1: 2 Economic Change, 1979-90 Flashcards
The eleven years of Conservative rule from 1979-1990 have been described as what for many commentators?
‘Revolution’
Why werec the eleven years of Conservative Rule from 1979-1990 been described as a ‘revolution’?
- Thatcher was revolutionary because she overturned the economic policies that governments had relied on since 1945.
- Her policies were underpinned by new economic assumptions.
- The impact of her policies led to significant changes in the economy by 1997. However, Thatchers economic policy evolved over time.
What was Thatchers early economic policy?
What new approach to economics did it reflect?
What did it introduce?
1) A break with the economic consensus that had dominated British politics from 1945.
2) Monetarism.
3) Introduced a new economic priority and therefore required new economic policies.
Monetarism 1980-82
1) What was Thatcher’s new economic priority?
2) Why was this a significant break with the past?
3) What did Thatchers initial measure include?
1) Controlling inflation.
2) Previous governmnents had prioritised keeping unemployment low, and were therefore willing to allow inflation to rise in order to preserve jobs.
3) Included tax rises & spending cuts.
Monetarism, 1980-82
What did Geoffrey Howe, Thatcher’s first chancellor - set out the plan to control?
What did the document set out the targets to do?
- Inflation- in the Medium Term Financial Strategy, which accompanied his 1980 budget.
- Targets- reducing the amount of money in circulation- in order to control inflation.
Monetarism & inflation
What did Thatcher & Howe believe had caused inflation?
- Years of excessive state spending & large pay rises for industry - resulting in too much money flooding into the economy.
- Inefficient industries produced too few goods & the result was price rises, as consumers with excess cash bid for scarce goods & services.
What economist was Thatchers inspried by which caused her to adopt a monetarist policy?
What was the monetarist policy designed to measure?
- Milton Friedman
- Designed to measure & reduce the amount of money in the economy in order to reduce inflation. The aim of the budgets from 1979- 1982 were to drain excess money from the economy.
What was Thatchers first policy to tackle inflation?
Change the tax system!
Taxation
How did Howe change VAT? (indirect tax)
Raised it from 8% to 15%
Taxation
What did Howe do to direct taxation to try to tackle inflation?
He lowered direct taxation, cutting the standard rate of income tax from 33% to 30%, and the top rate from 83% to 60%.
Taxation
What was Thatchers reasoning for income tax to be reduced?
However what consequences did it also have?
- There would be more incentive for people to work hard.
- Increasing VAT hit poor people harder than rich. VAT is a tax on spending, and therefore it targeted poor people who spent a higher proportion of their income than rich people.
- Cutting income tax helped the rich who had higher incomes than the poor.
Spending cuts
What was Thatchers seen to be from 1980-82?
How did public spending change from 1980-81?
What was this designed to do?
- Much more radical!!
- Dropped from £11 billion (1980) to £9 billion (1981).
- Designed to rebalance the economy so that the government did less in order to encourage the private sector to do more. It was also a monetarist policy designed to control inflation.
Why was Thatchers 1981 budget a turning point?
Against conventional wisdom- the government raised income tax in the middle of the recession.
New taxes were introduced on North Sea oil & a one-off windfall tax was imposed on the banks.
In total- taxes went up by £4 billion.
Spending cuts
What happened to education & health and benefit increased?
What budget was this at the time & what was happening to the economy?
How was this different to the past decades?
CUTS!
- Deflationary budget- when the economy was shrinking & unemployment rising.
- Complete change- when the governments increased spending in a recession to boost growth & safeguard jobs.
Spending cuts
What was the budget viewed as?
How did Labours shadow chancellor brand the policy?
What did this result in happening in the middle of 1981?
- ‘unconventional’ - resulting in 364 economists writing a letter to The Times, protesting at the policy! Concern also-even within the Conservative party.
- Labours shadow chancellor branded the policy ‘sado monetarism’ due to the pain it would cause.
- Thatchers policy softened- a cabinet rebellion in July 1981 rejected a further £5 billion of spending cuts, which they feared would make the recession even deeper.
Nationalised industry, 1979-82
What industries was Thatcher suspicious of & why was this?
State-run
- Believed they were inherently less efficient than private industries as they did not have to make a profit.
- She believed government money should not be used to keep failing industries afloat in the long term.
