Downing Street Years - Margaret Thatcher [75]
Geoffrey spelt out to Cabinet how difficult the economic situation at home and abroad had now become. Inflation in the major economies had risen sharply, oil prices had doubled, and the world was moving further into recession — led in this direction by Jimmy Carter’s United States. Although output in the UK had fallen rather less than predicted in 1980, it was likely in consequence to fall faster than expected in 1981. Inflation was slowing, but less rapidly than we had hoped. The background to the public spending round and to next year’s budget was, therefore, bleak. Then the discussion began. Some ministers argued for large increases in spending to stave off unemployment; others argued for prudence. I summed up by reaffirming the present strategy and noting the need to maintain public spending constraints, to reduce public sector pay increases and so to allow government borrowing and interest rates to fall — although within spending totals I was keen to see a higher priority given to dealing with unemployment, especially among young people. Round one went to Geoffrey and me.
But the debate continued inside and outside government. The “wets” arguments came in different forms of varying sophistication, though their central message was always the same: spend and borrow more. They used to argue that we needed extra public spending on employment and industrial schemes, over and above what we had planned and were effectively forced to spend simply as a result of the recession. But this did not escape from the fact that extra public spending — whatever it was spent on — had to come from somewhere. And ‘somewhere’ meant either taxes levied on private individuals and industry; or borrowing, pushing up interest rates; or printing money, setting off inflation. There was also a feeling, which I equally knew I had to resist, that the refunds which I had secured from the European Community budget should be used to finance extra spending. But why should it be assumed that public spending was better than private spending? Why should the fruits of my efforts to rein in the appetite of the European Community automatically be consumed by an almost as insatiable British public sector? I was, therefore, determined to ensure that the Cabinet endorsed the 1981–2 public expenditure total announced in the previous white paper, as reduced by the European budget receipts.
These basic differences between us came out clearly at the public spending Cabinet on 10 July. Some ministers argued that the PSBR should be allowed to increase to accommodate the huge new requirements of the loss-making nationalized industries. But the PSBR was already far too high, whatever the theoretical merits or otherwise of letting public borrowing rise in a recession. The higher it went, the greater the pressure to raise interest rates in order to persuade people to lend the Government the necessary funds. And at a certain point — if pushed too far — there would be the risk of a full-scale government funding crisis — that is, when you cannot finance your borrowing from the non-banking sector. We could not risk going further in that direction. So I emphasized once again the need to stay within the public spending plans — though within them there could be more priority given to assistance for jobs.
The defence budget was a special problem. We had already accepted the NATO commitment for annual 3 per cent real increases in our defence spending. This had the obvious merit of demonstrating to the Soviets our determination to prevent their winning the arms race on which they had embarked, but in two other respects it was unsatisfactory. First, it meant that the MoD had little incentive to get value for money in the hugely expensive equipment it purchased. Second, the 3 per cent commitment meant that Britain, spending a substantially higher proportion of its GDP on defence