Economy and Economics 1979/90 - The Impact of Thatcher 1979 - 1990

When Mrs Thatcher came to power, she sought to:

• Reduce inflation – running at around 14% in 1979 (after periods of 20% plus in late 1970s)
• Reduce budget deficit.
• Increase efficiency of economy
• Reduce power of trades unions

Summary of policies :

•       Belief in desirability of free markets over government intervention. E.g. pursuing policies of privatisation and deregulation.

•       Pursuit of supply side policies to increase efficiency and productivity.

•       Reducing power of trades unions and increased labour market flexibility.

•       Financial deregulation, e.g. building societies becoming profit making banks.

•       Reducing higher rates of marginal income tax to increase incentives to work.

•       Ending state subsidies for major manufacturing companies.

•       Encouraging home ownership and share ownership.

•       Targeting money supply and monetarist policies to reduce inflation of late 1979. Monetarism was effectively abandoned by 1984.

Monetarism

Context:

•       Monetarism is the belief that inflation is caused by the amount of money in the economy. Thatcher aimed to reduce the money supply through cuts to government spending and higher interest rates

•       This theory had only been tested in the military dictatorship in Chile

•       Introduced in Thatcher’s first term

•       “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!

Success

Failure

•       Inflation reduced to single figures by 1982, never rose above 9% for the rest of the 80s

•       1980 and 1981 budgets slashed government spending - riots in several cities (incl. Brixton in London) •       1980-1981 manufacturing fell 14% •       1980 inflation rose to 22% due to souring pay demands •       1982 unemployment at 3 million •       Unemployment benefits forced up government spending •       By 1983 monetarism was phased out in favour of more successful supply-side policies (tax cuts + deregulation) •       1979 inflation 10.3%. 1990, 10.9% - no change

Privatisation

•       Aimed to cut government expenditure, reinvigorate the economy and incentivise workers

•       Thatcher believe in popular capitalism - everyone in society should own property and shares in companies

•       Before 1983, British Aerospace, British Sugar and British Petroleum

•       1984 British Telecom sold

•       1986 British Gas sold - raised £5.4 billion, people were encouraged to buy shares with the advertising campaign, ‘If you see Sid, tell him’.

•       Shares sold cheaply to ensure a quick, wide take up

Thatcher’s legacy

•       British rail privatised 1994-1997 - government continues to subsidise trains

•       1992 Private Finance Initiative under John Major - public-private partnerships. Private funding and expertise used to provide a government service, which is then funded by the state in the long term

Success

Failure

•       £19 billion raised - able to pay for tax cuts •       Number of shareholders went front 3 million to 11 million between 1979-1990 •       Since the privatisation of the 10 state-owned regional water authorities in 1989, the number of customers at risk of low water pressure has fallen by 99%. •       BT privatisation led to better customer service -previously customers had to wait 6 months for the installation of a BT line, today BT lines installed within 15 minutes

•       BY 1990 only 20% of shareholders were owned by individuals - failure of popular capitalism •       Distribution of shares was uneven - only 9% of unskilled male workers owned any shares, compared to half of all professional males •       Privatisation led prices to increase faster than inflation (gas) •       Harold Macmillan compared it to ‘selling off the family silver’ •       Privatisation led to job losses -  200 000 jobs lost as the result of coal privatisation •       Privatisation of British Rail has not improved the service - while government spending on rail has doubled since 1994

Deregulation

•       The removal of rules and regulation - Thatcher hoped this would encourage innovation and competitiveness

•       1979 removal of exchange controls:

o   Ended restriction on how many pounds could be converted and spend abroad

•       1986 ‘Big Bang’

o   Relaxed rules of the ownership and trading operations of banks

Success

Failure

•       Removal of exchange controls fuelled greater overseas investment (with profits returned to Britain) •       Big Bang - City of London grew rapidly, became one of the major financial centres in the world •       Lawson Boom - economic growth reached 4-5% a year in late 80s

•       Removal of exchange controls led to an increase in spending on consumer goods, which drained money from Britain, increasing the balance of payments deficit on the current account •       Big Bang led to riskier financial schemes - unscrupulous individuals made huge sums of money, this culture contributed to the financial crisis of 2008 •       British people became more accustomed to borrowing money - not want Thatcher wanted, she supported ‘careful savers’ o   Private household debt increased from £16 billion in 1980 to £47 billion in 1989 o   Mortgage debt rose from £43 billion to £235 billion o   By 2003, personal debt was £1.3 trillion - highest in Europe

Taxation

•       Thatcher did not belief that taxation should be used to take money from the rich to subsidise the poor - 'The problem with socialism is that you eventually run out of other people's money.'

•       She thought this led to a lack of incentive to work hard and bred dependence at the bottom of the social scale

•       Aimed to promote more investment, growth and therefore government income through tax cuts

•       1980 BUDGET - top rate of income tax cut from 83% to 60%

•       1988 BUDGET - basic rate of income tax from 29% to 25%, higher rate of income tax was cut to 40%. The tax cuts were so large, the 1988 budget is often referred to as the 'giveaway budget'.

•       Taxation cuts were subsidised by the discovery of North Sea oil

•       However - average tax bill rose by 6% between 1979 and 1990 due to increase in indirect taxation

•       1979 VAT was increased from 8% to 15%

Success	Failure
•       Tax cuts were a fiscal stimulus which helped to increase disposable income and consumer confidence. This led to a rise in consumer spending and economic growth. •       Decline in tax avoidance schemes - wealthiest 5% paid as much tax in 1988 at the 40% rate as they did in 1978 at the 83% rate •       Tax cuts contributed to the Lawson Boom - 4/5% growth in late 80s	•       Increase of regressive taxes like VAT and National Insurance Payments placed a higher burden on the poor - increasing wealth inequality •       Poll tax brought down Thatcher

Trade Unions

•       In the 1970s, days lost to trade union strikes were at all-time highs.

•        It was feared that poor industrial relations and strikes were key factors in holding back industry.

•       Thatcher was determined to reduce the power of trades unions and end industrial disputes from costing British industry.

•       Their power was reduced through a series of Employment Acts

•       1980 Act - ended ‘closed shop’ and sympathy strikes

•       1982 Act - unions could be sued for illegal strike action

•       1984 Act - strikes had to be approved by a majority of union members in a secret ballot - Thatcher also begins building up coal reserves

•       After the strike further employment acts in 1988,1989 and 1990 further weakened TU

The miner’s strike

•       NUM Strike lasted 1984-1985

•       Thatcher branded strikers “the enemy within”

•       NUM leader Scargill made tactical errors that undermined the strike

o   Strike began after winter - UK needed less energy

o   Scargill did not ballot members about strike action

o   His provocative methods angered the public - he held 79% disapproval rating during the strike

Success	Failure
•       Unions became far more willing to work with government after NUM defeat •       Total number of TU members fell from 13.5 million in 1979 to under 10 million in 1990 •       Total number of working days lost to strike action fell from 10.5 million in 1980-84 to 0.8 million in 1990-1994 •       Government subsidies for failing industries removed	•       Unemployment: Between 1974 and 1991 the number of miners fell from 200 000 to 10 000 •       Communities in industrial areas were devastated; they experienced mass unemployment, high crime rates and emotional suffering •       Crime rate doubled during the 1980’s.