ITE ECONOMIC POLICIEINTRODUCTION
John Major as a successor to Margaret Thatcher was always going to find life difficult. He says himself he rejected any talk of his creating ‘Majorism’ as Margaret created ‘Thatcherism’, claiming instead that “The Conservative Party does not belong to any one individual” . His priorities (at least initially) as he saw them were clear; inflation, inflation, inflation. Further to that, he aimed to reduce unemployment, although not through artificial job creation, but by preserving a climate of low inflation in which growth would be encouraged. He aimed to privatise that which was feasible and had not already been done.
But the climate in which John Major became Prime Minister was markedly different from that of 1979 and so, by necessity, the leadership and policy-making styles of Thatcher and Major were different. Significant in his priorities were consolidation and continuity; it was for this reason, primarily, he was elected by the Conservatives; and for this reason it is difficult to see a Major agenda as distinct from Thatcher. Nevertheless there were some interesting differences between the two leaders which I shall attempt to draw here, emphasising the areas in which Major departs from Thatcherism; particularly in his attitude towards EMU and industrial policy.
During this essay I shall look first broadly at monetary and fiscal policy and subsequently examine the position within and attitudes towards Europe, an issue which, by its very nature, must have a profound effect on the direction of a nation’s macroeconomic policy. Their styles of leadership of course diverge greatly which is a significant factor in the differing culture of the times. Finally I shall examine the how the attitudes of the two Prime Ministers differed towards industrial policy. I shall attempt to demonstrate that macroeconomic policy remained largely consistent through over the Conservative time in office, however Major took much greater interest in the microeconomic policy which had been largely ignored under Thatcher.
The Thatcher Legacy
Where Thatcher had come in on a ticket of revolutionary policy, the general feeling when Major assumed office in 1990 was that, whilst the voters had taken as much as perhaps they could in terms of state retrenchment, there was no strong call for a radical new agenda. To this end, Major’s leadership was always going to be one of consolidation and conciliation. In this respect we can draw a strong comparison with George Bush’s succession of Ronald Reagan in 1989; the situations, personalities and policies of the four leaders were broadly similar. Reagan and Thatcher were conviction politicians; Major and Bush guardians.
John Major faced the problem that, without any real supporting evidence, the wider community believed Thatcher’s policies to have ‘transformed’ the economy, rather than just seeing the late 80s boom as the natural counterpart to the severe recession that preceded it. He was thus expected to reap the fruits of this imagined miracle, and was instead seen as failing to manage them properly on coming to office at the peak of an unsustainable boom with similarly unsustainable growth in outputs.
Previous to 1992, the recession experienced can reasonably be considered the result of the Lawson inflationary boom of the late 1980s. A year and a half of stagnation were followed by a year in which inflationary pressure dropped. Nevertheless there was a real and widespread conviction that inflation targeting was necessary not only for stability but also for general economic superiority and long run growth. In this way there was continuity between Thatcher and Major; her Medium Term Financial Strategy was devised with the primary aim of reducing inflation and, although targets were almost never achieved, they had the desired effect of altering expectations thus bringing inflation gradually down, albeit in a fashion very painful for the wider economy.
Major was determined in setting price stability targets, and talked of the pound eventually replacing the German Mark as the strongest currency in the EMS . He as widely criticised for his fundamentalist stance on inflation and refusing to devalue and, following the Black Wednesday ERM crisis, was forced to abandon inflation as the cornerstone of macroeconomic policy (to the relief of those who wanted more focus on issues such as employment and education). Nevertheless it is the case that inflation stood at 9.7% in November 1990; by the time Major left office it was 2.6%; he states proudly in his memoirs that “we had broken the inflationary psychology that so bedevilled our economy” which he describes as almost an invisible regressive tax on the poorest in society.
From the beginning of 1990, unemployment rose mercilessly to overtake the European average in 1991. Here the evidence of Thatcher’s legacy in Conservative policy (and indeed in the wider electorate) is clear; she was willing to tolerate unemployment in pursuit of other goals (namely inflation and competitiveness of industry), and so was Major (“‘if a policy isn’t hurting, it’s not working'” ). This is indicative of the secondary importance of political choice to market forces. The fact that the Conservatives could win a general election with three million predicted unemployed by 1993 is testament to a fundamental shift in political culture.
A Balanced Budget?
The revolution of Thatcher was to target fiscal policy at reducing the budget deficit, rather than on the business cycle. In a direct rejection of Keynesian policies, she raised taxes during the early 1980s recession. Major’s governments ostensibly continued this policy, although public spending rose from 38% of money GDP in Nigel Lawson’s last budget to 44% in Kenneth Clarke’s first. The PSBR rose similarly from a surplus of 1% GDP in fiscal 1989 to a deficit of 7% in fiscal 1993 .
One area in which Major faced criticism from his own party was on his policy of taxation, which has been pointed out as a break in continuity from the Thatcher years. The hugely unpopular poll tax was, rightly, one of the first casualties of the Major administration. His self-styled ‘compassionate conservatism’ was at odds with the die-hard Thatcherite elements of the party. Direct taxation was raised by 10.3bn , although he did introduce a reduced rate of 20p for a small number of taxpayers in an attempt to widen the tax base and spread the burden more thinly. There was an increase in ‘stealth taxation’ for example extending the range of VAT to previously zero-rated items and in fact raising the standard rate of Vat from 15 to 17.5%; perhaps the appropriate step in a recession, but at odds with the Thatcher legacy when, in the early 1980s recession, she cut tax. This in fact is one of the areas in which he drew strong criticism from those in the Conservative Party who wished to see him stick a little more faithfully to the Thatcher line.
Major in 1990-1992
Monetary policy was in the early nineties, of course, defined by membership of the ERM, which we joined under Thatcher with Major as chancellor. Major is well documented as having persuaded his Prime Minister that it would be in Britain’s interests to join ERM, and the decision seems to have been one taken quickly, at an ill-considered moment. German re-unification meant high real interest rates were necessary in the period of adjustment in relation to the rest of Europe. This meant Britain joined at the arguably unsustainable rate of DM 2.95 with a 6% bracket of DM 3.12 and DM 2.778. This put upward pressure on real interest rates across Europe, contrary to what may have been ideal for their domestic economy. In the case of Britain, the recession of the time meant it would have been preferable to cut bank lending rates to stimulate investment consumption and subsequently aggregate demand.
Monetary policy was tightened sharply under Thatcher/Lawson in 1988 at the height of the boom – -his policy needed to be further tightened in 1990 under Thatcher/Major on accession to ERM. Thatcher’s unwillingness to take part in ERM proved a large contributor to her downfall; it is perhaps because she knew that this would provide a strong framework for reducing inflation that she allowed herself to be swayed on her strongly anti-European stance. Major certainly was much more pro-European in approach; his negotiation in Maastricht was widely hailed as a triumph of diplomacy in securing the opt-out of the Social Chapter and the first round of EMU. The Thatcherite legacy of zero inflation was certainly her most important; he also saw the ERM as a means to squeeze all inflation out of the British economy once and for all. Membership of the ERM, then, was the cornerstone of Major’s economic policy in a way that it was not for Thatcher. Although we could argue that it was just his preferred method for implementing the same policy objective as his predecessor, the multitude of other economic and (of course political) considerations involved in ERM and, ultimately, EMU make this a clear departure from the Thatcher agenda.
After Black Wednesday
Peter Jay quite reasonably argues that the premiership of John Major can be clearly analysed as policy direction before and after Black Wednesday, September 16th 1992 . The frenzied attempts to hold the Pound above the critical DM 2.778 level meant interest rate levels were held up artificially at some considerable cost to the wider economy and it considered the prime reason for the length and severity of the early nineties recession.
A huge re-adjustment in macroeconomic policy meant a relaxed monetary policy, allowing the Pound to fall to its natural rate, lower interest rates to stimulate recovery, and a greater priority for industrial growth.
Nevertheless he points out that it is testimony to the success of the legacy of the policy under Major/Lamont that despite the spectacular failure of the Exchange Rate Mechanism, commentators were clamouring for a replacement system of the same nature which once against demonstrates the shift in ideas between the two leadership eras not only in terms of the two Prime Ministers, but maybe also in informed opinion.
The Thatcher Line
The Thatcher amalgamation of political ideology came from monetarism, supply-side economics and rational-expectations analysis . She forced a move away from the interventionist post-war era in which investment subsidies were usual, systems of ‘picking winners’ abounded and failing British industry was upheld. British firms instead were to be left to their own devices; the Department of Trade and Industry, once one of the biggest spending and most prestigious departments of government, was reduced to a shadow of its former self. Treasury power and centrality increased during the 1980s from its already strong position. It was made clear by Thatcher that those British firms which were unable to compete in the global marketplace would be allowed to fail to promote the efficiency gains considered necessary to restore Britain’s flagging productivity levels. Similarly, it was made clear that if traditional manufacturing in Britain must give way to the more productive service sector, than that also would be tolerated. Publicly owned firms were, as far as possible, sold off with the stated aim of encouraging private investment, increasing competitiveness, and increasing popular share ownership.
The result was rising productivity (though largely through cost-cutting; the IMF accused Britain of investing too little in human capital formation, meaning any such gains were likely to be short-lived), and booming business investment.
In some ways, once again, Major continued in Thatcher’s footsteps. His instincts were ‘wholly to endorse the Thatcherite principles of free choice and market economics and to adhere to what he called the central economic ‘truths’ of the 1980s’ . He agreed with her on the importance and centrality of the Treasury. He refused to make the Bank of England independent insisting that, whilst there should be more transparency in its working to avoid political manipulation, the people in charge of monetary policy ought to be democratically accountable. To this end, he authorised publication of monthly reports, meeting minutes and other transparency measures.
Where Thatcher made huge cuts in TU powers (including their power of veto), Major continued this work in abolishing Wage Councils. Industrial relations were more or less unchanged; certainly there was no attempt on the part of the Major government to move back to the tri-partite arrangements of the 1970s, or even recover some of the severed relations.
Nevertheless, on arrival in office, Major showed some departure from the Thatcher point of view; he considered himself more of a ‘social-market conservative’ than a pure ‘free-marketeer’. He was in all ways less of an ideological leader and took, once more, the conciliatory stance.
An important change in direction came with the installation of Michael Heseltine as the head of the DTI in 1992, thereby imbuing the department with a clear sense of purpose. Whilst being without portfolio in government, Heseltine had written a book urging active support of British manufacturing, more in line with the German social market approach than the British Thatcherite one. His appointment marks a clear departure in the views of Major; Steven Wilks categorically states that ‘no minister holding such views would have been appointed to the DTI under Thatcher’ . Soon after this, the DTI published a new mission statement, emphasising support for the British firm in terms of consultation and regional policy.
To some extent, this re-appraisal of priorities meant a new lease of life for British manufacturing; when compared with the 1980s recession, manufacturing productivity in the early 1990s downturn performed relatively well. Increase in labour productivity in the period 1989-93 was similar to that of 1979-83 , which helps once more to dispel the myth of Thatcher as ‘historical giant and economic miracle worker’ ; similarly in the Major/Lamont recession business investment levels held up significantly better than may have been expected, and training expenditure was maintained .
In some areas of industrial policy, Major toed the former party line. The Thatcher government had undertaken a huge programme of privatisation. This has been criticised as being done too quickly and at too low a price at the taxpayers’ expense; furthermore, the poor structure of some of the privatised industries has led to underperformance and inefficiency.
The Major government, particularly in the first two years, continued this programme. That Peter Lilley was retained as head of the DTI (until his replacement by Heseltine in ’92 as discussed above) gave weight to the Thatcherite legacy, and John Major gave no indication of wishing to return to the nationalised industry structure of the 1970s and before. British Rail, British Coal and part of Royal Mail have been privatised under Major to similar controversy, although he maintains that, had there not been the spectre of Labour renationalisation under subsequent governments, British Rail could have been sold at a significantly higher price .
Deregulation and The Citizens Charter
John Major’s slant on Thatcher’s policies is that of deregulation in some cases rather than privatisation. Having rejected the privatisation of education and health, he set about instilling market values in the services, granting budgets and making suppliers compete with each other for what were once ‘taxpayers’ or ‘citizens’ and are now ‘consumers’. London buses were deregulated and established routes contracted out to independent operating companies subject to stated performance criteria; efficiency has improved accordingly (at the social expense of lower wages and sloughing off of ‘excess labour’). The Civil Service has been largely agencified to cover around 75% of all Civil Servants, and local authorities regularly contract out services formerly provided ‘in-house’. In short, government and government-run services are being forced to behave as businesses in the expectation of all the attendant productivity and efficiency gains of a competitive marketplace.
Where Margaret Thatcher’s interest in popular capitalism began and ended with the offer of share ownership, Major put his own slant on the process by introducing ‘The Citizen’s Charter’ in 1991, a set of guidelines which attempts to change the culture of British public services. He claims to have developed it firstly to develop ideas about improving standards of service and information to the public, and secondly to invest the public services with a dignity and prestige he felt they were lacking.
Tariff reductions as part of the Uruguay Round of GATT and the Private Finance initiative have arisen as part of his ‘new partnership’ with British industry. Jay observes that, in time, Major may be credited with beginning the ‘long slow climb back to ideological disarmament between the prophets of pubic interest and the profits of private interest’ . This nicely demonstrates how, whilst generally carrying on the basic foundations of economic policy as defined by Margaret Thatcher, Major carried them out with his own slant, which tended to be less extreme and more socially-oriented than before.
It seems clear from this analysis that economic policy under John Major remained broadly consistent with that of the preceding ten-and-a-half years. Inflation reduction remained the cornerstone of economic policy, unemployment remained a secondary concern. Although we could contrast Thatcher’s seeming indifference to it with Major’s oft-asserted belief that it was a necessary short-term evil in order to secure conditions favourable to future employment, that of course would be mere speculation.
In most policy areas we can see a reasonable level of continuity; whilst Major was forced to raise taxes rather than lower them, he managed at least to introduce a reduced rate. Major continued with privatisation despite the easiest targets having already been taken care of by Thatcher/Lamont.
Nevertheless, their views on Europe, an issue generally considered of central importance in Britain today, differed distinctly as did those on supporting British industry, which Thatcher more or less left to flounder, so it would be unfair to accuse major of blindly following his former leader. Rather, it may be that, as asserted by Dennis Kavanagh, Major saw the Conservative Party as one of continuity not revolution (this would explain both his broad adoption of her policies and his less strident pursuit of them). Where the goals of the 1980s were necessarily economic, Major has taken them and tilted them toward the social; Thatcherism was defined by what it fought against; ‘it is less clear what the dragons are in the 1990s’ .
Chrystal and Price, Controversies in Macroeconomics, ch.11, (1994)
Crafts, N. F. R., ‘Industry’, from Kavanagh and Seldon, The Major Effect, (1994)
Hutton, W., The State We’re In, (1996)
Jay, P., ‘The Economy’, from Kavanagh and Seldon, The Major Effect, (1994)
Kavanagh, D., ‘A Major Agenda?’, from Kavanagh and Seldon, The Major Effect, (1994)
Major, J., John Major, The Autobiography, (1999)
Minford, P., ‘How Good a Chancellor is Kenneth Clarke?’, from Economic Review, 12(3), (1995)
Oliver, M., ‘The Conservative years: A Revolution in Economic Policy?’, from Economic Review, 14(4), (1997)
Wilks, S., ‘Economic Policy’, from Dunleavy et al, Developments in British Politics Vol. 4, (1993)
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