title
macrohistory.com

(POSTWAR WELFARE STATE to THATCHER and REAGAN – continued)

home | 1945-21st century

POSTWAR WELFARE STATE to THATCHER and REAGAN (5 of 7)

previous | next

Prime Minister Thatcher's Economic Policies

In Britain in 1979, Margaret Thatcher was leader of the Conservative Party and that year became prime minister, returning the conservatives to power once again after a little more than five years of rule by the Labour Party. She shared the sense of crisis felt by the public. She described as her goal the restoration of pride and vigor and less government bureaucracy in the life of the nation.

She brought to the Conservative Party a greater dedication to free market economics. She adhered to a school of economic thought derived from Ludwig von Mises and Friedrich von Hayek. She championed mass freedom to innovate over bureaucratic economic planning. She believed, as did von Mises and Hayek, that a few bureaucrats trying to constrict economic development into a plan of their making – no matter how bright – were not superior to a society-wide freedom to innovate and to allocate resources. She believed in letting capitalism work as little fettered by regulation as possible. She wrote that "every regulation represents a restriction of liberty, every regulation has a cost."

Thatcher rejected the idea that inflation could be successfully combated with wage and price controls. She believed that inflation discouraged saving (spend now before prices rise more tomorrow) and it encouraged short-term gambling and profiteering in markets by traders rather than substantial investing in markets. And Thatcher believed that inflation discouraged business investing. it discouraged business investing. Faced with the same rise in inflation confronted by Nixon, Ford and the Carter administration, she was determined, as President Ford had been, to beat inflation.

She and Britain were benefiting from the production of oil from the North Sea, which had begun in the late 1970s – and benefiting from high oil prices. The sale of this oil brought to Britain foreign currency that strengthened and stabilized British currency – the pound. The pound rose in value, which made imports cheaper and helped Britain trade balance – although it was a negative for selling manufactured items abroad.

Thatcher was idea-driven and ready to take on popular opinion, and a part of her strategy was to pursue policies that were unpopular right away. To cool down the economy, Thatcher raised interest rates – which were bound to lower economic activity. In keeping with her free enterprise ideology she lowered income taxes. The tax rate for the most wealthy was cut from 83 percent of earnings to 60 percent, and the common rate was reduced from 33 percent to 30 percent. The historian Earl A. Reitan writes that she believed that this would "benefit the economy by encouraging entrepreneurship and investment." note50

Thatcher reduced consumer spending (which increased demand for goods and therefore prices). But she increased the sales tax commonly known as the Value Added Tax (VAT) from 8 percent to 15 percent, and this provided needed revenue aimed at balancing the budget. She raised taxes on gasoline and the amount that people paid to the National Health Service (NHS). And she cut spending for government programs except for police, defense and the NHS. Subsidies to nationalized industries were reduced, which increased unemployment, and money for housing, local governments and education was reduced.

Inflation increased and the economy plunged into recession and unemployment climbed to ten percent and was soon around 12 percent. Private investment declined around 11 percent. It was Britain's worst recession since the end of the war. The mass unemployment in the inner cities was seen as contributing to riots across Britain in 1981. By December 1981, Thatcher's job approval rating fell to 25 percent.

Thatcher was seen as hostile to common or poor people, but she remained in support of Britain's social safety net provided by social security and the National Health Service. As Reitan writes, "Training programs for young people were introduced to assist them in preparing for the changing world of work," which may also have "done little more than keep restless youths off the streets." note51

In early1982, the recession bottomed out, with inflation declining to 8.6 percent, down from an earlier high of 21 percent. And that year, applying her strong will to what she saw as principle regarding the crisis with Argentina and what became known as the Falklands War, Prime Minister Thatcher won a resurgence of support. For the general election of 1983, thanks in part at least to Thatcher, the Conservatives expanded their majority in parliament.

Britain was changing economically. The service sector, including financial enterprises, was growing and the manufacturing sector declining. Professionals and people engaged in small-sized enterprises were among those supporting Thatcher's conservatism. Labour's traditional base had been eroding in size.

Step by step, Thatcher reformed the labor unions. The 1980 Employment Act demanded that to establish a closed shop had to have the approval of 80 percent of a plant's workers. Thatcher established an agency that would mobilize police from all over the country to stop illegal practices such as secondary strikes, mass picketing and violence.

She endeavored to keep her government out of private-sector labor strikes. If workers in the private sector wanted to damage their prospects for a job by ruining competition for the company they worked for so be it. She believed that over-all they would not. Her main problem with labor was with unions in nationalized industries, especially coal – which were immune from competition. She fought a major battle with striking miners, and she won.

Thatcher moved on her plans for privatization. She pushed to make nationalized industries successful enough that someone would be willing to buy them. Her government sold Jaguar. British Telecom became a private company with shares sold on the open market. British Petroleum and British Aerospace became private corporations, as did the National Bus Company, the Associated British Ports, ship yards, factories of the Royal Ordnance and others. The Thatcher government also sold off 1.5 million publicly owned housing units to their tenants. All of this added money to the government's treasury. And the Thatcher government encouraged growth of the financial services industry that some critics were to describe as "casino capitalism."

Thatcher did not attempt to privatize the nation's health care service. It was too popular. Instead she introduced new management techniques. And in 1987 an additional £101 million was provided by the government to the NHS.

Britain's economic growth rate reached 5 percent. Corporate profits and investing increased, consumer prices were stable, with inflation falling to a mere 4 percent. Unemployment was down and real wages were recovering. For the general election of 1987 Thatcher's party boasted that "Britain's Great Again. Don't let Labour wreck it." The Conservative Party maintained a majority of the seats in parliament while losing 21 seats and winning 42.4 percent of the popular vote. Labour gained 20 seats after campaigning from their more centrist position.

Thatcher never had been very popular. In a 1989 poll, 67 percent of the respondents expressed disliked for her while 63 percent expressed respect for her." note52

She was to remain in office until November 28, 1990 – the longest continuous period of office of any prime minister in the twentieth century. There had been declining revenues from the sale of North Sea oil. A boom in consumerism had faded, and Britain was suffering from a lack of competitiveness is automobile and electronics manufacturing. In March, 1990, inflation and unemployment had begun to rise again. Thatcher's support for an unpopular head tax in place of local property taxes contributed to her downfall within her own party, and she was replaced by the Conservative Party's John Major.

Some in Britain would remember her as having saved the country. A British Labour Party politician, Peter Mandelson, would compliment her with the statement in 2002 that "We are all Thatcherites now."

Among some in Britain who still believed in socialism would come the complaint that Thatcher's belief in free markets and individual wealth creation had undermined the fabric of society by encouraging selfishness and an increase in inequality.

Sources

Copyright © 2010-2014 by Frank E. Smitha. All rights reserved.