How successful were Thatcher’s economic policies?
Margaret Thatcher set herself the task of reversing Britain's long-term economic
decline when she came to power in May 1979 at the end of a traumatic decade
that had seen a three-day week, inflation topping 25%, a bailout from the
International Monetary Fund and the winter of discontent. By the end of her time
in power, she had overseen the crushing of the trade unions, the Big Bang in the
City, council house sales, the privatisation of large chunks of industry, the
encouragement of inward investment, tax cuts, attempts to roll back the state, a
deep manufacturing recession, a boom in North Sea oil production, and support
for the creation of a single market in Europe. As far as her supporters are
concerned, this radical transformation worked. Britain ceased to be the sick man
of Europe and entered the 1990s with its reputation enhanced. The economy had
become more productive, more competitive and more profitable. Deep-seated
and long overdue reforms of the 1980s paved the way for the long 16-year boom
between 1992 and 2008. To her detractors, however, Thatcher is the prime
minister who wiped out more than 15% of Britain's industrial base with her
dogmatic monetarism, squandered the once-in-a-lifetime windfall of North Sea oil
on unemployment pay and tax cuts, and left the UK a more economically
unbalanced and unequal country. Both perspectives contain some element of
truth and her economic legacy was, in reality, very mixed.
The economic impact of Thatcher’s first ministry (1979-83) was, on the face of it,
disastrous. Thatcher’s initial priority was to tackle the problem of inflation and
cut the Public Sector Borrowing Requirement (PSBR), by application of the strict
monetarist theories of American economist Milton Friedman and her key
economic advisers, such as Keith Joseph. Interest rates were raised to keep
borrowing down and keep the pound strong on international markets. To reduce
the PSBR, Geoffrey Howe’s budgets increased indirect taxation (VAT and duties
on such items as cigarettes, alcohol and fuel) and cut grants to local councils.
Income tax, in contrast, was lowered, supposedly to create incentive and liberate
private enterprise. On one level the policies did work – inflation, which had been
19% in 1979, fell to 5% in 1983. However, the short-term cost to the economy
was huge – the combination of reduced government spending, high interest rates
and high VAT set in motion a sharp contraction in industrial output, combined
with a rise in unemployment by 1980 to over 2 million and of inflation to 15%.
Steel production fell by 30% and other core manufacturing and mining areas
were hit particularly hard. It was probably only the flow of income from North Sea
oil that saved the government and economy from even more disastrous collapse.
Nonetheless, urban riots, dissent from ‘wets’ within the cabinet and huge media
pressure did not persuade Thatcher into a U-turn. She was convinced that the
bitter monetarist medicine (dubbed ‘sado-monetarism’ by Healey), even with the
side-effect of mass unemployment, was necessary to cure the central economic
disease of inflation.
However, it is not at all clear whether this analysis was valid. Had it not been for
the Falklands War and the problems within the Labour Party, Thatcher would
Margaret Thatcher set herself the task of reversing Britain's long-term economic
decline when she came to power in May 1979 at the end of a traumatic decade
that had seen a three-day week, inflation topping 25%, a bailout from the
International Monetary Fund and the winter of discontent. By the end of her time
in power, she had overseen the crushing of the trade unions, the Big Bang in the
City, council house sales, the privatisation of large chunks of industry, the
encouragement of inward investment, tax cuts, attempts to roll back the state, a
deep manufacturing recession, a boom in North Sea oil production, and support
for the creation of a single market in Europe. As far as her supporters are
concerned, this radical transformation worked. Britain ceased to be the sick man
of Europe and entered the 1990s with its reputation enhanced. The economy had
become more productive, more competitive and more profitable. Deep-seated
and long overdue reforms of the 1980s paved the way for the long 16-year boom
between 1992 and 2008. To her detractors, however, Thatcher is the prime
minister who wiped out more than 15% of Britain's industrial base with her
dogmatic monetarism, squandered the once-in-a-lifetime windfall of North Sea oil
on unemployment pay and tax cuts, and left the UK a more economically
unbalanced and unequal country. Both perspectives contain some element of
truth and her economic legacy was, in reality, very mixed.
The economic impact of Thatcher’s first ministry (1979-83) was, on the face of it,
disastrous. Thatcher’s initial priority was to tackle the problem of inflation and
cut the Public Sector Borrowing Requirement (PSBR), by application of the strict
monetarist theories of American economist Milton Friedman and her key
economic advisers, such as Keith Joseph. Interest rates were raised to keep
borrowing down and keep the pound strong on international markets. To reduce
the PSBR, Geoffrey Howe’s budgets increased indirect taxation (VAT and duties
on such items as cigarettes, alcohol and fuel) and cut grants to local councils.
Income tax, in contrast, was lowered, supposedly to create incentive and liberate
private enterprise. On one level the policies did work – inflation, which had been
19% in 1979, fell to 5% in 1983. However, the short-term cost to the economy
was huge – the combination of reduced government spending, high interest rates
and high VAT set in motion a sharp contraction in industrial output, combined
with a rise in unemployment by 1980 to over 2 million and of inflation to 15%.
Steel production fell by 30% and other core manufacturing and mining areas
were hit particularly hard. It was probably only the flow of income from North Sea
oil that saved the government and economy from even more disastrous collapse.
Nonetheless, urban riots, dissent from ‘wets’ within the cabinet and huge media
pressure did not persuade Thatcher into a U-turn. She was convinced that the
bitter monetarist medicine (dubbed ‘sado-monetarism’ by Healey), even with the
side-effect of mass unemployment, was necessary to cure the central economic
disease of inflation.
However, it is not at all clear whether this analysis was valid. Had it not been for
the Falklands War and the problems within the Labour Party, Thatcher would
