Downing Street Years - Margaret Thatcher [30]
It was not until the end of July that the Cabinet brought itself to take the necessary decisions. The conclusions were extensively leaked. Even so, we decided the wisest course was to wait for the autumn before publishing the full figures in the Autumn Statement. We had made some tough decisions in those first three months. It was, however, only a start.
Over the summer the economic situation worsened. On my return from my first Commonwealth summit in Lusaka in August, Geoffrey Howe presented me with a general survey of the economy which he rightly described as ‘not very cheerful’. Unemployment was likely to begin to rise as the international recession deepened. Inflation was accelerating. Our competitiveness had worsened as a high pound and high wage costs put industry under increasing pressure. We became increasingly worried about the implications of pay rises for unemployment and bankruptcies. I asked that we should collect and circulate examples of excessive pay awards, which priced goods out of the market and destroyed jobs.
In September we again returned to public spending. We not only had to publish the conclusions we had agreed in July, but also our plans for the years up to 1983–4. And that meant more economies. We decided on a renewed drive to cut waste and reduce civil service numbers. We also agreed sharp increases in the price of electricity and gas (which had been artificially held down by Labour) that would come into effect in October 1980. Electricity would rise by 5 per cent, and gas by 10 per cent, over and above inflation.
The 1980–81 Public Expenditure white paper was duly published on 1 November. These public spending plans honoured our pledges to provide more resources for defence, law and order and social security (reflecting the year’s record pensions uprating). They would also hold the public spending total for 1980–81 at the same level as 1979–80. In spite of the fact that this reduction of some £3.5 billion from Labour’s plans was denounced as draconian, it really was not large enough. That was evident not only to me, but also to the financial markets, already concerned about excess monetary growth.
Here, too, we seemed to be running up the ‘Down’ escalator. On 5 November Geoffrey Howe came to see me. The money supply figures were well above target, principally because the PSBR and bank lending were both higher than expected. The PSBR had been affected by one strike which held up payment of telephone bills and by another which had disrupted VAT payments. Companies were borrowing to finance wage settlements they could not afford. Interest rates overseas were on the way up. And the public spending figures had also, as I suspected, proved too high for the markets. A financial crisis threatened. In the days of Denis Healey this would have elicited a fiscal package or ‘mini-budget’. We had no hesitation in rejecting this approach. Higher interest rates or lower public spending, not tinkering with fiscal demand management, were the appropriate response.
On 15 November we accordingly raised Minimum Lending Rate (MLR — the successor to Bank Rate) to 17 per cent. (Measured by the RPI, inflation at this time was running at 17.4 per cent.) Other measures to help fund the PSBR were also announced.
Of course, the Opposition had a field day, attacking our whole strategy as misguided and incompetent. The fact of the matter was not that our strategy was wrong but that we had yet to apply it sufficiently