The second priority in the 1980s was to bring Britain’s public finances under control. In 1975/76 public sector borrowing as a share of GDP had reached 9.25 per cent. Under the impact of the IMF measures, the Labour Government reined it back, though it had started to grow again by the time of the 1979 election when it was over 5 per cent of GDP at the high point of the economic cycle. The 1981 Budget established a firm grip on public borrowing, which never loosened while I was Prime Minister. Between 1987/88 and 1990/91 we actually repaid £27,000 million of debt, reducing government debt as a proportion of national income to a level not seen since before the First World War. As for public spending, though the deep recession of 1980/81 pushed it up as more people became unemployed and government revenues fell, we reversed the previous long-term trend. Public spending as a share of GDP fell steadily between 1982/83 and 1988/89, when it reached a low point of 39.25 per cent. In 1989/90 and 1990/91 the proportion crept back up by 1 per cent, to 40.25 per cent — partly because of a massive overspend by local authorities (which knew that they could put the blame on the Community Charge), partly to ease the way for the NHS reforms introduced in 1990, and partly because the economy was moving into recession. Over the whole period, however, public spending as a share of GDP fell from 42.6 per cent in 1979 to 40.25 per cent in 1990.
The firm grip on public expenditure over these years also allowed tax cuts. Geoffrey Howe’s 1979 Budget cut the basic rate of income tax from 33 per cent to 30 per cent, shifting the balance from direct to indirect tax. The top rates of income tax were cut from 83 per cent to 60 per cent and from 98 per cent to 75 per cent on investment income. Nigel Lawson’s 1984 Budget made the fundamental changes in corporate taxation, cutting both capital allowances and corporation tax rates so as to encourage more efficient use of business investment. Nigel’s 1988 Budget completed the programme of income tax reduction, bringing down the higher rate to 40 per cent (for savings income as well as earnings) and the basic rate to 25 per cent. Sound public finances and low marginal tax rates were the goals in the 1980s: and they were achieved. Shortly after I left office, decisions were taken which led to large increases in public expenditure: in particular, the uprating of Child Benefit and extra money for the NHS, transport and local authorities. Combined with the recession, deepened as a result of sterling’s overvaluation in the ERM, this increase in public expenditure has also led to a succession of large budget deficits — peaking in 1993/94 at £45,000 million, over 7 per cent of GDP — and tax increases amounting to over 2 per cent of GDP. Clearly, the sooner both of these can be reversed the better: that will require keeping a stronger hold on public spending and judicious use of the most useful monosyllable in a Prime Minister’s vocabulary, ‘no’.
Some of the ground won in the 1980s has been ceded to the spending lobbies, but the significance of that decade’s rigorous public expenditure control has not diminished. Because we controlled public expenditure effectively in the 1980s — particularly by linking the basic retirement pension and other long-term benefits to prices rather than incomes and by scaling back the State Earnings Related Pension Scheme (SERPS) — Britain already enjoys an advantage over other European countries which failed to take such action, as the table below shows.
The potential advantage for Britain will indeed become greater as the years go by. Other European countries generally have much more adverse demographic trends, with a rapidly increasing proportion of elderly people being supported by a smaller workforce. They will be faced with the necessity of large increases in taxation. Professor Tim Congdon has argued that as a result of these trends ‘in the late 1990s the tax burden could be 15 per cent to 20 per cent lower in the UK than in the rest of the European Community’.[105] Lower taxes, combined with a more favourable regulatory climate for business, will reinforce Britain’s position as the dominant location for inward investment into Europe.
The third element of our economic strategy in the 1980s was to promote private enterprise and ownership. I wanted to shift the balance away from the state for both economic and political reasons. Privatization had a crucial role to play in this. In 1979 the only specific pledges of denationalization were those of the aerospace and shipbuilding industries and the sale of shares in the National Freight Corporation. But we got bolder and we learned as we went along. One by one, state-owned industries were brought into better financial shape and, in an improving economic climate, were prepared for privatization. By the time of the 1983 election, the list of candidates for privatization had lengthened to include British Telecom, British Airways, Rolls-Royce, parts of British Steel, British Leyland and the airports. After British Telecom, other utilities were privatized with differing structures and regulatory systems — gas, water and electricity. By the time that I left office the state-owned sector of industry had shrunk by 60 per cent and, largely as a result of the wider share ownership schemes which accompanied privatization, about a quarter of the population owned shares. I had set out to recreate a predominantly freeenterprise economy and to encourage a capital-owning society: I felt I had gone a long way, further even than I expected, in achieving both.
Finally — and, of course, cutting marginal tax rates and privatization were also a part of this — there was a wide-ranging programme of structural reforms to make markets work more efficiently, what has been called a ‘supply side revolution’.[106] From 1980 we pursued a ‘step-by-step’ programme of trade union reform, of which the 1982 Employment Act which reduced trade union immunities was the most crucial. The outcome of the 1984–85 miners’ strike effectively cemented the new order in which jobs had to depend upon satisfying customers rather than wielding collective power to extort subsidies. There was a corresponding improvement in industrial relations. In 1990, my last year as Prime Minister, the number of industrial stoppages was the lowest in any year since 1935. Trade union reform was supplemented by Norman Fowler’s 1988 reforms of Social Security to make it more worthwhile to work by reducing the so-called ‘poverty trap’. Wages Councils which used to set minimum pay rates that priced people, particularly the young, out of work were reformed to exclude those under twenty-one, and have since been abolished. When I was first Leader of the Opposition the great debate in economic policy was between proponents of incomes policy and ‘free collective bargaining’. By the end of my time in office incomes policy, with all its cumbersome distortions, had been laid to rest and wage bargaining was far less ‘collective’. The proportion of the labour force in trade unions had fallen from 50 per cent to 35 per cent, an important cause (and indicator) of greater labour market flexibility.
But, of course, our reforms to make markets work better were not confined to the labour market: they touched every market. We abolished exchange controls, and controls on prices, incomes and dividends. We promoted greater competition in financial services. We reduced controls over private rented housing to encourage supply, and gave public-sector tenants the right to buy their homes at large discounts. Further measures to promote competition — and so improve value for money and widen choice — in the public sector were made in education, the NHS and local government.[107]
106
Patrick Minford,