Making Modern UK Economic Policy under Margaret Thatcher 1979 to 1990

Economic Policy under Margaret Thatcher 1979 - 1990

Economic Policy under Margaret Thatcher 1979 - 1990N C Gardner MA PGCE15/01/2016Economic Policy1

Economic Policy-Making under ThatcherDuring the 1980s the world economy became increasingly interdependent and the openness of the British economy made it more difficult to operate an independent economic policy.

It became impossible to operate an economic policy running counter to the opinions of international financial markets.15/01/2016Economic Policy2

Nigel Lawson, Chancellor of the Exchequer 1983 89.

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Joining the European Monetary SystemSome economists and commentators argued that the loss of control of a policy instrument, the exchange rate, made a decision to join the European Monetary System (EMS) unwise; others said that international interdependence made it impossible to run an independent exchange rate policy in any case, and membership of the EMS would bring security by creating stable expectations, and generate support from European Community governments for sustaining a stable currency.15/01/2016Economic Policy4

Major shift in economic policy after 1979The Conservative election victory of May 1979 marked a major shift in economic policy. The Thatcher governments dominant aims were to master inflation through control of the money supply and to pull back the frontiers of the State with an increasing emphasis on privatisation.

These were pursued with great determination, but often with more rhetoric than success, in circumstances that included a second oil price shock in 1979, an international slowdown and recession and international economic recovery from 1984 onwards.15/01/2016Economic Policy5

With the election of the Conservative Party in 1979 under the leadership of Margaret Thatcher, a major shift in economic policy took place ending the post-war policy of Keynesian economics and ushering in full-blown market forces. Everyone and everything was given a price tag and Britain became one vast grocers shop. Thatchers dad was a grocer.15/01/2016Economic Policy6

Britains economic growth was very slow 1979 - 84The decade 1979 89 can be divided into two parts. In the first five years (1979 84), the increase in total output was only 3.8% in the United Kingdom but recovered over the next five years (1984 89) to 20.4%.

The comparable figures for the OECD countries as a group (including the UK) are 10.5% (1979 84) and 18.8% (1984 89). Thus the UK recorded less than half the growth in the rest of OECD in 1979 84 and slightly faster growth in 1984 89.15/01/2016Economic Policy7

Britain slower than others (1979 84); faster than others (1984 89)To grow more slowly than other industrial countries has been the usual experience in Britain since 1945. What was unusual in 1979 84 was the very slow growth in other countries; but Britains growth was even slower slower than any previous period since the war.

In 1984 89 Britains better performance was in relation to a rate of growth in OECD countries than was low by past standards. France and Germany, which had experienced growth rates of 5 or 6% annually in the 50s and 60s, averaged no more than in the 80s than 2.1 and 1.9% respectively.15/01/2016Economic Policy8

From the mid-1980s Britons became shopaholics.15/01/2016Economic Policy9

Britain doing better than the continentalsBritains performance from 1985 89 appeared to augur well for the future. Growth at 3.8% annually for five years was well above the rate across the Channel. Even in the five years 1968 1973, the nearest comparable period, growth was not fast.

But there were grounds for caution since the high growth rates were based upon an unsustainable boom. The rate of expansion in 1984 89 was fed on a lowering of unemployment by a million and an increase in pressure on industrial capacity that sent the balance of payments into enormous deficit and pushed up the rate of inflation. By 1990 there was a deep recession.15/01/2016Economic Policy10

High consumer spending: what keeps Britain afloat.15/01/2016Economic Policy11

High consumer spendingEconomic expansion was sustained by high consumer spending. This had risen strongly in 1978 79 but in 1980 81 increased hardly at all. From 1983, however, it rose to a more normal level until in 1986 88 it was swept up into a consumer boom on a scale never before experienced indeed in 1988 the increase in consumer spending was more than the rise in GDP.15/01/2016Economic Policy12


Labour had lost the ideological battleLabour governments in the 1970s (1974 79) had to grapple with economic problems all at once: inflation, public sector deficits, and downward pressure on the exchange rate.

Undoubtedly Labour lost the ideological battle of the 1970s. Thatcher was able to capture the Conservative Party leadership in 1975 in large part by playing on the theme of decline, and by linking that theme to contemporary economic difficulties.15/01/2016Economic Policy14

Decline panic 1970sIn her memoirs Thatcher wrote: decline was the starting point for the policies of the 80s: everything we wished to do had to fit into the overall strategy of reversing Britains decline, for without an end to decline there was no hope of success for our other objectives.

Declinism licensed many of Mrs Thatchers policy approaches after 1979. The hostility to trade unions, the desire to cut public spending, the privatisation of nationalised industries all drew heavily on the notion that Labour and Keynesian policies were to blame.15/01/2016Economic Policy15

Londons Leicester Square during the Winter of Discontent 1978 - 7915/01/2016Economic Policy16

Thatcher: a product of declinismIn an important sense, Mrs Thatchers capture of the Tory leadership in 1975 and her policy agenda of enterprise and markets were a product of declinism in the 70s.

By the late 1980s, and with the boom well under way under the Chancellorship of Nigel Lawson (the Lawson boom), the Conservatives were arguing that decline was a thing of the past. Britains relative growth performance improved as that of other Western European countries, most notably West Germany, worsened.15/01/2016Economic Policy17

Fashion sales boomed in the mid and late 1980s15/01/2016Economic Policy18

Me and my mates, 1980s15/01/2016Economic Policy19

Fall in savingsThe high consumer spending of the Lawson boom of the mid-1980s brought down the ratio of savings to personal income from 8.2% in 1986 to 5.4% in 1988.

The fall in the savings ratio it had been 13.5% in 1980 had been one of the main forces sustaining demand throughout the decade, but by 1988 the enthusiasm of consumers for getting into debt had overshot the mark and was not a helpful development.15/01/2016Economic Policy20

No balance of payments problemFor the whole of the 1980s until the end of the decade there was no balance of payments problem to impose itself on domestic policy. For that North Sea oil was in part responsible.

The output of North Sea oil reached its peak in 1985 86 and the downturn that followed coincided with the return of a chronic external deficit.

In addition persistent underemployment remained which reduced the spending power of some consumers below what would have been earned at full employment, and hence limited the demand for imports.15/01/2016Economic Policy21


A change of economic philosophyThe new Conservative government which took office in May 1979 was dominated by ministers with a very different economic philosophy from that of earlier governments. They were strongly against state intervention in industry and wanted to abolish state subsidies.

They intended to cut public spending and reduce taxation. They hoped to return an unspecified amount of publicly owned industry to private enterprise. Producers and consumers were to be left as free as possible to conduct their own affairs.15/01/2016Economic Policy23


Full employment ended in the 1970s and has never returnedFull employment had ended in the 1970s when a world in which it was politically unthinkable that unemployment could remain above 600,000 had given way to a world in which for years (the 1980s) unemployment remained at over twice that level (i.e. at least 1.5 million).

In the 1980s unemployment rose to at least five times the highest level in the 1960s, and a level about as high as was ever experienced in the Great Depression of the 1930s, without any marked political upset.15/01/2016Economic Policy25


Changes in the way unemployment was counted made it difficult to gage the exact number.The basis of counting the numbers of unemployed was changed repeatedly always in a downward direction and eventually related only to claimants of unemployment benefit aged 18 or over.

Therefore it was difficult to know the exact numbers of unemployed people, but estimates of up to 3.8 million have been made, and compared with the official estimate of 3.1 million for 1986.15/01/2016Economic Policy27


Contraction in manufacturingThe steep rise in unemployment in the Thatcher decade was almost entirely due to a contraction in manufacturing employment.

Employment in manufacturing had already fallen from nearly 9 million in 1966 to less than 7 million in 1980. There was a continuous fall in manufacturing employment until 1987. By 1990 nearly 2 million fewer workers were employed in manufacturing than in 1980.15/01/2016Economic Policy29

Madonna, Queen of Pop in the 1980s15/01/2016Economic Policy30

Conservative priority: the control of inflationThe rise in unemployment in the 1980s was the outcome of policies designed to curb inflation. Since the Conservative government was determined not to embark yet again on an incomes policy, and had little hope of carrying the TUC with it if it had, it had to leave wages and prices to market forces and rely on a contraction in demand to keep prices down. 15/01/2016Economic Policy31

Jennifer Beals, star of Flashdance a hit movie of the 1980s15/01/2016Economic Policy32

The benefits of North Sea oilThere is no doubt that North Sea oil contributed to the very different outcome of the second oil shock in 1979. It is estimated to have contributed a net 6 billion in 1980 and 9 billion in 1981 compared with 3.8 billion in 1979.

For ten years from 1977 to 1987 North Sea oil freed Chancellors of the Exchequer from the compulsions of a balance of payments deficit.15/01/2016Economic Policy33

The stars of Dynasty, the hit TV show of the 80s. Linda Evans and Joan Collins strongly influenced ladies fashion.15/01/2016Economic Policy34

Different economic policy from previouslyThe economic policy-makers of the new Conservative government of 1979 regarded the prime aim of macro-economic policy as the maintenance of a stable economic environment, with stability in the value of money enjoying top priority.

The level of employment on the other hand was regarded as a matter of micro-economic policy since it was represented as varying with the wage at which labour could be hired. If workers insisted on pricing themselves out of a job it was not for the government to create more jobs at the cost of inflation and so destabilize the economy.15/01/2016Economic Policy35

Young, upwardly mobile professionals were beneficiaries of the Thatcher Revolution, the freeing-up of market forces.15/01/2016Economic Policy36

Macroeconomic policy, 1979 - 82The first phase of macroeconomic policy was the attempt to apply a monetarist strategy to bring down inflation. Monetarist theory played a key role in the rise of Thatcherism in the Conservative party, and in the early years of the Conservative government.



Macroeconomic policy, 1979 - 82The Medium Term Financial Strategy (MTFS) in 1980 set out target growth ranges for the money supply up to 1984. The theory was that decision-makers will change their expectations of future inflation once they become convinced that a government will stick rigidly to a declining rate of monetary growth, and this in turn will make it possible to reduce inflation at a lower cost in terms of rising unemployment.



Inflation rising 1979 - 80The results of monetarism, the control of the money supply, was a rising inflation rate. Inflation was rising at the time of the 1979 general election, and it continued to rise during 1980 to 22%.

OPEC oil price rises and the ending of the Labour governments incomes policies caused inflation, but the major part of inflation was a direct result of Conservative polices. However, inflation fell to 4% per annum just prior to the 1983 general election.15/01/2016Economic Policy41

1979 Budget of Geoffrey HoweGeoffrey Howes first budget as Chancellor took place in June 1979 and its main feature was a switch from direct to indirect inflation. Income tax was lowered from 33% to 30%, the top rate of income tax was cut from 83 to 60%, and personal tax allowances were improved in various ways.

On the other hand, VAT (indirect taxation) was raised to 15%. Public spending was cut by 1.5 billion.15/01/2016Economic Policy42

Geoffrey Howe, Chancellor of the Exchequer 1979 83. Reducing inflation was the prime objective.15/01/2016Economic Policy43

The return of mass unemploymentDuring 1980 81 unemployment nearly doubled. The collapse in employment and industrial production was similar to the onset of the Great Depression of the 1920s.

Monetary policy played an important role in creating the recession of 1980 to 1982, but it did not operate by means of a reduction in the money supply, but rather via the exchange rate. In 1979 Geoffrey Howe attempted to control the money supply by rapidly driving up interest rates.


Interest ratesThe idea is that since interest rates are the price for borrowing money, increases in base rates tend to choke off the demand for credit, which is an important component of broad money.

Thus manipulation of interest rates is the main mechanism for influencing the money supply.

However, high interest rates also attract foreign currency or hot money to Britain seeking a higher rate of return than elsewhere, which in turn drives up the value of sterling.15/01/2016Economic Policy45

Brideshead Revisited, a hit TV show of 1981 82, based on the novel by Evelyn Waugh. The Downton Abbey of the early 1980s.15/01/2016Economic Policy46

The value of sterling became too high, 1979 - 80High interest rates in 1980 served to increase the already high value of sterling, and this increased the price of exports and reduced the price of imports.

This damaged exports and stimulated imports, and this increased unemployment. The high interest rates also choked off industrial investment, creating rapid increases in unemployment in the capital goods and construction industries.15/01/2016Economic Policy47

Large cuts in public sector investmentAnother thing that made the recession worse were large cuts in public sector investment designed to meet target reductions in public spending.

Such cuts are ultimately short-sighted because they reduce the efficiency of essential infrastructure, and investment in human capital which is necessary to sustain long-run growth.15/01/2016Economic Policy48

In 1981 Duran Duran started their chart run in Britain and the United States becoming one of the most successful pop bands of the Eighties.15/01/2016Economic Policy49

Monetarism to fight inflationOverall the aim of the monetarist experiment was to fight inflation and establish credibility among bargainers that inflationary wage claims would not be underwritten by the government.

Gross Domestic Product fell sharply in 1980 in comparison with the previous year and did not reach 1979 levels until 1983, four years into the Thatcher government.

Gross Investment in machinery in constant prices, one of the prime determinants of long-run economic growth, did not attain 1979 levels until 1988.15/01/2016Economic Policy50

Output per person increasedOutput per person employed, the key measure of productivity, responded more rapidly and exceeded pre-Thatcher levels by 1982. But that reflected a rapid rise in unemployment as much as a rise in competitiveness.

The Public Sector Borrowing Requirement declined very slowly until well into the second term of the Thatcher government, at which point it declined rapidly.

This rapid decline after 1985 coincided with a rise of the balance of payments deficit.15/01/2016Economic Policy51

In 1983 David Bowie was top of the charts with Lets Dance the single, album and world tour.15/01/2016Economic Policy52

Weaknesses of the British economyReliance on smoke-stack industriesOvermanningPoor productivityWeak managementUncooperative trade unions

The world was in recession in 1979 81 following the second OPEC oil price rises of 1979 and the above problems of the British economy exposed the country to the full effects of the international economic downturn. Unemployment rose steadily to over 3 million.15/01/2016Economic Policy53

In 1983 Michael Jacksons Thriller album was the biggest-selling in the United States and worldwide.15/01/2016Economic Policy54

1981: the return of mass unemploymentFor the first time since the Great Depression of the 1930s, mass unemployment returned to Britain in 1980 81.

In the spring of 1981, with unemployment at 2.7 million and still rising and output down 5.5% in two years, there was enormous pressure for the Budget to reduce the squeeze on spending and taxes.

Most in the Treasury and even supposed monetarists like the Chancellor, Geoffrey Howe, favoured a little relaxation.15/01/2016Economic Policy55

The Ladys Not For TurningBut Thatcher was convinced by Professor Alan Walters, her personal economic adviser, to stick with the programme of reducing public spending and controlling inflation even at the cost of rising unemployment.

Walters and Thatcher felt it necessary to convince the markets that the government was indeed determined to reduce inflation no matter what.


Economics is the method; the object is to change the soul. (Margaret Thatcher, The Times, 1981)15/01/2016Economic Policy57

Economics is the method; the object is to change the soul. (Margaret Thatcher, The Times, 1981)Margaret Thatcher wished to reverse the orderly management of decline that she perceived had taken hold of Britain in the Seventies.

The decline narrative stated that Britains withdrawal from empire after 1945 and its decline as a global economic superpower, and its transition to a mass democracy and modern welfare state had caused major problems.15/01/2016Economic Policy58

Economics is the method; the object is to change the soul. (Margaret Thatcher, The Times, 1981)Mrs Thatcher was a devout Christian and in 1979 Britain elected its most religious leader since Gladstone. Christianity maintained a lingering influence upon Britain in the 20th century.

All three parties Liberal, Conservative and Labour could claim a Christian ethos. The post-war settlement, which massively expanded the responsibilities of the state in the areas of education, health, welfare and housing was part of a moral consensus forged out of the shared hardships of the Depression and the War.15/01/2016Economic Policy59

Christianity retained a lingering influence in post-war Britain.15/01/2016Economic Policy60

Thatcher was the most religious prime minister since Gladstone.In education, broadcasting, law and in national ceremonies, Britain remained identifiably Christian. Christianity still mattered and for Margaret Thatcher it mattered a great deal.

Thatcher was the daughter of a Methodist lay-preacher and therefore she had a clear understanding of the religious basis of her political values.

The conviction politics of the Iron Lady satisfied a thirst for certainty in an age of profound doubt and religious decline.


Thatcher: a product of provincial inter-war EnglandMargaret Thatcher was very much a product of provincial inter-war England. But, crucially, she escaped and then benefited from the opportunities that were opening up for women from the 1950s onwards.

Thatcher experienced Britains imperial decline and accepted the new American empire of the mid to late 20th century.

The two defining moments that shaped the politicians of her generation the Great Depression of the 1930s and the Second World War she experienced from a distance.15/01/2016Economic Policy62

Unlike Thatcher, Edward Heath experienced directly the Depression and the Second World War. Therefore his political outlook was fundamentally different from that of Thatcher.15/01/2016Economic Policy63

Monetarism dies, 1985In 1985, a sterling crisis began to unfold, and the Chancellor, Nigel Lawson, reacted by raising interest rates to defend the value of the currency.

The policy dilemma Lawson faced was that a rapid devaluation of the currency would accelerate inflation by driving up the cost of imports, whereas a rapid rise in interest rates would undermine investment and ultimately slow economic growth.15/01/2016Economic Policy64

Nigel Lawson, Chancellor of the Exchequer 1983 89, faced a sterling crisis in 1984. Eventually monetarism was abandoned in October 1985 by Lawson.15/01/2016Economic Policy65

To keep interest rates as low as possibleThe essential aim of policy during this period was to keep interest rates as low as possible consistent with a slow devaluation of the currency.

But this proved difficult to achieve; when the pound dropped to $1.12 in January 1985 interest rates were raised by no less than 4.5% in the space of two weeks.

In a TV interview Thatcher was asked at this time if she thought the economy had reached the natural rate of unemployment, and she dismissed this key concept of monetarist theory by saying it was not a doctrine to which she subscribed.15/01/2016Economic Policy66

Monetarism died in 1985Thus monetarism as an ideological underpinning for Conservative economic strategy was dead, following the TV interview with the Prime Minister in 1985.

Pragmatism had arrived and this enabled the Chancellor, Nigel Lawson, to begin to stimulate growth. But essentially the policy had returned to the traditional stop-go strategy, characteristic of economic policy for most of the post-war years.

This involved the government stimulating the economy in order to produce growth and reduce unemployment, and following this with periodic deflations designed to deal with the balance of payments and currency problems which resulted from the initial stimulus.15/01/2016Economic Policy67

Nigel Lawson, with his wife, on a Budget Day in the 1980s15/01/2016Economic Policy68

Creating a pre-election boom, 1986With the economy in growth, conditions were favourable for creating a pre-election boom in 1986. The Chancellor, Nigel Lawson, had considerable political space within which to operate.

The balance of payments surplus derived from North Sea Oil revenues made it possible to stimulate the economy without risking a run on the pound.15/01/2016Economic Policy69

North Sea oil gave Britain favourable economic conditions and a balance of payments surplus in the 1980s15/01/2016Economic Policy70

Unemployment: the most urgent problemIn March 1986 no less than 81% of the electorate thought that unemployment was the most urgent problem facing the government.

Thus a stimulus to the economy designed to bring down unemployment which would have only a small impact on inflation in the short run was an attractive political option.15/01/2016Economic Policy71



Rapid rise in the money supplyFrom January 1986 the government presided over a rapid rise in the money supply, which was well in excess of that required to support economic growth.

The fiscal stimulus to the economy in the period prior to the election (1986 87) was defended on the grounds that the Public Sector Borrowing Requirement was at a historic low level in 1986 and actually went into surplus by 1987.15/01/2016Economic Policy74

Deregulation of the financial sector, 1986


Making Modern UK Economic Policy under Margaret Thatcher 1979 to 1990

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