During the Thatcher years we saw a huge shift in the focus of the economy. Whereas the post-war consensus had been based on Keynesian ideology with the main impetus on full employment, monetary policy in contrast focused on defeating inflation at the dire expense of mass unemployment, which did not bother the Conservatives – it was a price worth paying. As Nigel Lawson MP stated 'We set as the overriding objective of macro-economic policy the conquest of inflation'(Johnson,1991,p27). Keynes had argued that the state of the economy was affected by the level of public spending and taxation. Milton Friedman,one of the early monetarist thinkers, argued that it was not this but the money supply that mattered, and that changes in the money supply cause a change in product prices (inflation). Thatcher abandoned Keynesian economics in 1979 and instead used monetary policy in order to bring down inflation. It is believed by monetarists that by using interests rates as the main tool, inflation can be manipulated: if the money supply is decreased through raising interest rates then inflation should not rise.
The experiment was a failure, the money supply grew at about twice the rate set by the government. Ironically inflation did decrease although obviously not as a result of monetarist policy. Keynesian economics aimed to avoid boom and bust cycles through manipulating demand, but Thatcher's government thought they were natural and should be left alone. This meant Britain experienced a recession in the mid 1980's, then a short-lived boom in 1987-88, and then a depression again.
The switch to monetary policy brought with it other shifts in Britain´s economic structure. Government spending was reduced in order to prevent it exceeding public income. If this happened, there would be an increase in the money supply. In contrast to Keynesians, monetarists were not prepared to stimulate the economy by investing money it might not have. The 1979 Budget showed this, as its main aim was to reduce the budget deficit, unlike prior attempts which allowed a deficit in order to keep unemployment low. By the mid 1980's the first surplus budget in post-war history was announced.
Closely linked to the policy of reducing government spending is the third strand of Thatcher´s monetary policy. She saw a need for a free-market economy with minimal government intervention, or laissez-faire. The only role that government should play is the control of the supply of money in the economy. Instead of the government setting policies, the market should decide the level of things like wage settlements. Again, this was a major break from Keynesian thinking. Thatcher thought an orientation towards the needs of the market would modernise the economy and society, ridding Britain of uncompetitive structures and encouraging entrepreneurial spirit.
Up until now, Britain had had a mixed economy, with a similar share of both public and private firms and bodies. Thatcher completely reorganised it into a private market-based economy through her seemingly endless programme of privatisation. This encouraged the free-market economy by increasing the size of the private sector while decreasing the size of the public sector, therefore allowing market forces more influence in the economy. It also allowed the government to raise money without the need for borrowing, and this money was not placed into the money supply so inflation would not rise. This was a major reason for the budget surpluses in the 1980's. Many nationalised industries such as electricity, and gas were privatised under Thatcher, something which never would have happened under the previous government. She was even criticised by former Tory Prime Minister Harold MacMillan for 'selling off the family silver'.
By 1988 the government had sold off nearly $58 billion worth of its assets (Green,1989,p226). The amount of home owners increased massively with the sale of council houses and 'right to buy'. This resulted in house prices dropping because there were so many on the market. Many people who had bought houses in the south-east of England in 1987 found a few years later that their homes were worth much less than what they owed on their mortgage and that they had 'negative equity'. It also resulted in a shortage of rented property because councils could not use the money made from selling to build new houses. This meant many people had to be housed in Bed and Breakfast hotels when they had their homes repossessed in the early 1990s recession which was expensive for the government and caused even more of a strain.
In taxation policy Thatcher switched the emphasis from direct to indirect taxation. This meant that rather than an individual paying most of their taxes based on their income, it was paid when buying goods with VAT. Income tax was lowered from 33% in 1978 to 26.5% in 1989, while indirect tax in National Insurance Contributions rose from 7.7% to 9%, and VAT almost doubled to just under 17%. (Johnson, 1991,p143). Income tax is always paid in relation to earnings to make it a fair game. Although the rich still paid more tax during the Thatcher years, tax cuts benefited them greatly as most of the cuts were made to middle and high income earners, who's income tax fell from 86% to just 40%. This encouraged foreign and domestic investors to set up their ventures in here during the years of the booming economy in the late 80's. Because of tax incentives on borrowing, the use of personal savings dropped to its lowest level in a while in 1989.
Thatcher had an impact on unemployment levels which rose from 1 million in 1979, to 5 million by 1986 (Johnson,1991,p237) and then decreased. During the 1980's there was a world-wide recession which contributed but it was also down to measures taken by the government. Trade unions' bargaining power was reduced through law reforms which made it easier for employers to lay-off workers. During the recession of the early 80's the government had refused to use macro-economic policy to bring down unemployment because they thought if the supply of money was allowed to rise then inflation would return, and they believed that the labour market was best left to sort itself out. In their last term, the government was able to lower the level of unemployment through various changes. The real cost of labour to employers was reduced, encouraging them to take on more staff and payroll taxes were cut by the abolishment of the National Insurance Surcharge and by a reduction in contributions paid by lower-paid workers. In 1989, unemployment figures had been brought down to just under the 1980 level.
During a recession, when the economy is slow and many people are out of work, there is a greater need for social security benefits. This caused a strain on the welfare state. What made it worse was that, because Thatcher had sold off so many council houses, people having their homes repossessed had to be housed in expensive Bed and Breakfast hotels which cost the government even more money.
Thatcher completely changed the face of the National Health Service. It had been an established comfort since the Beveridge Report, that the NHS should be free at the point of delivery. Thatcher introduced prescription charges and dental charges. She also introduced internal markets into the NHS through the idea of Fund Holding GP's. GP's who were 'efficient' and were left with a surplus left over at the end of the year would be able to reinvest that money into their practice. Those who did not use their money so 'wisely' would go bankrupt and have to be shut down. GP's would buy operations from hospitals with their funds, so the 'survival of the fittest' also applied to hospitals.
Margaret Thatcher and her government completely restructured Britain's economy. The main contributor to national wealth shifted from secondary to tertiary industry and she changed the whole focus of the economy by switching from Keynesian demand-centred policy, to monetarist supply-centred economics. She privatised nearly all of Britain industries and made huge tax cuts. She also changed the face of the welfare state.
Political Economy
What impact did the Thatcher years have on Britain’s economic structure?
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Autumn 2003
Bibliography
Artis, M.J. (1996) The UK Economy, 14th ed (Oxford,Oxford University Press)
Bentley, R. (2000) British Politics in Focus, 2nd ed, (Lancs, Causeway Press Ltd)
Green, F. (1989) The Restructuring of the UK Economy (Herts, Harvester Wheatsheaf )
Johnson, C. (1991) The Economy Under Mrs Thatcher (London,Penguin)
Pollard, S. (1992) The Development of the British Economy, 4th Edition, (London,Edward Arnold)
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