Economic Strategy in a “Maze of Problems” Mrs Thatcher’s Years

This Contribution, for a change, looks at economic strategy. The period chosen is the 11 ½ years during which Mrs Margaret Thatcher (MMT) was Prime Minister (PM) of the United Kingdom (UK) of Great Britain and Northern Ireland*¹. Reference will be made to “her” strategy because, although having to operate through a Cabinet, she dominated that body and did not hesitate (with one late exception which will be discussed later), from using the PM’s prerogative to dispense with those who did not agree with her. By the end of her time in the PM’s office she had no-one left who had formed her original Cabinet (Ref. 1).

*1. There will be no reference in No. 20 to the events in Northern Ireland, where military operations occurred throughout the period because a proportion of that region’s population wished to separate themselves by force of arms from the UK. The invasion and liberation of the Falklands will also not be covered. That can be read in Contribution No. 9 C4. It should be remembered that these were serious parts of the “Maze of Problems” with which MMT had to cope.

This No.20 will present charts showing the main features of MMT’s time, from 4^th May 1979 to 28^th November 1990, during which the Conservative Party of which she was leader was re-elected twice.

Fig. 1. Inflation & Interest Rates

Fig. 1

Note concerning the EEC

The entry into the European Common market – officially the “European Economic Community” (EEC) had taken place by government decision on 1^st January 1973. It was confirmed by a nation-wide referendum on 5^th June 1975. The principal actions relating to the EEC had taken place before MMT took office, being:-

Opening-up British fishing waters to other members of the EEC;
Abandonment of special commercial ties with the British Commonwealth.

The hope was that, by greatly enlarging the market without customs barriers, the advantages of scale on export prices possessed by the USA would become available to the UK.

The MMT period was too early for any such advantage to appear significantly.

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MMT inherited the enormous adverse effects on Inflation which were due to oil price rises stemming from actions in the Middle East (the Yom Kippur War of 1973 = x4 and the Iranian revolution of 1979 = x2). She had no hesitation in raising Interest Rate to a peak of 17% on 15^th November 1979. The effect of this on Unemployment is shown on Fig.2 below.

[ Discussion of the effect of entering the European Exchange Rate Mechanism (ERM)in 1990 will be made later.]

Fig. 2. Unemployment

Fig.2

The result of the increase in Interest Rate was that the Unemployment Rate more than doubled over the first 3 years of the MMT period. It was in 1981 that a letter to which 364 economists gave their support was sent to MMT to protest that her policy would ruin the economy. No sooner than the Rate had come down a little than a politically-motivated miners’ strike held it up. It lasted a year but did not achieve its ostensible object of preventing mine closures.

By the end of MMT’s time as PM unemployment had returned apparently to the level she had inherited. This has to be said with caution because, throughout that period, the statistical definitions were adjusted continually to reduce the “headline” figure. This included having doctors signing-off people as “incapable of work” so that they moved onto another part of the social benefit payments.

[Again, the effect of the ERM will be described later.]

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Fig.3. Gross Domestic Product (GDP) at Constant 2010 £

Fig.3

With a shallow dip the economy followed a “J” curve, to produce a respectable growth at constant money value of about 35% during MMT’s time (just over 2.5% per annum on average but 3.5% pa from 1981 to 1990).

Fig.4:- Dollar/Pound ($/£) Exchange rate

Fig. 4

As a major numerical relation between the UK and the World’s most powerful economy the $/£ exchange rate indicates the health of the former. From 1945 the rate had declined 50% over 33 years, from $4/£ to $2/£ on MMT taking office as PM. This was the devaluation required to keep “Mid-Atlantic” export prices competitive as UK pay inflation exceeded US rates. This drop had been by fits and starts, initially set reluctantly and late by UK governments and later allowed to float in the money market, the average rate of decline being about 1% pa compound

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. Despite a large drop in the ‘80s (even down to $1.08, the lowest ever, on the 18^th February 1985) MMT’s economic management saw a recovery to almost the $2/£ at which it began.

Fig. 5:- UK National Debt/GDP Ratio

Fig. 5

During MMT’s holding office as PM the National Debt/GDP Ratio was reduced by nearly half, from 42% to 22%. It would never be as low as that again.

MMT’s economic strategy had therefore accomplished the double:- to raise GDP significantly while reducing Debt significantly, both in terms excluding inflationary effects..

MMT’s economic mistake on 8^th October 1990

MMT appointed John Major as Chancellor of the Exchequer on 26^th October 1989. This was a promotion consistent with her acceleration of his career since becoming an MP at the same election by which she became PM. This rapid rise was because she believed that he agreed with her principles of government.

Captured by the Treasury (Permanent Secretary, Sir P. Middleton*²) and also influenced by a wide variety of “The Great and the Good” (including the Opposition), Major decided that the UK should enter the European Exchange rate Mechanism (ERM) on 8^th October 1990

MMT was opposed to joining the ERM but, having only just appointed Major as Chancellor so that it was too soon to sack him and with other senior Cabinet ministers in favour, she conceded the entry at 2.95DM/£. This was a mistake, as Fig. 2 shows.

Being effectively forced by Europhiles from the post of PM on 28^th November 1990, having become a Eurosceptic, MMT escaped the odium for the forced exit from the ERM on 16^th September 1992.

*2. Note that Sir P. Middleton left the Treasury to become Group Deputy Chairman of Barclay’s Bank in 1981, comfortably before the forced exit of the UK from the ERM.

Conclusion

Oceans of ink have been expended by trained economists to review and evaluate the management of the UK economy during the time that MMT was PM. It is hoped that this collection of simple factual charts will help visitors to form a balanced Judgement.

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References