Downing Street Years - Margaret Thatcher [419]
By 1989 even Nigel’s usual apparently limitless confidence about our economic prospects had become dented. Monetary policy had been tightened sharply to cut back inflation. But what about fiscal policy? It was clear that the budget surplus was a reflection at least as much of the runaway pace of economic growth raising tax revenues as of underlying financial soundness; even so it was difficult to argue that such a large budget surplus should be increased still further.
And indeed when I saw Nigel for our usual discussion on Sunday 12 February, I found less difficulty than usual in persuading him to see things my way. I urged him to revise his Cabinet paper, to be less complacent, to drop the idea of a further one-penny cut in income tax (which I said would look wrong psychologically), to forget his proposal to remove the tax on the basic retirement pensions and to scrap the earnings rule instead.* I also said that there must be no loosening of monetary policy. He went along with all this: he then used some of the revenue in hand to make sensible changes in the structure of employees’ national insurance contributions.
But Nigel decided not to raise the excise duties with inflation, giving an artificial downward twist to the inflation figure, which enabled him to predict that inflation would rise to about 8 per cent before falling back in the second half of the year to 5.5 per cent and perhaps 4.5 per cent in the second quarter of 1990. However, by the second quarter of 1990 it was to reach not 4.5 per cent but approaching 10 per cent. The degree of inflation that shadowing the deutschmark had injected into the system was greater than anyone, including Nigel, had realized. But by 1990 Mr 10 per cent had departed and others were left to deal with the consequences.*
John Major was in some ways all too different from Nigel Lawson as Chancellor. It seemed strange to me that, having been a competent Chief Secretary, he did not feel more at home with tackling the difficult issues he now faced when he returned to the Treasury. But probably Nigel had made all the important decisions and John had not had much of a look in. As preparation for the 1990 budget, we had a seminar attended by John and me, Richard Ryder, the Economic Secretary to the Treasury, and officials. (Nigel would never have dreamed of such a thing before a budget.) It did not get us very far, which was not John’s fault: the problem was that by now none of us had any faith in the forecasts. I found myself in disagreement with John on only one issue: I stopped consideration being given to a new tax on credit. I had a good deal of sympathy with the proposition that banks and building societies had made credit too easily available and that this was leading feckless or just inexperienced borrowers into debt. But I never doubted that if we once tried to stop this by imposing a tax on it, all that general support which puritanical policies evoke in principle would soon turn into a hedonistic outcry as video recorders, expensive lunches, sports cars and foreign holidays moved out of financial reach. The tax would also have put up the RPI, though this would have been a once-and-for-all effect only. In fact, within the little room for maneouvre available in these circumstances, John Major’s only budget was a modest success, containing several eye-catching proposals to boost the woefully low level of savings. But by then it would take more than a sound budget — more even than a Prime Minister