When the House of Commons reassembled, the new boys included Tony Blair (aged thirty), Gordon Brown (aged thirty-two) and, the youngest member returned, the 23-year-old SDP MP for Ross, Cromarty
and Skye, Charles Kennedy. The frequent gripe that politicians should have more
experience of the real world once again ran up against the reality that ambitious people who
go far in their chosen profession start at it while they are young. This was not the only unshaken reality. Ethnically, the chamber was still entirely white. There had been eighteen candidates from
ethnic minorities (eight Alliance, six Labour, four Conservative), none of whom was elected. This was scarcely regarded as peculiar. After all, there had not been a non-white MP since 1929. It was,
nonetheless, a postscript to a campaign in which the Conservatives’ most controversial advert had depicted a black man in a suit with the slogan ‘Labour Says He’s Black, Tories
Say He’s British’. Despite the domination of the Iron Lady, it was also still predominantly a man’s domain. The number of female MPs crept up only from nineteen to twenty-three
(thirteen Tory, ten Labour, zero Alliance), an increase from 3 to 4 per cent of honourable members. In other respects, the traditional affinities and backgrounds of the MPs had changed little. Of
Labour’s 209 members, 123 were sponsored by trade unions. Fourteen per cent were public schoolboys (two of them Old Etonians), as against 70 per cent of Tories, among whom were forty-nine Old
Etonians.
21
The casualty list hit the Labour Party profoundly, the most prominent victim being Tony Benn in Bristol East (though he returned the following year courtesy of a by-election in Chesterfield).
Outside London, the party was all but wiped out in southern England, its survivors clinging to the heartlands of central Scotland, South Wales and northern England. This made Labour politicians
almost exclusively the representatives of Britain’s most deprived areas and, conversely, the Tories were equally dominant where prosperity was returning. Scarcely before had British democracy
been quite so starkly divided between the party of the haves and the party of the have-nots, with all the inevitable consequences this produced for mutual incomprehension. However, haves and
have-nots had ceased to be proxy terms for middle class and working class in the broader sense. Nationally, the working class had swung by 3 per cent from Labour to Conservative – a statistic
that masked what was really the fracturing of the class, with skilled workers moving decisively to the Conservatives but unskilled workers (and those among the unemployed who voted) sticking
overwhelmingly with Labour.
22
In this sense, the traditional class–voting relationship was breaking down. Thatcher’s message of
aspiration – or, to its critics, greed – appealed particularly to the more affluent C1 and C2 categories of the working class.
While the emergence of the Alliance as a third party with nationwide appeal further unsettled traditional voting patterns, the minor parties fared poorly. Neither the Welsh nor Scottish
nationalists made any headway, each returning just two MPs to Westminster. Furthermore, the polarized stances of the two main parties cut the small extremist parties out of the market. Seemingly in
terminal decline, the National Front and its breakaway British
National Party between them won a not very grand total of 41,686 votes nationwide, while the Communists sank to
11,606 votes and the Trotskyite factionalists of the Workers’ Revolutionary Party a mere 3,643 – despite the best efforts of its most prominent supporter and former candidate, the
actress Vanessa Redgrave. With the Conservatives determined to roll back the state, Labour promising to push it ever onwards, and the Alliance offering a safe haven for 1970s-style corporatist
Keynesianism, voters could hardly protest at the lack of clear choices available among the electable candidates.
Recovery
‘Landslides don’t on the whole produce successful governments,’ had been the courageously expressed opinion of the Foreign Secretary, Francis Pym, when he
appeared on the BBC’s
Question Time
programme shortly before the country went to the polls. If by that he meant they encouraged prime ministers to ignore the search for consensus and
to dispense with cautious or contrary colleagues, then his judgement was quickly shown to be sound. The day after the election, Thatcher summoned him to Downing Street and delivered the brutally
direct greeting: ‘Francis, I want a new Foreign Secretary.’
23
His government career terminated, Pym trudged back to the back benches.
Yet, those who feared that giving the prime minister such a majority would only encourage her to wring the remaining ‘wets’ out of office and impose an even more restrictive form of
monetarism were in for a surprise. Thatcher responded on the morrow of her triumph by keeping in the Cabinet such potential troublemakers as Michael Heseltine, Jim Prior and Peter Walker. What was
more, with Sir Geoffrey Howe assuming Pym’s Foreign Office responsibilities, the Treasury passed from a man with the temperament of a Puritan to one with the air of a Cavalier.
Upon offering Nigel Lawson the job, Thatcher managed to restrict herself to making only one demand – that he get a haircut. She did not think it seemly for a Chancellor of the Exchequer to
look too carefree. He submitted to a token trim before rebelling by letting his locks grow back to their previous length. Lawson, after all, was a man of considerable self-assurance, whose will was
further fortified by the knowledge that the bare facts of Howe’s tenure scarcely represented a hard act to follow. The scale of the recession, by curbing tax receipts and boosting welfare
payments, had increased rather than diminished the state’s size. The intention had been to reduce public spending by 4 per cent in four years. The reality had been an increase of 6 per cent.
Despite cutting the rates at which income tax was levied, the total tax burden (excluding North Sea oil revenue) had jumped during Howe’s tenure from 35.5 per cent to over 38 per
cent.
24
Unemployment stood at three million and, incredibly, was still rising.
On the positive side, apparent victory over inflation could certainly be trumpeted, even if it was achieved only through a mixture of design and accident. Hitting the
targets for money supply growth had proved mostly beyond the Treasury’s ability. It transpired to be the fall in world commodity prices, as well as the tight monetary policy, that brought
inflationary pressure under control. During 1986, inflation fell to 3.4 per cent, which represented the lowest level for nineteen years. With the economy growing again, Lawson could take comfort
from the thought that Howe had endured the worst of it and that better times lay ahead. Aside from unemployment, most of the key indicators were heading in the right direction. The one advantage of
Britain’s manufacturing sector being leaner was that it was fitter: in the previous year its productivity had soared by 12.5 per cent, ensuring that those firms that had survived the deluge
were well placed to benefit both from returning domestic consumer confidence and from a falling exchange rate, which boosted exports. Assisted by soaring North Sea oil production, the balance of
payments was improving and returning a £4 billion current account surplus. Thus the prospects for removing the regulatory and fiscal burdens on business and individuals had not looked so
favourable for well over a decade. Though large parts of the country would reap scant gain from it, the ‘Lawson boom’ was about to take off.
If unemployment was to be brought down in the long term, then it was clearly going to take more than the plethora of training schemes that were being established. To Lawson, the key was to
reduce the burdens on business. Although some mitigating allowances were scrapped, corporation tax was reduced from 50 per cent in 1983 to 35 per cent in 1986. The cost of National Insurance
contributions to companies and their lower-paid employees also fell, thereby reducing the expense of hiring labour. While indirect taxes on spending continued to rise, a renewed effort was made to
bring down income tax, since Lawson held that lower direct taxes, unlike lower indirect taxes, encouraged saving and investment. Lawson’s 1984 budget lifted 850,000 low-paid workers out of
paying any income tax at all. Even so, it was not until the budget of 1986 that the basic rate of income tax was brought down for the first time in seven years, and that was only a 1 per cent drop,
to 29 per cent. Meanwhile, Lawson’s cuts to public spending transpired to be cuts in the rate of increase rather than in absolute terms. Where there was clear success in sticking to the
rhetoric was in the continuing reduction in the PSBR, which by 1985/6 had fallen to 1.5 per cent of GDP, its lowest level since 1970/1. In consequence, the cost of interest payments on government
debt fell.
While the British economy had slipped into recession ahead of its major competitors, it also emerged out of it ahead of them. By 1986, economic growth was outstripping all of the country’s
principal European competitors.
It was, of course, a boom that appeared more impressive because it was ascending out of a period of stagnation. The relaxations on austerity
measures were risked only because of the pain that had previously been applied in order to drive inflation down to acceptable levels, emphasizing the extent to which control of inflation was seen
as the prerequisite. Meanwhile, the boost in consumer demand had been stimulated back in July 1982 when Howe had abolished hire-purchase controls. Returning confidence and easier credit helped get
the country spending again. Banks lent £934 million, out of £2.09 billion turnover, on credit card accounts in 1980. These sums began to multiply to the extent that by the
decade’s end, they were lending £6.6 billion on credit cards, on £20 billion turnover. In fact, compared to the highly leveraged first decade of the twenty-first century,
borrowing money remained expensive throughout the eighties. But at the time it seemed that a climate of easy credit was emerging, which contrasted with the prime minister’s strictures about
the need to save and put something aside. Along with ever greater mortgages to support a soaring property market, the consequences represented a financial revolution.
EN18
The expansion of credit had obvious consequences for monetary policy. Lawson announced in his 1985 Mansion House speech that he was effectively giving up on Sterling M3 as the Treasury’s
primary money supply indicator. It had continued to exceed its targets even when interest rates went back up. While still searching (vainly) for something better, Lawson promoted the importance of
Sterling M0, a narrower definition of the money supply which sought to quantify the amount of cash held by the public along with the till money held in banks. He also announced that ‘the
other good and early guide to changing financial conditions is the exchange rate’.
25
For disciplined monetarists in the Cabinet, like Nicholas Ridley, it seemed the Chancellor was suddenly preaching heresy.
26
For the previous six
years, the Treasury had largely left the exchange rate to the whim of the markets, seeing it first soar in the early days of high interest rates and oil receipts, and then dive by the middle of the
decade to a point where it almost reached parity with the dollar. Now, Lawson was arguing that managing the exchange rate was useful not just in order to create greater stability for trade but also
as a tool of Treasury policy. It could hardly be questioned that seismic changes in sterling’s value were of no consequence. Together with soaring receipts from North Sea oil, the high
interest rates that had accompanied the tight monetary squeeze at the beginning of the decade had helped price British exports out of international markets, adding to the woes of the manufacturing
sector in particular. Sterling had stood at $2.45 in October 1980. But
from then onwards it began to slide. By April 1983, it had slumped to $1.54, reaching an all-time low
of $1.05 in February 1985. Previously hard-put exporters of goods and services rejoiced at the opportunity to swamp foreign markets, allowing UK manufacturing output finally to exceed its level of
the eve of recession in 1979.
The explanation for the currency’s rapid depreciation lay only partly with the relaxation of interest rates – much reduced though they were, at 12 per cent in July and 9.5 per cent
in December of 1984 they were hardly negligible. The primary explanation lay less in London than in Washington. Having contracted in 1982, the US economy bounced back and during 1984 soared by over
6 per cent. It was a rate of expansion that, when combined with high interest rates, ensured an overvalued dollar. In February 1985, it took concerted action by the Bank of England and the European
and Japanese central banks to head off the immediate prospect of a 1:1 sterling–dollar exchange rate. This was a temporary respite, for the over-strong dollar remained a problem that risked
overshadowing world economic recovery. With American exports being priced out of the markets, the mood in Congress turned vengeful and introspective, with concerted demands for protectionist
tariffs – a response no more attractive to Reagan than it was to the free-trader of Downing Street.
The prospect of a descent into protectionism was headed off in September 1985 when Lawson and his fellow US, French, German and Japanese finance ministers convened their informal G5 group of
major capitalist nations and agreed the ‘Plaza Accord’. Japan promised to remove its impediments to foreign imports, while the US accepted its responsibility both to cut its
dramatically widening budget deficit and to intervene to prop up the value of the other G5 currencies against the dollar. For Britain’s part, Lawson agreed to carry on his dual policy of
balancing the budget and removing market restrictions.
27
It was the markets’ reaction to the Plaza Accord that would be the true test of
whether the solidarity between finance ministries was taken seriously. As was hoped, the dollar began to slide to a more competitive rate and the calls for protectionism diminished. Narrowly
avoiding parity, sterling appreciated against the dollar throughout 1986 (but slid against the Deutschmark). Most significant from the British economic perspective was that the episode strengthened
Lawson’s belief in an internationally managed exchange rate – taking him first into a furtive policy of shadowing the Deutschmark and then, when that failed, into a deadly dispute with
his next-door neighbour over taking sterling into the European Exchange Rate Mechanism. It was a divide that would do much to seal his fate and, eventually, that of the Conservatives’ claim
to economic competence.