Downing Street Years - Margaret Thatcher [82]
On Friday 13 February I had a further meeting with Geoffrey Howe. Alan Walters was also present. The latest forecast for the PSBR was between £13.5 billion and £13.75 billion. The tax increases Geoffrey was proposing would reduce it to something between £11.25 billion and £11.5 billion, but he did not believe it was politically possible to go below £11 billion, and in his view an increase in the basic tax rate had to be ruled out. But Alan argued strongly that the PSBR should be lower still. He told us that a PSBR of, say, £10 billion would be no more deflationary than one of £11 billion because the latter would actually be worse for City expectations and for interest rates. Alan concluded by arguing that we had no alternative but to raise the basic rates of income tax by 1 or 2 per cent.
Alan was the economist. But Geoffrey and I were politicians. Geoffrey rightly observed that introducing what would be represented as a deflationary budget at the time of the deepest recession since the 1930s would be difficult enough; doing so via an increase in the basic rate would make it a political nightmare. I went along with Geoffrey’s judgement about the problems of raising income tax, but I did so without much conviction and as the days went by my unease grew.
When Geoffrey and I had our next budget meeting on 17 February, he said that he too had been having second thoughts. He was now prepared to contemplate a basic rate increase. But his concern was whether it might not be better to raise the basic rate of income tax by 1 per cent and personal allowances by about 10 per cent, thus reducing the burden on people below average earnings. I confirmed that I in turn was prepared to contemplate this, but I also told him that I was coming to the view that it was essential to get the PSBR below £11 billion.
My advisers — Alan Walters, John Hoskyns and David Wolfson — continued to argue for this much lower PSBR with great passion. Keith Joseph also strongly backed this view. Alan, who knew that he could always have access to me more or less when he wished — as in my view any really close adviser should if a prime minister is not to be the prisoner of his (or her) in-tray — came in to my study to have one last attempt to get me to change my mind about the budget. He ran over again the reasons why we could never have lower interest rates — which was what the economy desperately needed — unless we had lower borrowing, which now meant higher taxes. I know today that he went away still believing that I was not persuaded. But the more I wrestled with the problem in my mind, the more accurate his analysis seemed. The budget he was arguing for would be unpopular with the public, mystifying to many of my strongest supporters in the Commons and the country and incomprehensible to those economists still stuck in post-war Keynesian orthodoxy. Its consequences for my administration were unpredictable. Yet I knew in my heart of hearts that there was only one right decision, and that it now had to be made.
Geoffrey Howe and I — without Alan who was engaged on some other business but with Douglas Wass, the Treasury’s Permanent Secretary — met for a further discussion of the budget on the afternoon of Tuesday 24 February. Geoffrey still envisaged a PSBR for 1981–2 of £11.25 billion. I said that I was dismayed by such a figure and that I doubted whether it would be possible to cut interest rates, which we badly needed to do, unless government borrowing was reduced to a figure around £10.5 billion. I said that I was even prepared to accept a penny on the standard rate. In the light of all the taxpayers’ money which had gone to coal and steel there would at least be a clear explanation for this.
Geoffrey argued against