T4 Economic Flashcards
1
Q
The Thatcher Economic Revolution
A
- High Levels of government spending, which led to borrowing, excessive taxation and inflation.
- Unnecessary government control and interference in running the economy.
- The growth of bureaucracy which meant that civil servants and officials increasingly intruded upon people’s lives.
- A combination of weak managers and powerful trade unions which had resulted in a continual increase in wages, but a decline in productivity; this led to wage-price spiral inflation and a lack of economic competitiveness.
2
Q
Thatcher’s Economic policies (1979 – 1983)
A
- Britain’s economy had struggled post 1945 (stop-go cycles, stagflation, devaluation 1967,
industrial unrest, Winter of Discontent). - Thatcher believed that monetarist policies were key to improving economic performance.
- Monetarism – an economic theory promoted by Milton Friedman and the Chicago School of Economists which advocated controlling inflation by lowering government spending and borrowing, and limiting the money supply (the amount of currency in circulation).
- Interest rates were used as a mechanism to control inflation – in 1979 these were raised to 17% - putting considerable strain on businesses and homeowners.
- Businesses found it hard to borrow money and also to export – which led to some businesses crashing and unemployment developing.
- Thatcherites believed that controlling inflation was the only economic priority – unlike previous ‘One-Nation Tories’ like Macmillan who was keen to avoid high levels of unemployment.
- Thatcher was prepared to accept a period of higher unemployment as the British economy and industry adapted in order to become genuinely competitive.
- Areas of the Midlands and the North were hit very hard in the early 1980s in a process some described as the ‘de-industrialisation of Britain’ - manufacturing fell by 15% in two years, in the West Midlands production fell by 25%, steel production was cut by 30%.
- By 1980 the UK economy was in serious recession – with inflation at 15% and unemployment on the rise (above 2 million). Inflation actually peaked in May 1980 when it reached 22%.
- By 1983 unemployment was at 3 million, 13% of the workforce and the highest figure since 1945.
- Unemployment would not fall below 3 million until after 1987, and in some areas particularly dependent on heavy industry, the rate was much higher – eg. 25% unemployment in Liverpool.
- Government efforts to tackle unemployment, such as the creation of Youth Employment Schemes to give employers a subsidy for creating jobs and National Insurance rates reductions for lower paid jobs did little to boost employment rates.
- North Sea oil and gas revenues was propping up the economy and preventing a run on the pound
- Thatcher and Howe stuck to their economic principles in 1981 – despite pressure to reverse their approach they actually intensified their monetarist approach – government borrowing went down, grants to local councils went down and benefits were frozen.
- Howe described the 1981 budget as ‘the most unpopular budget in history.’
- Thatcherites believed that the individual spends money more effectively than governments, which also explains the rationale behind cutting government spending and the decision to cut direct taxation (income tax) and increase indirect taxation (VAT).
- VAT doubled from 8% to 15% in 1979, whereas the top rate of income tax (paid by richest) went down from 83% to 40% between 1979-1988, while the standard rate of income tax (paid by most workers) went down from 33%-25%.
- Thatcherites argued this would encourage hard work as people could keep more of what they earned, critics argued the richest benefited most and the poorest were hit hardest.
- The Conservative government also repeatedly clashed with Labour controlled local councils as they were ideologically opposed, and Thatcherites accused them of being part of the ‘loony left’ and wasting public money.
- Thatcher was especially critical of Ken Livingstone’s leadership of the Greater London Council (GLC).
3
Q
Milton Friedman’s Theory of Monetarism
A
- The ‘New Right’ consensus believed that controlling inflation and not keeping unemployment low should be the government’s priority.
- To bring inflation under control, Margaret Thatcher’s government chose to adopt monetarism, a financial theory particularly associated with Milton Friedman, an influential American economist of the Chicago School of Economics.
- This was a theory that had only previously been experimented with, in ‘real-life’, in Chile in the early 1970s under the Chilean dictator Augusto Pinochet and nowhere else in the world.
- Friedman taught in the mid-1970s that the root cause of inflation was ‘big government’ spending.
- It followed, therefore, that in order to control inflation governments had to restrict the amount of money in circulation by reducing government spending.
4
Q
Cutting Government Spending
A
- From its first budget in 1979, Thatcher’s government set out to reduce government spending
according to monetarist principles, which, it was believed, would reduce inflation and lead to
economic growth. - The gap between government spending and tax revenue is called the Public Sector Borrowing
Requirement [PSBR]. - In keeping with Friedman’s ideas, Thatcher began to radically cut government spending, hoping
that it would reverse the position in which the country’s Public Sector Borrowing Requirement
(PSBR) was always in deficit. - To control inflation further, and to reduce the money supply, interest rates were kept at a high
level. This deterred irresponsible borrowing and kept the pound strong on the international financial market.
5
Q
Rising Unemployment
A
- While monetarism was successful in controlling inflation, it did so at the expense of causing mass
unemployment. - By 1980 the economy had plunged into serious recession, hit by both inflation above 15% and
unemployment reaching three million by 1982.
6
Q
The 1981 Riots
A
- This might have been acceptable had the fall in inflation been accompanied by economic growth,
but the opposite was happening. - In 1981, falling orders for manufactured goods had seen the start of the economic recession. On
top of this, monetarist economic policies, had led to serious 1981 rioting in parts of London,
Bristol, Manchester and Liverpool as the economic effects of inflation, rising unemployment and
government spending cuts were impacted upon the poorest and most vulnerable in society.
7
Q
‘The Lady’s not for turning’
A
- Most people expected a government to reverse its economic policies and to U-Turn like Heath’s
government did in the 1970s. - ‘The lady’s not for turning’ was a phrase used by Thatcher in her speech to the Conservative Party
Conference on 10 October 1980. - Indeed, the 1981 budget applied even further monetarist measures.
- Government borrowing went down. Grants to local councils were cut and welfare benefits frozen.
- A government economic advisor described the budget as the ‘biggest fiscal squeeze of peacetime’.
- Thatcher’s Chancellor, Geoffrey Howe, called it ‘the most unpopular budget in history’.
8
Q
North Sea Oil & Gas Revenue
A
- It is likely that the economy would have been in an even more disastrous state and there would
have been a serious run on the pound but for the flow of North Sea Oil and Gas whose revenues
now saved Britain from what would have been otherwise a severe balance of payments crisis. - North Sea Oil and Gas revenues also helped pay for tax cuts.
- But this came at the cost of investing Britain’s oil wealth into a sovereign wealth fund for future
generations which was the approach taken by the Norwegian government with its North Sea Oil
and Gas revenues.
9
Q
Monetarism Abandoned
A
- By the time of the 1983 general election, Thatcher was able to recover the support that the
opinion polls suggested she had lost in the early 1980s, as a result of her unpopular monetarism
economic policies, thanks to the surge of patriotic popularity that the 1982 Falklands War had
brought her. - Although monetarism was never formally dropped as a policy, after 1983, it was largely, albeit
quietly, abandoned. - Despite the public rhetoric on controlling public spending, Thatcher in fact never managed to cut
public spending in real terms, partly because spending on welfare social security spending like
unemployment benefits went up due to the high levels of unemployment caused by monetarist
government spending cuts. - Thatcher would after 1983 shift her economic policy towards Supply-Side Economics [Privatisation
and Deregulation].
10
Q
Shifting Taxation from Direct to Indirect Taxes
A
- There was, however, another reason why Thatcher wanted to continue to cut government spending.
- She believed that private individuals, especially rich entrepreneurs, spent their own money better
that the government did. - The belief that ordinary people rather than the government spent money more efficiently led to
a shift from direct taxation such as income tax, to indirect taxation such as VAT. - This in practice meant a shift in taxes away from taxes directly on people’s incomes or property and towards taxes on the goods and services on which they chose to spend their money.
- Hence between 1979 to 1990 the top rate of income tax fell from 83% to 40% and the standard rate of tax dropped from 33% to 25%, but VAT went up from 8% to 15%.
- Similarly, taxes on petrol, cigarettes and alcohol went up in almost every single budget between
1979 and 1988. - Supporters argued that reducing direct taxation would incentivise wealth creation by allowing
people, especially rich entrepreneurs, to keep more of the money that they earned. - Critics argued that transferring the taxation burden from direct to indirect taxation was less
progressive and hit the poorest of society harder who now had to spend more on basic goods like
food and fuel.
11
Q
An economic miracle?
A
- Thatcher’s second government moved away from the ‘monetarism experiment’ during the second
term in office. - However – Thatcher’s government did not go back to the post-war consensus approach which
could be characterised as ‘demand side’ economics. - Thatcher’s approach was ‘supply side’ economics – whereby the government stepped back from
intervention in the economy; de-regulating businesses and ensure low levels of taxation to
encourage enterprise and entrepreneurs.
12
Q
Privatisation: Supply-Side Economics (1983 - 1987)
A
- In place of monetarism, Thatcher began pursuing ‘Supply-Side Economics’ during her second government at the height of Thatcherism.
- This approach was based on the belief that post-war consensus Keynesian policies had distorted the operation of the free market economy by attempting to create consumer demand artificially.
- Supply-Side economists argued for a return to a laissez-fair free market and incentives based on maximising individual wealth based on profits.
- People would work harder and more productively if they were allowed to keep more of their individual wages and company managers their company profits.
- This would stimulate the economy based on a ‘trickle-down’ theory that the richer the rich would get the more ordinary workers would benefit.
13
Q
Supply-Side Economic Policies included:
A
- Reducing taxation so as to provide employees and businesses with an incentive to work.
- Encouraging greater competition in order to lower prices.
- Limiting the power of trade unions so that they could no longer demand decent wages, worker
protection laws or prevent the modernisation of failing industries. - Cutting welfare payments and shrinking the welfare state protections as a way of saving public
money, so taxes cut be further cut with the fall in government spending, which would reduce
welfare dependency.
14
Q
A Free Market Economy
A
- Privatisation was driven by an anti-Socialist ideology and a total rejection of the post-war
consensus that the nationalisation of the ‘leading heights of the economy’ was essential to ensure full employment. - Under Thatcher the British economy was to be changed from a ‘mixed economy’ to a ‘free market economy’.
- Just as Thatcherism believed that private individuals, especially entrepreneurs, were better at spending money than government, it was also a core Thatcher belief that the private sector was more dynamic and efficient than the public sector at running and delivering goods and services.
- Businesses would compete with others in the marketplace which would encourage efficiency, improvements, and innovation.
- This would all lead to what Thatcher called a ‘rolling back of the frontiers of the state.’
15
Q
Privatising State-Industries (Denationalisation)
A
- Privatisation or denationalisation became central to Thatcherite economic policy, especially during her second term in office between 1983 to 1987.
- A few steps had been taken in this direction during her first term in office: British Petroleum (PB) had been privatised in 1979 and British aerospace in 1980.
- The drive for Privatisation gained real momentum with the successful sale of British Telecom in 1984.
- The sale of British Gas in 1986 became the biggest share offer in history and was accompanied by a high-profile advertising campaign seeking to maximise the purchase of shares by ordinary people.
16
Q
The Scale of Privatisation
A
1979: British Petroleum (BP).
1980: Council Houses (Right to Buy Scheme).
1981: British Aerospace & Cable and Wireless
1982: Britoil.
1983: Associated British Ports.
1984: British Telecommunications (BT), Jaguar & British Airport Authority.
1986: British Gas & National Bus Company.
1987: British Airways, Rolls-Royce & Rover Group.
1988: British Steel & Municipal Bus Company.
1989: Water Companies.
1990: Electricity.
17
Q
‘Outsourcing’
A
- At the same time that state industries were being privatised there was an increase in state
‘outsourcing’ for essential public services. - This is whereby private and profit motivated companies took on government contracts to deliver
goods and services previously provided by the State: for example, in refuse collection, managing
prisons, providing school meals, hospital cleaning services etc.
18
Q
Supporters of Privatisation
A
- Radical Thatcherites wanted pointed out that privatisation brought a lot of revenue to the
government and reduced government spending on failing industries. - The financial gains from privatisation and reduced government subsidies could in turn be used to
finance further government tax cuts. - There were calls to push ahead with further privatisations including the coal industry and railways,
along with parts of the NHS. - These plans were later pursued in the 1990s by John Major’s Conservative government.
- The privatisations conducted by Thatcher in the 1980s marked a significant shift in the British
economy. - Perhaps more than any other factor, the drive for privatisation signalled the end of the post-war
consensus about state management of the economy.
19
Q
Critics of Privatisation
A
- Critics of privatisation argued that privatised industries were sold off too cheaply in order to
ensure share purchases were taken up. - Older one-nation conservatives, who believed in the post-war consensus, like Macmillan,
criticised Thatcher’s privatisation policy as ‘selling off the family silver’. - The policy was most disastrous for the former public employees of privatised industries who lost
their jobs, as privatised companies cut employee numbers and pension contributions to maximise
their profits.
20
Q
Deregulation Defined
A
- Deregulation means ‘taking away the rules’.
- Typically, this means reducing the amount of government interference in the economy, cutting
what is called ‘red tape’, or bureaucracy, by having fewer laws affecting what businesses can and
cannot do, thus creating a more laissez-faire ‘free market’.
21
Q
Thatcher’s Motives for Deregulation
A
- Thatcher’s government believed that the market and private enterprises were fast and efficient.
While the government was slow and inefficient. - A critical move towards a laissez-faire free market economy was made with the introduction of
deregulation. - This was a concerted effort to remove the financial and legal restrictions that Thatcher believed
had prevented efficiency and profitability in many areas of social and economic activity. - This meant removing ‘red tape’ making it easier for businesses to trade and grow and therefore
encouraging entrepreneurship and wealth creation.
22
Q
Encouraging Entrepreneurship
A
- The Loan Guarantee Scheme made it easier for small businesses to borrow money and the
Enterprise Allowance Scheme encouraged the unemployed to start their own businesses by giving
them £40 a week for up to a year to get their businesses of the ground.
23
Q
Chief measures the deregulation programme included:
A
- Finance: Credit and Exchange Controls were abolished.
- Transport: Bus companies were deregulated to encourage competition.
- Education: Schools were entitled to opt-out of state funding and to become responsible for their
own financing. - Hospitals: Were required to operate and internal market by taking control of their own finance
and matching needs to resources. - Housing: Council House tenants were given ‘the right-to-buy’ the homes they were renting.
24
Q
Deregulating the Workforce
A
- In 1982, the government did away with the ‘Fair Wages Resolution’, a long-standing agreement
that government business would go to employers who paid fair wages and offered their workers
decent working conditions. - Following an attempt to reform and limit the old Wages Council – which since 1909 had been
establishing minimum rates for pay for specific industries – it took until 1993 to finally abolish
them.
25
Financial Deregulation [‘The Big Bang’]
1) The 1986 Financial Services Act: This made the trading of stocks and shares easier to attract foreign
investment.
2) Computer Trading: The change took place at the same time that the stock market began computer
trading.
* The Big Bang meant a great deal of government regulations on the financial industry was scrapped.
* This modernised the stock market and allowed banks to make more risks with their lending and
investments.
* This led to the Lawson Boom from 1987 till 1990 and ultimately to the 2008 Financial Crash.
* Financial regulation freed up the City of London and the financial markets from the tight controls of the Bank of England.
* The ‘Big Bang’ on 27th October 1986 deregulated the London Stock Exchange, opening the way for
computer screen trading and replacing the ‘old boys’ network with free competition.
* Foreign banks could ow 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.
* The ‘yuppie’ became an iconic image of the 1980s and the City became a place where bigger risks
were taken, and fortunes could be made.
* It made London one of the financial capitals of the world and allowed it to compete with Wall Street.
* Financial Services became one of the UK’s most important export industries.
26
The City of London (Golden Square Mile) became a world financial centre because:
* Geography: London is conveniently located between the US and European markets in terms time
zones of when financial trading markets were open.
* Language: London English is spoken which is the international language of business.
* Stability: The UK is a safe country to invest money as it is a politically stable democracy with the rule of law.
* Deregulation: Thatcher deregulated the London Financial Markets with the ‘Big Bang’ on the 27th
October 1986.
27
The Consequences of Deregulation
* Unregulated finance led to the rise of private household debts, which stood at £16 billion in 1980
and rose to £47 billion in 1989.
* Easier access to mortgages meant that mortgage debt rose from £43 billion to £235 billion.
* By 2003, personal debt (including mortgages), stood at £1.3 trillion – by far the highest in Europe.
* People with lower incomes where borrowing more than they could afford.
* The rise of credit cards also contributed to the problem.
* While banks made huge profits, in 2003 the Financial Services Authority estimated that six million
families, around 20% of the population, faced problems with debt.
* Many blamed financial deregulations of banks for the 2008 Financial Crash.
28
Economic miracle?
* There was certainly stronger economic growth during Thatcher’s second term.
* Looking at the period 1980-88 as a whole, Britain’s average annual percentage growth was 2.2%, which was no better than during the 1970’s (mainly because the period 1980-83 was so poor.
* 2.2% compared negatively against the US (2.8%), Japan (4.1%), and Italy (2.4%).
* Growth in 1984-1988 was much stronger, ranging from 3.4-4.8% each of those years.
* While inflation had reduced to a low of 2.5% in 1986, it did start to increase in the final years of the second term, rising back up to 5.9% in 1988.
* Despite supply side economics making some people hugely wealthy – unemployment did not drop
below 3 million until 1988.
29
Thatcherism: Economic Realignment & Deindustrialisation
* There is no doubt that the economy grew during Thatcher’s premiership.
* Productivity, however, did not increase by much. Overall, at 2.2% growth in GDP (Gross Domestic
Product) during the 1980s was no better than in the 1970s.
* This was because the growth of the second half of the 1980s was balanced by the
underperformance at the beginning of the 1980s.
30
How effectively did Thatcher control Inflation?
* Thatcherites, following the ideas of the New Right and the principles of monetarism, believed that
inflation was a greater threat to the economy than unemployment.
* They looked back to the recurring long-term problems of the British economy that had made
Britain the ‘sick man of Europe’ and blamed Keynesian economic policies of the post-war
consensus for having allowed inflation to rise.
* This analysis concluded that if inflation could be controlled then the economy would continue to
grow and be more successful. This was a reversal of the post-war consensus that regarded controlling unemployment as the central goal of economic policy.
* Interest rates were used as a mechanism to control inflation; they were raised to 17% in 1979
with the aim of reducing the money supply within the economy.
* The downside, however, of such high interest rates was that it made it more expensive for
businesses to borrow money, which they needed to invest and grow.
* In addition, the high interest rates also increased the value of the pound which made it more
difficult for businesses to export goods as they were now more expensive for foreigners to buy
using sterling.
* The high interest rates of the early 1980s led to decline in both output and demand.
* The economy went into recession with many businesses going bankrupt, which in turn led to high
unemployment which reached 3 million by 1983.
* Even worse, initially inflation went up, peaking at 22% in May 1980.
* Thereafter, it did fall, reaching a low of 2.5% in 1986. Attempts to control inflation in the later
1980s led to a further recession and eventual entry into the European Exchange Rate Mechanism
[E.R.M].
31
How effectively did Thatcher control unemployment?
* Because the Thatcher government and New Right economic theory saw the control of inflation as
the key threat to the British economy, maintaining low levels of unemployment was no longer
seen as a primary aim.
* Instead, British industry had to be prepared to be more competitive and if this led to a rise in
unemployment then it had to be accepted.
* In fact, the impact of monetarist policy was drastic.
* Many industrial plants closed permanently. The worst hit areas were Britain’s centres of
traditional industries since the time of the Industrial Revolution.
* The worst hit areas were therefore the Midlands, the North of England, Central Scotland and
South Wales. Areas in the South and Southeast of England were not hit as badly.
* Some commentators described what was happening as the ‘deindustrialisation of Britain’.
* Manufacturing output fell by 15% in two years. In the West Midlands production fell by a quarter.
Steel production alone was cut by 30% to less than 14 million tons.
* By 1983 the number out of work rose to over 3 million unemployed, the highest it had been in
the post-war period (this was 13.5% of the total workforce).
* Youth Employment Schemes were created whereby employers received a subsidy to take young
people on, and employers National Insurance rates were reduced for lower paid jobs.
* Nevertheless, the unemployment rate did not fall below 3 million until 1987.
* The government remained firm in its conviction that controlling inflation was more important
than controlling unemployment.
* In some areas, which had been dependent on heavy industry, such as Liverpool, the
unemployment rate was as high as 25% and remained in double figures throughout the 1980s.
* Far fewer people were being employed in manufacturing industry.
* Traditional ‘Blue Collar’ Workers found their traditional skills were no longer in demand because
they were rendered out of date by mechanisation or by flexible working practices.
* The economic realignment [deindustrialisation] towards service industries also meant than men
were hit harder than women and, in many homes, women now became the main breadwinners.
32
How far did Thatcherism ‘deindustrialise’ Britain’s economy?
* Even without the government’s policies, long-term economic trends caused by globalisation were
already affecting Britain’s older industries.
* These old, labour-intensive industries were facing challenges from cheaper foreign competition
and from technological innovations.
* Britain’s economy was moving away from being based on manufacturing and heavy industry and
becoming based on the service industries.
* The Thatcher government embraced this significant economic shift in Britain’s economy as a sign
of modernisation.
* In areas that had never known anything other than coal mines, textiles, shipyards and steelworks,
however, people faced painful adjustments.
* The foundations of the working class and of the communities in which they lived were crumbling.
This was especially true of Northern England, Scotland and Wales.
* This sharpened the north-south divide, as traditional industries contracted, leaving large tracts of dereliction in the Midlands, the Northwest, the Northeast, Scotland and South Wales.
* The Economic realignment caused by deindustrialisation and the shift towards a service economy could also be seen in the decay of many inner-city areas.
* There were increased problems of ill-health and depression, as well as increased addiction to
alcoholism and drugs.
* Young people could no longer expect to follow their parents into work.
* Many were forced to move away from home. Long-term trends were shifting economic activity
towards London and the Southeast, changing the face of many towns and cities.
