and 1982, the rate ofgrowth of sterling M3 — the broadly defined money supply — consistentlyovershot the Chancellor's targets, often by large amounts. Thereafter,however, the growth of money supply was kept broadly within the govern-ment's target range. "Proper monetary discipline" (the government's phrase)undoubtedly played a considerable part in bringing down the rate of infla-tion — as well as in pushing up the unemployment rate.

Government BcxrowingThe Thatcher government was determined to bring down the volume

of government borrowing, i.e. to reduce the budget deficit, and in this itsucceeded. Britain along with Japan was almost the only industrial countryin the early 1980s to move towards, though it did not actually reach, budge-tary surplus. It has been calculated that British policy in this period wassix times more deflationary than that of the United States. In the words ofa LcMidon Financial Times correspondent:

After adjusting for the recession and higher interest pay-ments, the British government t i^tened its fiscal policy, viaa reduction of its budget deficit, by an amount equivalent to6 per cent of GDP. This was four times the average changefor the seven countries (Britain, Japan, Canada, West Ger-many, France, Italy and the United States) taken as a whole.The U.K. h£is thus been the least Keynesian of all major in-dustrial countries (Riddell, 1983).

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Cuts in Public SpendingThe government was determined to cut public spending. "The state,"

the Conservatives said in their 1979 election manifesto, "takes too much ofthe natiwi's income; its share must be steadily reduced." In fact, under theConservatives the share of national income taken by the state has beensubstantially increased, from 40i% of GDP to 43% in 1983-84 (GEP, 1984).This unintended outcome is the result, on the one hand, of the continuingrece^ion (British gross domestic product actually fell between 1979 and1983) and, on the other, of vastly increased government spending on de-fence, the police, agriciiture (largely thanks to the European Community)and entitlement benefits such as unemployment insurance (largely thanks tothe length and depth of the recession) (Riddell, 1983). Public spendingmight have grown by even more under some other government, but it couldequally be argued that under another government the recession in Britainwould not have been so long and deep and that less money would have beenspent on defence and the police (two areas in which the Conservatives'generalised preference for small government is replaced by a preferencefor large, not to say huge, government).

Tax CutsThe Thatcher government turned out to be not only a high-spending

government but also, despite its declared intentions, a high-taxing govern-ment. Higher levels of taxation were an inevitable consequence of the com-bination of higher spending and lower borrowing already described. In theevent, the burden of taxation under the Tories reached all-time records.The highest proportion of GDP taken in taxation under the previous Labourgovernment as 40.2% in 1975. In Labour's last fuU year, the proportion was38.2%. In 1982, under Thatcher, it reached 45.7%.^^ The Conservativesdid, however, succeed in reducing the higher marginal rates of income tax(thereby, it was hoped, increasing incentives).

Market DisciplineThere is no known way of measuring the extent to which a country's

economy is exposed to "market discipline." Nevertheless, it is clear thatthe British economy is much more market-oriented than it was even fiveyears ago. Despite the scale of government subsidies to some of the nation-alised industries, most of the publicly owned industries have shed labourand become more productive, and in the private sector record levels ofbankruptcies testify to ministers' refusal to bail firms out. The Thatchergovernment has resisted all pressures to protect British industry from for-eign competition and there can be Uttle doubt that, whereas once ownersand managers of large firms believed that, if they got into trouble theycould look to the government for assistance, they no longer do so. Morepositively, the present government has broken monopolistic practices andintroduced competiticm into activities as diverse as intercity bus travel, thesupply of telephone equipment, property conveyances and the filling of pre-scriptions for glasses. "Deregulation" (though the term is little used inBritain) has proceeded apace, if not as fast as many of the government'scritics would like.


Incomes PolicyThe government said it would not have an incomes policy, either

voluntary or statutory, and it has not had one — though, of course, it hashad to bargain with its own employees in the public sector and has oftenplayed a considerable part, albeit behind the scenes, in pay negotiationsbetween specific nationalised industries and their employees.

"Corporatisiii"British government is still characterised, at middle levels of adminis-

tration, by a dense network of consultative (and sometimes decision-making) committees which include representatives of government and ofinterested parties such as trade unions and employers' associations. TheManpower Services Commission, respctfisible for industrial training, is agood example. The Thatcher government has not substantially disturbedthis network, but it has reduced the number of non-departmental bodies(often known in Britain as "quangos") and, as was mentioned earlier, hasresolutely refused to engage the national "peak" orffanisaticms — notablythe CBI and the TUC — in corporatist discussions.^^ In its insistence onlimitir^ the role of intermediaries between the government and the people,the Thatcher administration is at least mildly Gaullist.

PrimitisatioiiIn this field the government has gone further and faster and, in its

own terms, been more successful than in any other. The Thatcher govern-ment inherited one of the largest public sectors in the liberal-democraticworld. By the end of its second term of office, the British public sectorwill certainly not be larger than the OECD average and will probably besmaller. Here is a partial list of the firms that the Thatcher governmenthas already sold off in whole or in part or will sell off by 1987-1988: BritishPetroleum, International Computers Limited, British Sugar Corporation,Cable and Wireless, Amersham International (a biotechnology firm), theNational Freight Corporation, Britoil, Associated British Ports, EnterpriseOil, British Telecom (the previously state-owned telephone company), Brit-ish Airways, British Airports, the National Bus Company, British NuclearFuels, Sealink, Land-Rover, Rolls-Royce and Jaguar (see Brittan, 1984;Riddell, 1983). In selling off such firms, the government has sought to raiserevenue as well as increase competition and boost industrial efficiency.

CultureThere is reason to think that there has been some increase in the

incidence of individualist and business-oriented values in Britmn in the pastfew years, but no systematic evidence on the subject exists and no oneknows whether any changes that have taken place wiE turn out to beephemeral CM* relatively permanent.

CONCLUSIONS"Big government" in Britain probably reached its peak in Britain in

the mid-1970s. Since then, although public spending and taxation have in-creased, the size of government by almost any other measure has been sub-stantially reduced. Incomes policy is at an end. Corporatism is virtually atan end. The public sector has shrunk. The role of the market has greatly

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increased. On a more prosaic level, the number of civil servemts in Britainfell from Just under 750,000 in 1976 to well under 650,000 in 1984 (Riddell,1983). Several of these changes, including the reduction in the size of thecivil service, began under Labour, but many of them, notably privatisation,were initiated by the Thatcher administration and all of them have beengreatly accelerated under Thatcher. Labour may have signalled the end ofthe Keynesian era in British economic management, but the Conservativesunder Thatdier have gone much further than Labour would have done inliberalising the British economy. Whether in 1990 or 2000 the Britisheconomy will be seen to have been strengthened by the experience, orwhether it will be strcxiger than it would have been but for the experience,are open questicms. The government, at least, professes optimism.

What have been the political consequences of government's being cutdown to size? In response to this question, three points are worth making.The first, to repeat something said earlier, is that smaller government inBritain is not institutionally different government. A textbook writer of the1950s, or even the 1930s, would have had little difficulty in following theCallaghan and Thatcher governments' budget-cutting and related efforts.Secondly, it is almost certain that the end of Keynesianism, and the wide-spread suspicion of public enterprise and of government as an actor in theeconomic realm, have brought about — indeed may be thought to constitute— a profound shift in "public thought" in Britain. Apart from activists inthe Labour party (a group much smaller than a generation ago), few inBritain any longer believe in nationalisation, in centralised economic plann-ing, in the altruism of trade unions or in the capacity of any British govern-ment to find a way, on its own, out of the world recession. In that sense,Thatcherite ideas have won, at least for the time being. Thirdly and finally,the shrinking of big government has coincided with, even if it has notcaused, mass unemployment, immense persongd hardship and the virtual de-struction of civilised life in several of Britain's inner-cities. On the onehand, most commentators draw attention to the quiescence of the Britishpeople, especially the unemployed, in the face of economic privation; but,on the other, there are a few voices in Britain warning that, in cities likeLiverpool and Glasgow, demoralisation is almc«t total and violence lurksonly a little distance below the surface.

NOTES1. But the Thatcher government's efforts to cut big government down to

size went much further than those of the Wilson and Callaghan Labourgovernments; see Heclo and Wildavsky, 1981, p. xx.

2. Sir Douglas Wass quoted in Keegan and Pennant-Rea, 1979, p. 32. Seealso Keegan and Pennant-Rea's own discussion, pp. 131-137.

3. The non-British (indeed the non-English) reader may need to be toldthat many years ago cricket teams used to be divided into professional"players" and amateur "gentlemen." The players were usually of alower social class than the gentlemen — and far better cricketers.

4. The Trades Union Congress had got used over a long period of years tobeing asked for its advice on a wide range of economic matters, notjust those directly affecting the unions. The TUC frequently played alarge role in the formulation and implementation of incomes policies.From 1979 onwards, it found itself relegated to the sidelines. Its

492 Policy Studies JounMd

advice had often been ignored before; now it was not even sought. TheTUC collectively suffered from something like withdrawal symptoms.

5. The figures are given by Riddell, 1983, p. 74. Riddell points out thatthe actual unemployment figures were probably a good deal highersince, between 1979 and 1983, the method for computing them waschanged in such a way as to bring them down and since the Britishmethod for calculating unemployment has always tended to result inlower figures than the methods employed in other countries. In 1984"real" unemployment in Britain is generally reckoned to stand at aboutfour million.

6. Crewe, 1981, p. 304. By 1983 the proportion against tax cuts if theyled to cuts in government services had gone up to 80%.

7. For two views of these developments, see Gilmour, 1982; Pym, 1984.Gilmour and Pym were among thc^e sacked from the government. Bylate 1984 only one wet of any political weight remained in the cabinet,Peter Walker.

8. Much has been made of the Chancellor's failure to consult hiscolleagues in 1981 before introducing a strongly deflationary budget,but Howe was merely following precedent (though he kept his cardscloser to his chest than some other Chancellors would have done). SeeKeegan, 1984, p. 169.

9. In the United States, the president's budget concentrates on the admin-istration's expenditure plans; in Britain, the Chancellor's budget con-centrates on tax changes.

10. Actually the situation was slightly more complicated. Rayner left be-hind two bodies, the Rayner Unit and also a new FinancisJ ManagementInitiative Unit. Rayner was always more concerned with the quality ofmanagement throughout the civil service than with merely saving afew million pounds here and there. On "Raynerism" see Greenaway,1984, pp. 35-39. In the same connection, a system known as Manage-ment Inf<M*maticm for Ministers (MINIS) was introduced in a number ofdepartments, notably the Department of the Environment, whose firsthead under Thatcher, Michael Heseltine, was that rare bird a politicianinterested in management and good at it. For a brief description ofMINIS, see Peele, 1983, pp. 98-99.

11. Most of the data in this part of the paper are drawn from Riddell,especially chapter 3.

12. The view is widely held that, but for the government's deflationary po-licies, the rise in unemployment might have been held to half of whatit actually was. For a brief discussion, see Riddell, 1983, pp. 90-91.

13. Economic Trends, October 1984, quoted in The Times, 11 November1983, p. 2.

14. A quango is a quasi-nongovernmental organisation, though in fact someof the bodies so duWaed are better described as quasi-governmental. Onthe Thatcher government's threat to them, see Hood, 1981.

REFERENCESAllison, Graham T. 1971. Essence of Decision: Explaining the Cuban Missile

Crisis (Boston: Little, Brown). "Bacon, Robart, and Walter Eltis. 1976. Britain's Economic Problem: Too

Few Producers (London: MacmiUan).


Barnett, Joel. 1982. Inside the Treasury (London: Andre Deutsch).Brittan, SamueL 1984. "The Politics and Economics of Privatisation,"

Political Quarterly 55 (April-June).Crewe, Ivor. 1981. "Why the Conservatives Won" in Howard R. Penniman

(ed.), Britain at the Polls, 1979: A Study of the General Election(Washington, DC: American Enterprise Institute).

GEP. The Government's Plans 1984-85 to 1986-87, Volume 1, Cmnd. 9143-1(London: Her Majesty's Stationary Office).

Gilmour, Ian. 1982. Britain Can Work (Oxford: Martin Robertson).Greenaway, J.R. 1984. "Bureaucrats under Pressure: The Thatcher Govern-

ment and the Mandarin Elite" in Lynton Robins (ed.). Updating BritishPolitics (London: Politics Association).

Heald, David. 1983. Public Expenditure: Its Defence and Reform (Oxford:Martin Robertson)!

Heclo, Hugh, and Aaron Wildavsky. 1981. The Private Government of PublicMoney: Community and Policy inside British Politics, 2nd, ed. (London:MacmiUan).

Hood, Christopher. 1981. "Axeperson, Spare that Quango . . ." in Hood andWright.

Hood, Christopher, and Maurice Wright (eds.). 1981. Big Government inHard Times (Oxford: Martin Robertson).

Keegan, William. 1984. Mrs. Thatcher's Economic Experiment (London:Allen Lane).

Keegan, William, and Rupert Pennant-Rea. 1979. Who Runs the Economy?— Control and Influence in British Economic Policy (London: TempleSmith).

King, Anthony. 1985. "Margaret Thatcher: The Style of a Prime Minister" inKing (ed.). The British Prime Minister, 2nd. ed. (London: MacmiUan).

King, Anthony. Forthcoming. "Margaret Thatcher's First Term" in AustinRanney (ed.), Britain at the Polls, 1983 (Durham, NC: Duke UniversityPress).

Peele, Gillian. 1983. "Government at the Centre" in Henry Drucker (ed.).Developments in British Politics (London: MacmiUan).

Pliatzky, Leo. 1982. Getting and Spending: Public Expenditure, Employmentand Inflation (Oxford: BlackweU).

Pym, Francis. 1984. The Politics of Consent (London: Hamish HamUton).Rhodes, R.A.W. 1984. "Continuity and Change in British Central-Local

Relations: 'The Conservative Threat', 1979-83," British Journal ofPoUtical Science 14 (July): 261-283.

RiddeU, Peter 1983. The Thatcher Government (Oxford: Martin Robertson).Rose, Richard. 1974. The Problem of Party Government (London:

MacmiUan).Stephenson, Hugh. 1980. Mrs. Thatcher's First Year (London: JiU Norman).Wapshott, Nicholas, and George Brock. 1983. Thatcher (London: Futura).Wright, Maurice (ed.). 1980. Growth and Restraint in the 1970s (London:

Alien and Unwin).

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