Margaret Thatcher: The Authorized Biography (84 page)

Energy price increases were seen as a possible cover for price rises in the nationalized industries to recover the cost of broken cash limits. ‘The right course’, the Cabinet minutes recorded with frank dishonesty, ‘might be to seek very large price increases immediately, and attribute this to the inefficiency of the industry.’
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On 31 May the Cabinet agreed the spending reductions which John Biffen had proposed. It also agreed immediate large sales of public sector assets to balance the books, but stipulated that the assets be sold, said Geoffrey Howe, ‘in a way which would secure the best possible spread of ownership, and pave the way to successful disposal of an equity interest in some of the nationalised industries in due course’.
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Immediately, however, the implications of the cuts became clearer and the demands greater. On 4 June, Biffen informed Mrs Thatcher that the squeeze on central government expenditure to keep within the agreed cash limits turned out to mean a 6–7 per cent cut in Labour’s inherited plans, 2 per cent higher than expected. By July, Howe was looking gloomily at what would be needed to meet the agreed target of getting public spending back to the level for 1977–8 by 1982–3. Five and a half billion pounds would have to come off the last government’s White Paper for 1980–81. ‘Cuts of this size’, said Howe, ‘are larger than we envisaged when in Opposition,’ but even then might not be enough to prevent tax rises ‘if the proportion of the PSBR to GDP is to be reduced’. To avoid this, public expenditure cuts of £6.5 billion would be needed. The effects of Clegg, he went on, would be to push up public sector wages by 18.5 per cent in 1980–81, compared to 14 per cent in the private sector. What was Mrs Thatcher’s preference, asked Howe – cuts of £5.5 billion or of £6.5 billion? Mrs
Thatcher noted that her answer was ‘Given orally’. It was £6.5 billion.
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In her zeal, she considered no economy too small to be worthy of her notice. Thinking that the Garden Room needed better equipment, Kenneth Stowe had ordered thirty-two new typewriters. One day, returning from Prime Minister’s Questions, Mrs Thatcher entered the hall of No. 10 to find these objects in packing cases, just delivered. ‘What’s going on?’ she cried. The situation was explained to her. After forty-eight hours, she issued Stowe with an order: ‘You can keep three.’ The other twenty-nine had to go back.
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At the very same time as the spending figures were proving that the situation was worse than had been thought, some Cabinet ministers, led by Jim Prior, were starting to say that the policy was already too tough. John Hunt summed it up in a note to Mrs Thatcher preparatory to the Cabinet of 12 July:

Although it is true that Cabinet decided the Budget strategy only six weeks ago, some Ministers may argue that the climate has changed … Your own view remains, I believe, that the Government should stick to the present PSBR target for this year, and to a lower target for next year, to leave room for further tax cuts. But some Ministers are becoming alarmed at the consequences of this policy (for example, Mr Prior’s remarks about interest rates at E on Monday) and you may want to give them a brief opportunity to voice these worries. The immediate situation is worse, and the long haul rather longer, than ministers believed immediately after the election. Some may be tempted, therefore, to adopt a more gradual approach. I think you could bring this issue to a head yourself.
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Hunt recommended asking the Chancellor to say what the consequences of higher public spending would be for GDP and for interest rates. His proposed way of ‘steering’ the discussion was to push all individual spending arguments into bilateral meetings with the Chief Secretary and stick to general points in Cabinet. On the same day, Keith Joseph, the voice of her conscience, wrote to Mrs Thatcher to say: ‘The fact of the matter is that public expenditure on pay is soaring without real restraint.’
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At Cabinet on 12 July, Mrs Thatcher blatantly employed the unorthodox style of chairmanship for which she was already known, and announced the conclusion of the meeting at its very beginning: ‘Unless we go for this, we’ll be taking a larger proportion of national revenue and have no scope for further tax reductions.’
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Howe then told the assembled company that British economic performance was deteriorating and that all the economic indicators were pointing in the wrong direction, with everything made worse by the high oil price. ‘Got to go through this vale of tears but is the last chance of restoring sanity,’ Hunt noted Howe as saying.
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There was
a fierce debate in which, as the official minutes put it, ‘it was suggested that the Government faced the most serious dilemma in economic policy of any post-war Government.’
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Mrs Thatcher, haunted more by past Tory failure than by anything the previous Labour government had done, begged colleagues to support the Chancellor: ‘Remember the Barber spending spree,’ she cried.
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Cuts, said Jim Prior, with some support, would lead to ‘massive redundancies’, and would be worse politically than putting up taxes. He warned of ‘severe depression’.
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Using the time-honoured official formula for expressing both sides of the case, the minutes added, ‘Against this, it was argued strongly that no one had faulted the Chancellor’s analysis of the economic prospects.’
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At a meeting four days later, Prior had it out with Mrs Thatcher at No. 10. The official Note for the Record said:

Mr Prior said that he was very worried that the Treasury were aiming for excessive public spending cuts. In his view, the Treasury forecasts for the PSBR were too pessimistic. It would be disastrous for industry if public expenditure was cut too much. The Prime Minister … did not accept the premise that public expenditure cuts would damage industry: industry would only recover if resources were freed from the public sector to the private sector.
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Mrs Thatcher had no intention of trimming in Prior’s direction, but debate raged both about the methods of public expenditure control and about its extent. The desire to avoid a public sector pay norm, with its tendency to unite unions in resistance and to make what was intended as a ceiling become a floor, remained, but on the other hand those paying salaries – local government, for example – had to have some idea of what the government could afford. This would imply a view about what the appropriate level of settlements was. The alternative, favoured by Prior and other ‘moderates’, was to set cash limits separately from pay, to reflect only the decisions on the volume of spending and on price changes. They would then be adjusted in the light of pay decisions. It was not until September, after the summer break, that the Treasury and No. 10 carried the point, in principle at least, that cash limits should include pay right from the start. The battle against spending increases was still not successful enough. When the public spending plans for 1980–81 were finally presented to the House of Commons by John Biffen on 1 November 1979, they were £500 million adrift from the reduction sought in July. The White Paper’s striking first sentence was no more than the truth: ‘Public expenditure is at the heart of Britain’s present economic difficulties.’

The Treasury’s tactic, therefore, was to try work out firmer, medium-term spending plans to compensate for what, it knew well before it
announced its figures, would not be a good enough result. Cabinet ministers returned from holiday in September to a stern memo from Howe and John Biffen on spending plans after 1980–81; ‘we cannot confidently take credit for any significant growth in the GDP over the next few years,’ it said. ‘So even with rising receipts from the North Sea, there will be little, if any, increase in total government revenue at unchanged tax rates.’ Howe and Biffen continued:

The conclusion is inescapable … it is only through substantial reductions in the inherited expenditure plans for the years after 1980–81 that we shall be able to implement our policies for the money supply and taxation – which form the core of an economic strategy. Our ability to face up to this issue will be seen as the crucial test of our determination to stick to our announced policies, and will thus play a vital part in affecting expectations.
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Howe’s and Biffen’s reference to inherited plans was intended to remind ministers that they were not being asked for actual, aggregate cuts, but this distinction between cuts in planned increases and genuine cuts in spending totals was one which the public never readily understood. The general view was that the Thatcher government was engaging in ‘cuts’, even when the real problem was that public expenditure was rising far more sharply than intended. The only two years since the Second World War when public spending actually fell were under the Labour administration of Jim Callaghan. In 1976–7 public expenditure fell by 2.5 per cent, and in 1977–8 by 6 per cent. There was to be no year in which it fell under Mrs Thatcher, although it did decrease as a proportion of GDP.

Political objections were not the only difficulty the government faced. As well as the question of how much to cut, there was also the problem of how to achieve it. In addition to the Clegg difficulties, an enormous amount of public spending, all of it contributing to the PSBR, was attributable to local government. Some of this was paid for by the local rates, but 61 per cent was contributed by central government through the Rate Support Grant (RSG). Labour local authorities, many of them then in the process of being taken over by the hard left, were more than happy to use their position to raise the standard of revolt, increase the rates – which fell mainly on Tory-voting homeowners and on businesses – and complain loudly about the effect of government meanness on the level of local services. A rigorous central government approach, reducing the percentage of RSG, could easily damage prudent local authorities as much as extravagant ones. From the beginning, Mrs Thatcher found this problem neuralgic. In a memo to her as early as 16 July 1979, John Hunt mentioned in passing ‘your own view that it may be necessary to take powers directly to control rates’.
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Should the government control local government expenditure by a block grant, or by a mechanism which tried to allocate resources more precisely, penalizing the extravagant? The minutes of E Committee’s discussion on 17 September of how cash limits could apply to local government record magisterial indecision: ‘All these measures involved a degree of intervention with local government which might seem contrary to the Government’s policy of giving the authorities greater freedom. But it was arguable that the greater freedom now being given to local authorities justified an overall control on the level of their expenditure and rate demands.’
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During October, it was agreed that the RSG should be controlled by a single overall cash limit rather than cash limits on individual local authorities.

Michael Heseltine, the Environment Secretary, put forward his own interpretation on the government strategy, in order to avoid a reduction of the RSG. He wrote to Biffen describing the 1980–81 settlement as ‘critical’ for the whole Parliament: ‘It will set the key note for our relations with local authorities for the rest of this Parliament.’ The aim should be to keep the domestic rate down, said Heseltine. ‘This would fit in with our economic strategy and the attack on inflation and would be seen as not incompatible with our longer term intention to abolish domestic rating.’
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Rates should not go up above inflation and therefore, he argued, the RSG should not change. He also tried to make space for himself about the announcement of council house rent increases, which he described at Cabinet on 18 October as ‘the single most explosive political issue which faced the Government’.
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He caused irritation. On 24 October Hunt wrote to Mrs Thatcher, rather wearily complaining that ‘At the very last minute’ Heseltine was making trouble about the rent increase: he ‘wants to announce it in his own way, at a time of his own choosing … Every Minister could deploy arguments like that, and the result would be no White Paper at all. You might like to support the Chief Secretary.’
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She did. But she also gave in, in the last arguments before the deadline for the 1980–81 White Paper, to those who said that the RSG percentage must remain unchanged in order to protect Conservative shire counties.

Although she supported the Treasury in Cabinet discussions, Mrs Thatcher was also increasingly displeased with it as political pressure on her grew. So irritated was she by what she saw as John Biffen’s feebleness under fire that Geoffrey Howe brought in Nigel Lawson, the Financial Secretary to the Treasury, to assist the beleaguered Chief Secretary. She felt that there was a lack of focus, and was perhaps irritated by Howe’s prolixity (paper poured forth from him as from no other member of the government). ‘This is not in suitable form for Cabinet discussion,’ she wrote on a paper from him in mid-September about the handling of
public sector pay. ‘Send it back … We are getting far too many “woolly” papers from the Treasury.’
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In the very last days before the White Paper was unveiled, Biffen wrote to the Prime Minister, trying to overturn the Cabinet’s agreement to delete unemployment assumptions from it. He wanted to include them in his speech, he said, because they would be helpful to Parliament. Conscious of the political embarrassment of making such assumptions known, Mrs Thatcher tried to avoid publication, and also to question the accuracy of the assumptions themselves, saying that 1.65 million projected unemployed for 1980–81 was ‘unduly pessimistic’.
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She wanted a lower figure mentioned ‘if Ministers are pressed to reveal the assumptions’
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and questioned whether it was essential to do so. Biffen, a strong parliamentarian, wrote back to her, rather bravely: ‘To deny the House as a whole what I am prepared to give in due course to a Committee would set a damaging precedent for this Government’s dealings with the House. I personally attach great importance to this.’
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The Prime Minister gave in, but her enthusiasm for Biffen had now markedly diminished.