Downing Street Years - Margaret Thatcher [77]
In September, Geoffrey Howe sent me a note elaborating on the warning he had already given to Cabinet about public expenditure. The increases required for the nationalized industries, particularly BSC, would require larger cuts in programmes than those agreed in July in order to hold the total. To the extent that more was provided, as the Cabinet wished, for industrial support and employment, the corresponding cuts would need to be larger still. The fifth public expenditure round in sixteen months was bound to prompt squeals of indignation: and so it proved.
Indeed, a further note from Geoffrey in early October confirmed that the position was, if anything, deteriorating: the figures were worse than suggested the previous month. The latest forecast of the PSBR for 1981–2 approached £11 billion, far higher than planned. The Treasury had already begun to examine ways in which it might be reduced and were looking at the possibility of increasing taxes on the profits from North Sea oil and gas, raising employees’ national insurance contributions and not fully indexing personal income tax allowances in line with inflation. All of these unpalatable tax options reinforced the necessity for further public spending cuts: we needed a cash limits squeeze on all programmes and a cut in local authority current spending, and we would have to look again at defence spending and at the even more politically sensitive social security budget. (The social security budget accounted for a quarter of total public spending, of which the cost of retirement pensions was by far the largest element. But I had pledged publicly that the latter would be raised in line with inflation during the Parliament.) We were entering perilous waters.
The tactics in handling the new public expenditure discussions were obviously very important. Geoffrey and I decided not to take the whole matter to Cabinet cold, as it were, so I called a meeting of key ministers to go into it first. The Chancellor described the position and outlined the arithmetic.
Our plan succeeded. Without too much grumbling, the Cabinet of 30 October endorsed the strategy and confirmed our objective of keeping public spending in 1981–2 and later years broadly at the levels set out in the March white paper. This meant that it would be necessary to make cuts of the order of magnitude proposed by the Treasury — though even with these reductions we would be forced to increase taxes if we were to bring the PSBR down to a level compatible with lower interest rates.
Much stronger Cabinet opposition surfaced when we began to look at the decisions required to give effect to the strategy which had been endorsed. The ‘wets’ now discovered a new approach. They claimed that they lacked sufficient information to judge whether the overall strategy was soundly based. Without this, they said, they were in no position to weigh the economic, political and social consequences of all the various means of achieving it, including changes in taxation and reductions in public spending. The ploy was transparent. In effect, spending ministers were trying to behave as if they were Chancellors of the Exchequer. It would be a recipe for complete absence of spending control and thus for economic chaos.
The three most important areas of discussion at our meeting on Tuesday 4 November were the Health Service and defence budgets, and the special employment measures which Jim Prior wanted. On Health, we decided that the NHS element in the National Insurance Contribution should be raised rather than the health programme itself reduced — so continuing to honour our manifesto pledge. On defence, the Cabinet accepted that the reductions would have to fall somewhere between what the Treasury demanded and the MoD was then offering. Finally, we agreed on the special employment measures, which I later announced in my speech on the Address, and which provided for 440,000 places on the Youth Opportunities Programme — 180,000 more than in the