Thatcherism: Economic Policies (AQA A-Level History): Revision Notes
Thatcher's Economic Policies
Margaret Thatcher's government came to power in 1979 with a distinct economic agenda that represented a break from the post-war consensus. Her administration pursued policies rooted in free-market principles, aiming to reshape Britain's economic structure and reduce state intervention.
Economic priorities
Thatcher's government identified five interconnected economic objectives:
- Reduce inflation
- Reduce the budget deficit
- Reduce the size of the state
- Reduce the power of trade unions
- Deregulate the market
These priorities were not treated as separate goals but as parts of an integrated strategy. The government believed that excessive public spending had become economically unsustainable. Economist John Redwood (later a government minister) calculated that public expenditure had risen from 43% of GDP in 1963 to 60% by 1975, and warned that at this rate the public sector would consume the entire gross national product by the end of the century.
Thatcherites argued that 'big government' stifled individual enterprise and imposed bureaucratic burdens that required high taxation, creating further obstacles for business. This represented a fundamental challenge to the prevailing economic orthodoxy of the post-war period.
Theoretical foundations: monetarism
Monetarism represents an economic approach that prioritises controlling the money supply to manage inflation. This contrasted sharply with the Keynesian economics that had dominated British policy since the Second World War.
Keynesian vs monetarist approaches
British economic policy under both Labour and Conservative governments had been heavily influenced by John Maynard Keynes. However, Thatcher, guided by prominent Conservative Keith Joseph, adopted monetarism instead.
Keynesian economics operated on the principle that governments should actively manage the economy through fiscal policy. Keynesians believed that moderate inflation was acceptable provided unemployment remained low. They advocated government spending to create public sector work even if this meant running up additional debts, which could be paid off during more prosperous times through increased taxation.
Monetarist economics, by contrast, prioritised keeping inflation low over concerns about unemployment. Monetarists argued that moderate unemployment was less damaging than inflation to overall economic health. They advocated less regulation and lower taxes, believing this left people with more money to spend, which benefited business. Control of the money supply became a central government responsibility, as allowing too much money to circulate inevitably led to inflation.
Intellectual influences
Milton Friedman emerged as the most prominent monetarist thinker whose ideas shaped Thatcherite policy. Monetarists wanted to see less regulation and lower taxes. They argued that regulation slowed business down and increased costs, whilst lower taxes left people with more disposable income. Controlling the money supply was viewed as an essential government responsibility, since central banks (such as the Bank of England) that allowed too much money in circulation would always trigger inflation.
Friedrich von Hayek provided philosophical justification for free-market economics. His 1944 book The Road to Serfdom, published whilst he was in exile in Britain, argued that centralised decision-making could not cope with the myriad of unforeseen circumstances in a complex economy. Hayek maintained that economics should be left in the hands of individuals operating in a free market, warning that any other system either was tyranny or would lead to tyranny.
Historian Richard Vinen notes that whilst commentators have often drawn links between Thatcher's government thinking and Hayek, there are doubts about how well they actually knew his work, writing that it provided 'a convenient philosophical polish on things that Thatcherites wanted to do for reasons that had little to do with Hayek's thinking'.
Tax policy
Geoffrey Howe, Thatcher's first Chancellor of the Exchequer, implemented substantial changes to the tax system:
- Reduced the standard rate of income tax from 33% to 30%
- Cut the marginal rate for higher earners from 83% to 60%
- Lowered the tax on unearned incomes from its highest rate of 98% to 75%
- Increased VAT from 8% to 12% (depending on the item being sold) to a flat rate of 15%
Controversial Consequences:
These changes had significant social impacts:
- Richer people paid less tax whilst poorer people paid more
- The cost of living increased
Howe and his colleagues viewed inflation as the more pressing economic problem, believing it to be short-term. They calculated that once inflation was controlled, everyone in work would benefit and the issue of differences in prosperity levels would become less important.
However, the immediate social impact proved problematic. The increased cost of living represented a genuine economic burden for many households, though the government saw this as a temporary difficulty on the path to long-term economic health.
Interest rates and their effects
As inflation rose, Howe was compelled to raise interest rates from 12% to 14% in June 1979 and to 17% in December. This made borrowing expensive, affecting both individuals and businesses. Meanwhile, public spending moved in an unwelcome direction, partly because of the climbing numbers of unemployed people who had to be paid out-of-work benefits, whereas had they been working they would have been paying tax.
Over time, inflation did decline and tax cutting became a policy to which Howe's successor Nigel Lawson at Number 11 Downing Street remained committed. Indeed, Lawson's 1988 budget became famous for cutting taxes. However, cuts in direct taxes were balanced by increases in other indirect taxes.
Additionally, whilst cuts in public spending were indeed made, overall spending was pushed up by the rising rate of unemployment. The differences between Thatcher's economic policies and those of the preceding Callaghan government proved less substantial than the rhetoric suggested.
Privatisation
One aspect of the post-war political consensus had been belief in a mixed economy, whereby a large number of businesses would be privately owned (whether by directors or by shareholders), but some infrastructure (the structures that underpin social and economic activity, such as roads, railways, bridges and power supplies) would be owned by the state. Public ownership was Labour Party policy under Clause 4 of its constitution.
Privatisation programme
During the period of Conservative governments in the 1980s and 1990s, the government sold shares in numerous state-owned enterprises:
| Year | Entity privatised |
|---|---|
| 1979-87 | British Petroleum ('BP') |
| 1984 | British Telecom |
| 1985-87 | British Aerospace |
| 1986 | British Gas |
| 1987 | Rolls Royce |
| 1988 | British Leyland (as 'Rover Group') |
| 1988 | British Steel |
| 1993 | British Rail |
Economic and philosophical rationale
Privatisation served multiple purposes. Economically, each sale generated fresh income, bringing large sums of money to the Exchequer. However, the policy also reflected deeper political and philosophical commitments. The influence of Austrian economist and political scientist Friedrich von Hayek proved substantial here. He had argued not only that centralised planning by governments was bound to fail, but also that when governments legislated for social equality, the process increased the power of governments at the expense of citizens. Interventionist governments were thus anti-democratic.
The British Telecom Example:
British Telecom's sale exemplifies the approach. A large-scale advertising campaign was mounted to ensure that large numbers of people bought shares. These could easily have been sold to institutions, but the political decision was to build a share-owning democracy, in which large numbers of people owned shares in companies.
This was clearly a political imperative for a Conservative government, as shareholders were statistically more likely to vote Conservative in elections. Additionally, widely distributed shares are harder to repurchase in renationalisation.
According to Peter Hennessy, Professor of Contemporary History: 'Once British Telecom was floated successfully in 1984, the boundaries of that highly disputed frontier – the public/private divide – were to be changed forever.' The process reduced the presence of the state in the economy; by the end, publicly owned corporations employed fewer than half as many people and contributed half as much to GDP.
Market competition and monopolies
Part of the philosophical logic was that privately owned companies face competition and must work to improve in order to retain market share. However, some of the large enterprises that were sold off were monopolies (large companies with no competitors). The government was forced to create independent authorities to rule on whether, for example, price rises were justified. This was not really what the Thatcherites had wanted to achieve.
Mixed Results of Share Ownership:
The creation of a large number of shareholders produced contradictory outcomes during the 1980s:
- The number of individuals owning shares trebled to nine million people
- The number of shares in the hands of individuals, as opposed to large share-owning institutions, fell by a third
Deregulation
Deregulation means 'taking away the rules'. Typically, this involves reducing the amount of government interference in the economy, cutting what is called 'red tape', or bureaucracy, by having fewer laws affecting what business can and cannot do, thus creating a more 'free market'. The Thatcher government believed that:
- The market and private enterprise were fast and efficient
- Government was slow and inefficient
Fair Wages Resolution
In 1982, the government abolished the 'Fair Wages Resolution', a long-standing agreement that government business would only go to employers who paid fair wages and offered decent working conditions. Following an attempt to reform and limit the old Wages Councils (which since 1909 had been establishing minimum rates of pay for specific industries), it took until 1993 to finally abolish them.
Financial deregulation: the Big Bang
In 1983, the government negotiated an agreement with the London Stock Exchange regarding a complex case. The Office of Fair Trading had investigated the Stock Exchange, suspecting that its fixed minimum commissions system was illegal under existing restrictive practices legislation.
The Old System:
The old system had enforced a distinction between two types of financial professionals:
Stockbrokers acted on behalf of specific clients and were paid a commission for doing so.
Stockjobbers kept lines of stocks and shares on their books, something which kept the stock exchange system fluid and moving and prevented things grinding to a halt.
Additionally, no one who was not a British citizen could be a member of the London Stock Exchange. Finally, brokers and jobbers were supposed to be independent, not members of a larger concern.
In October 1986 the rules changed in what became known as the Big Bang (the name of the removal of several restrictive practices from the financial markets in 1986, which was seen as having created a new set of rules and expectations in the financial markets). The financial markets abandoned fixed commission charges. The broker/jobber distinction disappeared. The social class limitations of the Stock Exchange, maintained by established members, vanished. Old-established firms changed hands. International, and even foreign, companies chose to be listed on the London Stock Exchange, instead of elsewhere (even instead of in their own country).
During this process, the London Stock Exchange moved from individuals calling across a noisy room to achieve sales, to the use of computer screens and online trading. Removing some rules was intended to make trading in London quicker, easier and simpler and, therefore, more attractive. This was intended to make London the centre of the financial world, something that it achieved.
The same year, parliament passed the Financial Services Act, combining governmental regulation and self-regulation to provide a legal framework of accountability for the financial services industry. The Financial Services Authority became the equivalent of the regulators of privatised monopolies. Whether the outcome should be regarded as deregulation or increased regulation remains controversial.
Inflation
Inflation was an important force driving the 1979 electoral success of Margaret Thatcher and her governments. Nevertheless, the first thing inflation did under the Conservatives was increase:
| Year | Inflation rate |
|---|---|
| 1978 | 8.3% |
| 1979 | 22% |
| 1980 | 18% |
| 1981 | 11.9% |
| 1982 | 8.6% |
| 1983 | 4.6% |
Understanding the statistics
Although these statistics look damaging, two points require consideration:
Key Considerations for Interpreting Inflation Data:
- The inflation rate was already in the teens and climbing when Thatcher won the May 1979 election.
- These statistics reflect the consequences of policies from earlier years, not of the year in which the statistic is recorded, since it takes time for any policy to take effect.
The initial budgets made the problem of inflation worse in the short term. Additionally, the price of imported oil went up, pushing up inflation and worsening the balance of payments. As historian Robert Blake notes, 'By the summer of 1980 inflation was running at over 20 per cent and unemployment rose from 1.5 to 2 million between April and August.' The Conservatives lost their lead in the opinion polls; the next election looked unwinnable.
Political response: "The lady's not for turning"
At the October 1980 party conference, Thatcher, referring to demands for a change in direction, declared:
'To those waiting with bated breath for that favourite media catchphrase, the "U-turn", I have only one thing to say: "You turn if you want to. The lady's not for turning".'
Everyone understood the 'you turn'/'U-turn' joke; how many picked up the pun on the name of a once-famous play, The Lady's Not for Burning, is unclear. But the combination of the scriptwriter's humour and the politician's stubborn delivery was effective.
Key Points to Remember:
- Thatcher's economic policies represented a deliberate break from post-war Keynesian consensus, embracing monetarism to prioritise inflation control over unemployment concerns.
- Tax policy shifted the burden from direct to indirect taxation: income tax fell whilst VAT increased, benefiting higher earners but increasing the cost of living for others.
- Privatisation extended beyond economics to encompass a political and philosophical project, influenced by von Hayek, which aimed to reduce state power and create a share-owning democracy.
- Deregulation, particularly the Big Bang of 1986, transformed London's financial markets by removing restrictive practices and enabling international competition.
- Despite Thatcher's election on an anti-inflation platform, inflation initially worsened (reaching 22% in 1979) before declining, forcing the government to hold firm against political pressure with the famous "lady's not for turning" speech.