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Rolling Back the State? Fiscal Squeeze, Thatcher-Style

Background: The Period in Perspective

Like the Labour squeeze associated with the 1976 IMF bailout, the story of 'Thatcherism'—the policies of the Conservative majority-party governments led by Margaret Thatcher in the 1980s—has been told frequently and from many different angles. As with the 1970s episode, many of the leading players published memoirs, and archives for much of the period were available at the time of writing. This chapter does not seek to offer any new interpretation of the much-discussed topic of Thatcherism in general, only to look at that period through the lens of 'fiscal squeeze', to compare it with the other episodes covered in this book.

As we saw in Chapter Two, reported financial outcome data show up two main fiscal squeeze episodes in the 1980s. One was a hard revenue squeeze after the 1979 election, some of which seems to have come from an abrupt near-doubling of VAT rates in 1979 under Margaret Thatcher's first Chancellor (Geoffrey Howe) and more from a deeply controversial budget in 1981 which sharply raised taxes, in the depths of what was then the most severe recession since World War II. The other episode is a longish (five-year) 'soft' squeeze on both revenue and expenditure under Margaret Thatcher's second Chancellor (Nigel Lawson) that shows up in the financial outcome numbers from 1983/84. That second episode occurred during a long period of economic growth (albeit with turbulence in both politics and financial markets), as the deep recession triggered by a steep increase in the world oil prices in 1979 gave way to economic recovery from 1982/83 and developed into a financial boom.

As with several of our other cases, this era brings out the limitations of using reported aggregate financial outcome data as the sole indicator of the political effort going into fiscal squeeze, for several reasons. One is that undeniable efforts by ministers to cut public spending in the Thatcher Government's first term (following 1979 election pledges to do so) did not produce an overall fall in expenditure in the reported outcome figures shown in Chapter Two. That is because the early 1980s recession greatly pushed up welfare spending (and related employment measures for training and work experience) as unemployment rose by a million to hit 2.5 million in 1981, more than doubled between 1979/80 and 1982/83, and reached levels not seen since the 1930s. At the same time, the economy shrank (with GDP contracting by about 2 per cent in 1980), such that, far from falling, government spending rose relative to GDP. So the early Thatcher period is a case where cyclically adjusted figures may give a better indication of the efforts going into restraining spending.

A second point relating to the reported revenue numbers in this case is that North Sea oil came fully on stream during this period. That development had various effects, including turning the pound into a petrocurrency in the government's first term, with severe effects on manufacturing. But from a fiscal squeeze perspective the important consequence is that it gave the government a major new source of tax revenue in the early 1980s (amounting to something like half the yield from income tax), greatly increasing government revenue and making room for cuts in business and personal taxes that would otherwise have been far more difficult. So there is room for argument as to how far revenue increases derived from newly exploited natural resources really amount to a 'squeeze'.

A third issue with reported financial data as indicators of fiscal squeeze concerns the asset sales for which the Thatcher Government became internationally famous (though it followed in the wake of the previous Labour Government's big sale of BP stock in 1977, discussed in the Chapter Seven). The 'privatization swag', as the government's critics termed it,1 had the effect of lowering spending by reducing the need for borrowing, and it is also debatable how far asset sales really amount to a squeeze on spending. For all these reasons, it is important to look behind those aggregate outcome figures in Chapter Two.

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