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Modern Britain Y2 > (!) 4:14 Thatcher's economic policies and their impact > Flashcards

(!) 4:14 Thatcher's economic policies and their impact Flashcards

1
Q

What economic principle did Thatcher’s government promote in their first budget in 1979?

A

Reducing government spending according to monetarist principles: controlling the money supply which should reduce inflation and lead to economic growth

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2
Q

By 1980, the economy had plunged into…

A

a serious recession:
> inflation was above 15%
> unemployment was sharply rising above 2 million

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3
Q

What are the principles of monetarism?

A

> Too much money in the economy causes inflation

> To solve this, the gov. needs to put up interest rates and reduce public spending to squeeze excess money out of the economy

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4
Q

What is inflation?

A

When the prices of goods and services increase - this happens when people have more money to spend than there are goods available

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5
Q

Monetarism aimed for which two out of full employment, low inflation and growth?

A

Low inflation and growth

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6
Q

After these disastrous results, many people expected that…

A

the government would reverse its policy

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7
Q

Cutting government spending will be effective since…

A

the government is the largest spender, so this will reduce the amount in the money supply

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8
Q

Minimum interest rates are set by the government. When interest rates are low…

A

the public will be inclined to borrow more - this increases the amount in the money supply

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9
Q

Therefore, in 1979, Thatcher sets the minimum interest rate to…

A

17%, which is exceedingly high. This means people are much less inclined to borrow

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10
Q

According to monetarism, what is the ideal inflation rate?

A

Around 1.5-3%, so Thatcher aspires to this

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11
Q

Monetarists believed that some unemployment was…

A

generally healthy for the economy

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12
Q

In 1981, 364 British economists warned Thatcher…

A

that she would seriously harm the economy

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13
Q

What was the first budget of the new Conservative administration?

A

Geoffrey Howe’s June 1979 budget

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14
Q

What did the 1979 budget consist of?

A

It was a major change of direction for the economy:

> To control inflation, there was now increased reliance on interest rates and monetary policy

> Taxation was now based on taxes on spending rather than on income

> VAT was raised to a single rate of 15% - this was seized on by critics as evidence that the Conservatives had betrayed an election campaign promise

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15
Q

What was the 1980 budget (Geoffrey Howe)?

A

> Increased prescription charges and indirect taxes

> Broad reductions in public spending, but more resources for police and defences

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16
Q

What was the 1981 budget (Geoffrey Howe)?

A

Thought to be the most significant budget, came at the bottom of a deep recession

> Cuts in public spending and increases in personal and indirect taxation

> Grants to local councils were cut

> Benefits were frozen

Howe described it as ‘the most unpopular budget in history’

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17
Q

What was the 1982 budget (Geoffrey Howe)?

A

> No dramatic moves

> Personal allowances and thresholds raised by 2% more than the 12% required to match inflation during 1981

> Tobacco, alcohol and petrol duties all raised

> Child benefit increases, unemployment benefit and state pensions also rise

This budget was delivered after unemployment had reached 3 million

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18
Q

What was the 1983 budget (Geoffrey Howe)?

A

A pre-election budget

> Increases in social security allowances

> Overall, tax reductions amounted to approx. £2,000 million for individuals and £750 million for businesses

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19
Q

What is privatisation?

A

When the government makes public entities privately owned: the transfer of assets from the public (government) sector to the private sector

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20
Q

The belief that people rather than governments spend money more efficiently led to…

A

a shift away from direct taxation (e.g. income tax) to indirect taxation (e.g. VAT).

There were now more taxes on the goods and services that people chose to buy.

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21
Q

The top rate of income tax fell from…

A

83% to 40% by 1988

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22
Q

During the same period…

A

VAT went up from 8% to 15%

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23
Q

In almost every budget between 1979 and 1987…

A

taxes on petrol, cigarettes and alcohol went up

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24
Q

Cutting public spending also led to…

A

a series of clashes between the Conservative central government and many Labour-controlled local councils.

The Thatcher government saw left-wing local councils as enemies, especially since they blamed them for wasting resources.

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25
Q

Name one of the fiercest clashes.

A

Fought with the Greater London Council (GLC) headed by left-winger Ken Livingstone. Thatcher treated many GLC policies in education and public transport as provocations

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26
Q

In order to control the overspending of Labour local authorities…

A

the Conservative government introduced rate capping:

this limited the local taxation charged by local councils on all privately owned businesses and houses

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27
Q

Give an example of resistance to rate capping.

A

In 1985, a number of authorities, including Sheffield and Liverpool, tried to rebel against the cap and refused to set budgets.

Eventually, they had to back down due to bankruptcy.

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28
Q

What was the Local Government Act of 1986?

A

It abolished the big metropolitan local authorities that had been set up by Heath’s government.

The powers of the central government were greatly increased at the expense of local government.

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29
Q

Despite the rhetoric on controlling public spending…

A

Thatcher in fact never managed to cut public spending in real terms, partly because spending on social security went up to due high levels of unemployment

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30
Q

By Thatcher’s second term (1983)…

A

the experiment with monetarism was effectively ended

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31
Q

However, this did not mean a return to pre-Thatcher economic policies:

A

there continued to be a greater emphasis on supply side economics.

This concentrated on market reforms such as privatisation and deregulation

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32
Q

What is supply-side economics?

A

The belief that economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade.

According to supply-side economics, consumers will benefit from greater supplies of goods and services at lower prices, and employment will increase.

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33
Q

An industry can also be privatised by…

A

giving it to a single company, allowing one person to hold it

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34
Q

Thatcher wanted the nationalised industries to stop receiving…

A

government subsidies

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35
Q

Thatcher also wanted nationalised industries to be subjected to…

A

the discipline of the marketplace

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36
Q

Why did John Redwood have a negative opinion of nationalisation?

A

They were bleeding the nation dry; they were not efficient nor competitive. For example, coal mines needed £3 billion per year in subsidies.

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37
Q

What proportion of industries were removed from government control under the Thatcher governments?

A

2/3rds of state-owned industries were sold into the private sector

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38
Q

Why did Thatcher dislike the use of subsidies?

A

She believed it fosters dependency. Thatcher treated the economy like survival of the fittest: a failing industry was not saved since it was their own fault (neo-liberalism).

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39
Q

What was the ‘discipline of the marketplace’ that Thatcher encouraged?

A

Competition among industries, so that people learned the lessons of life in the economy without government help

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40
Q

How much did the sale of British Telecom in 1984 raise for the Treasury?

A

£3.7 billion - a huge amount

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41
Q

Thatcher claimed that privatisation was taking place…

A

globally, e.g. France, Singapore, Japan. In reality, this was not exactly the case.

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42
Q

Which new ideology had been born?

A

Popular capitalism - the idea that capitalism doesn’t just work in the favour of a small group

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43
Q

How did Thatcher define ‘popular capitalism’?

A

As a crusade to enfranchise the many, in the economic life of the nation

44
Q

When Thatcher came to power in 1979, what was the % of people owning shares and what was the % by 1990?

A

7% in 1979
25% in 1990

45
Q

Why was it so important to the Conservatives for people to own shares?

A

In owning shares, they thought people would better understand capitalism and its benefits

46
Q

What initial steps had been taken towards privatisation in 1979-80?

A

British Petroleum was privatised in 1979 and British Aerospace in 1980 - this was well received

47
Q

Which big two privatisations ensured that privatisation gained a great deal of momentum?

A

British Telecom in 1984 and British Gas in 1986

48
Q

British Telecom in 1984 and British Gas in 1986

A

Thatcherites believed that the private sector was more dynamic and efficient than the public sector at running and delivering goods and services.

Competition encouraged improvement and innovation.

49
Q

How was privatisation criticised?

A

Privatised enterprises were sold off cheaply to ensure all shares were taken up.

As a result, some employees lost jobs as the privatised enterprises cut back on staff.

50
Q

Privatisation signalled the end of…

A

the post-war consensus ideas about economic management

51
Q

What were the overall negatives of privatisation?

A

> Increased income inequality

> Increased the fragility of the economy, since it opened many more industries up to the possibility of failure (only state-owned industries cannot fail)

> The risks of the market

52
Q

What measures did the Thatcher government introduce to make it easier for businesses to trade?

A

> Foreign banks can buy up parts of the stock exchange
Foreign investment

53
Q

What was the other key element of supply side economics: deregulation?

A

The government would interfere as little as possible. It was easier for businesses to trade and grow and therefore encouraging entrepreneurship and wealth creation.

54
Q

The government also introduced other measures to encourage start-up companies:

A

The Loan Guarantee Scheme made it easier for small businesses to borrow money

The Enterprise Allowance Scheme encouraged the unemployed to start up their own businesses by giving them £40 a week for up to a year to get their business off the ground.

55
Q

What was the ‘Big Bang’ in the City of London in October 1986?

A

The deregulation of the London Stock Exchange, opening the way for computer screen trading and replacing the ‘old boys’ network’ with free competition.

56
Q

What new type of trader emerged as a result of the Big Bang?

A

Yuppies - young urban professionals
> They became an iconic image of the 1980s
> People working in cities with large amounts of disposable income to spend on consumer goods

57
Q

What were the impacts of the Big Bang?

A

> Foreign banks could now operate as stockbrokers

> It blew away old tradition and is credited with restoring London’s position as a world financial centre

> A new breed of dealers and speculators took over

58
Q

What were the major benefits of the Big Bang?

A

Britain became the financial capital of the world, it made some very wealthy. London could now compete with Wall Street.

59
Q

Content summary:

A

> First budget in 1979 and its impacts
Monetarism
Thatcher’s minimum interest rate
Geoffrey Howe’s budgets in the early years
Industries removed from the public sector
‘Popular capitalism’
Encouraging people to own shares
The impacts of privatisation
The Big Bang and deregulation

60
Q

There is no doubt that….

A

the economy grew during Thatcher’s premiership

61
Q

However, what was lacking?

A

> Productivity did not increase by much

> At 2.2%, growth in GDP during the 1980s was no better than in the 1970s. This was because the growth in the second half of the decade was balanced by the underperformance in the first half.

62
Q

Thatcherites, following the ideas of the New Right, believed that inflation was…

A

a threat to the economy: they thought that if inflation could be controlled, then the economy would grow and be more successful.

63
Q

What was used as a mechanism to control inflation?

A

Interest rates: they were raised to 17% in 1979

64
Q

However, what were the detriments of raising interest rates?

A

> It made it more expensive for businesses to borrow

> They increased the value of the pound which made it more difficult for businesses to export

> Overall, this led to a decline in both output and demand. The economy went into recession with many businesses going bankrupt, which in turn led to high unemployment.

65
Q

Even worse, initially inflation went up:

A

peaking at 22% in May 1980

66
Q

Thereafter it fell:

A

> reaching a low of 2.5% in 1986

> later attempts to control inflation led to a further recession in the late 1980s, and entry into the European Exchange Rate Mechanism

> by 1990, it had reached 10%

67
Q

Maintaining low levels of unemployment was no longer the primary aim:

A

instead, British industry had to be prepared to be more competitive, and if this led to more unemployment then that had to be accepted

68
Q

The impact of monetarist economic policies in the early 1980s on industry was drastic:

A

> many industrial plants closed down permanently

> the worst hit areas were the North and Scotland

> manufacturing output fell by 15% in 2 years

> steel production alone was cut by 30%

69
Q

In 1983, unemployment rose to…

A

over 3 million, the highest it had been in the post-war period. This was 13.5% of the total workforce

70
Q

In some areas which had been dependent on heavy industry…

A

the unemployment rate went as high as 25%

71
Q

What policies did the government introduce to combat this?

A

> Youth Employment Schemes were created, whereby employers received a subsidy to take young people on

> Employer National Insurance rates were reduced for lower paid jobs

72
Q

Nevertheless, the unemployment rate did not fall below 3 million until…

A

1987

73
Q

In particular, far fewer people were being employed in…

A

manufacturing industry

Workers found that their traditional skills were not in demand because they had been rendered out of date by mechanisation or by flexible working practices.

74
Q

Even without the Thatcher government’s economic policies…

A

long-term economic trends were already affecting Britain’s old industries

> These old, labour-intensive industries were facing challenges from foreign competition and technical innovation

> Britain’s economy was moving away from being based on manufacturing and heavy industry and becoming based on services

75
Q

However, in which areas did people face painful adjustments?

A

Areas based on coal mines, shipyards and steelworks

> the foundations of the working class and their communities were crumbling

> this sharpened the north-south divide, as the old traditional industries contracted, leaving behind large tracts of dereliction in the Midlands, the North, Scotland and South Wales

76
Q

1985 average weekly household income:

A

North/Northeast: £173

Southeast: £248

77
Q

The economic realignment could also be seen in the urban decay of many inner city areas:

A

> there were increased problems of ill health and depression, and alcoholism and drugs

> young people could no longer expect to follow their parents into work - many were forced to move away

> long-term trends were shifting economic activity towards London and the south, changing the face of many towns and cities

78
Q

In April-July 1981, there were a series of…

A

riots in Brixton, London, Birmingham, etc

79
Q

The Scarman Report was commissioned to examine the causes of the 1981 riots:

A

it identified poverty and race as the key components

> the areas in which riots had happened were suffering high levels of unemployment and deprivation

80
Q

This was exacerbated by…

A

the fact that these were areas where young black and Asian people felt the ‘sus law’ meant that the police unfairly targeted them

81
Q

What was the ‘sus law’?

A

It gave police officers permission to stop and search suspected people if they thought they might commit a crime

82
Q

Despite the Scarman Report and subsequent changes in policing policies…

A

there were further riots in 1985

83
Q

The economic realignment also led to investment and regeneration in some of these areas:

A

Heseltine led redevelopment projects in the dockland areas of London and Liverpool

84
Q

Overall, the economic realignment that resulted from Thatcher’s economic policies depended on perspective:

A

Britain looked a different place depending on the city, north or south, etc

85
Q

Inflation under Thatcher experienced many fluctuations:

A

1979: 15%

1980: 22%

1986: 2.5%

1990: 10%

86
Q

What was unemployment in 1979?

A

1.5 million

87
Q

Unemployment only began decreasing from 3 million from…

A

1987, at 2 million by 1990

88
Q

What was coal production in 1979?

A

125 million tonnes

89
Q

What was coal production in 1984?

A

40 million tonnes

90
Q

Coal production was on a mostly steady decline. By 1990 it was…

A

85 million tonnes

91
Q

The basic rate of income tax fell from…

A

33% to 25%

92
Q

Demand side economics focused on…

A

taxing businesses and individuals, using this tax to support full employment

93
Q

Supply side economics focused on…

A

deregulation and low taxation to encourage enterprise and entrepreneurship

94
Q

How many owned shares in 1979?

A

3 million

95
Q

How many owned shares in 1990?

A

9 million

96
Q

How did privatisation and deregulation affect employees?

A

Job security and working conditions tended to get worse

97
Q

With the Big Bang, financial services became…

A

one of Britain’s most important export industries

98
Q

Why did Britain enter the European Exchange Rate Mechanism in 1990?

A

As an attempt to combat rising inflation

99
Q

The industrial impacts of monetary policy have been described as…

A

the ‘deindustrialisation of Britain’

100
Q

No. of those employed in manufacturing fell from…

A

7.1 million to 5 million

101
Q

While economic realignment was already underway…

A

the government’s economic policies accelerated this

102
Q

Unemployment was concentrated in…

A

the areas most hit by the decline in traditional industries

103
Q

Whole communities went into decline, since…

A

when the primary industry of an area closed, jobs disappeared which in turn hit local jobs and services

104
Q

How successful were Heseltine’s redevelopment projects?

A

The Canary Wharf development on West India Docks in London became the second most important financial district in the country

105
Q

Overall, how did the Thatcher government break with the post-war consensus?

A

> Monetarism and supply side policies

> Concentration on combatting inflation rather than unemployment

> Aim to reduce government intervention with deregulation and privatisation

106
Q

What successes did the Thatcher government have?

A

> Inflation reduced

> Businesses forced to become more competitive

> Growth of service industries, particularly financial services

> GDP grew

Modern Britain Y2 (7 decks)

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