Thatcher's Economy

Supply-Side Economics

Although monetarism was never fully dropped as a policy, from the mid-1980s it was largely abadoned. Instead, the government followed supply-side economics. This approach rested on the belief that Keynesian policies had distorted the operation of the economy by attempting to create demand artificially through demand-side economics. Supply-side economics argued for a return to incentives, so people would work harder and more productively if they were allowed to keep their earnings. This would then stimulate the economy. Chief policies within this included:

• Reducing taxation so as to provide employees with a greater incentive to work.
• Encouraging competition in order to lower prices.
• Limiting the powers of the trade union so that they could not block productivity or prevent the modernisation of industry.
• Cutting wsteful welfare payments as a way of saving public money and reducing dependency.

Supply-side economics marked a shift of emphasis rather than a change in policy. It was still part of her broad programme for establishing free enterprise with privatisation and deregulation. 

Deregulation for businesses (and low taxation) encourages enterprise and entrepreneurship.

Flexible labour makes it easier to fire or hire workers.

Employees spend on goods and services (encouarged by low taxation on individuals).

Business makes profits.

Profits encourage expansion or further investment into business. 

Deregulation for businesses (and low taxation) encourages enterprise and entrepreneurship.

Government uses tax to support full employment.

Employees spend on goods and services produced by businesses.

Businesses make profits.

Profits encourage expansion or further investment into business.

Government can tax business and individuals. 

Government uses tax to support full employment.

Privatisation was drvien by an anti-socialist ideology and became a central policy under Thatcher. Just as Thathcerites believed that private individuals were better at spending money than government, it was a core 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 each other in the marketplace, which would encouarge improvements and innovation.

At the same time the financial pressures that local government was under also led to a 'rolling back the frontiers of the state'. 'Outsourcing', whereby private companies took on contracts to deliver goods and services previously provided by the State, became increasingly widespread, such as in refuse collection.

A few steps had been taken to carry this policy out in Thatcher's first term, such as the privatisation of BP in 1979 and British aerospace in 1980. The major turning point however was the 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, allowing the public to become shareholders. Rolls Royce was privatised in 1987. Between 1979 and 1990, there were 9 million shareholders amongst the British public, and 14 major British companies had been privatised.

Considerable revenue was brought into the government, with an average of £4,700 million each year between 1979 and 1989. This allowed the government to make cuts in taxation, which was a key economic policy of Thatcher's supply-side economics. This changed British society in a fundamental way as it promoted the capitalist streak that the polocy developed within the individual, giving the potential for social mobility as it generated wealth, another important policy of Thatcher's.

However, many criticised privatisation as being selfish, particularly one-nation conservatives such as Harold Macmillan. This was because businesses were sold off cheaply in order to ensure all shares were taken up which in turn meant that like was more insecure for employees. Some lost their jobs as privatised companies cut back on staff, and others found that they could no longer rely on long-term job security and on reliable pension provision. Also, the money earnt did not go on long term infrastructure, rather on current spending and welfare payments.

Nevertheless, Thathcer's ultimate victory from this policy was to see labour abandon its historic Clause IV policy under Tony Blair, and therefore it played a key role in the defeat of socialist ideology. It also signalled the end of the post-war consensus in State role.

Further privatisations, such as the coal indsutry and the railways wanted to be carried out, however this was left until later in the 1990s.

The other key element of supply-side economics was deregulation. The government would interfere as little as possible in terms of legislation towards businesses, and therefore removed the 'red tape'.

The government also intorduced other measures to encouarge start-up companies. The Loan Guarantee Scheme made it easier for small businesses to borrow money and 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 up and running. However, a significant part of the money borrowed was then spent on consumer goods from abroad. The result was that between 1979 and 1989 Britain's balance of payments deficit rose from £700 million to £5,600 million.

Schools were entitled to opt out of the State sector and become responsible for their own financing.

Bus companies were deregulated to encourage competition.

Hospitals were required to operate an 'internal market' by taking control of their own finance and matching needs to resources.

Financial deregulation freed up the City of London and the financial markets from the tight controls of the Bank of England. The 'Big Bang' on the 27th October 1986 deregulated the London Stock Exchange, opening the way for computer scree trading and replacing the 'old boys' netowrk with free competition. 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.

The 'yuppie' became an iconic image of the 1980s and the City became a place where bigger risks were taken and bigger fortunes could be made. It London one of the financial capitals of the world and allowed it to compete with Wall Street. Financial services became an important export to the UK.

Even without the government's economic policies, long-term economic trends were already affecting Britain's old industries. These old, labour-intensive industries were facing challenges from foreign competition and from technological innovation. Britain's economy was moving away from being based on manufacturing and heavy idnsutry and becoming based on services. The Thatcher government's embraced this shift.

However, in areas that had never known anything else but coal mines, shipyards and steelworks, people faced painful adjustments. The foundations of the working class and of the communities they lived in were crumbling. This sharpened the north-south divide as old industrial contracted, leaving behind large tracts of dereliction in the Midlands, northwest, northeast, Scotland and south Wales.

This economic realignment could also be seen in the urban decay of many inner city areas. There were increased problems of ill health and depression, and also alcoholism and drugs. Young people could no longer expect to follow their parents into work, causing many to have to move away. Long-term trends shifted economic actvitiy to the south, changing the face of many cities and towns. In 1981 Howe advised Thatcher to leave Liverpool to 'managed decline'.

In 1981, there were a series of riots between April and July in Brixton, Handsworth, Toxteth and Chapeltown. The riots in Brixton consisted of hundreds of black youths running riots, burning shops and looting property. It was only with the greatest difficulty that the police eventually contained the trouble. It was estimated that unemployment for ethnic minorities in Brixton stood at 25%, with black youths at 55%.

The Scarman Report was commissioned to examine the causes of these riots. It identified poverty and race as key components. The areas in which riots had happened were suffering hihg leevls of unemployment and deprivation. This was exacerbated by the fact that these were also areas where young black and Asian people felt the 'sus law' meant that the police unfairly targeted them. Despite the Scarman Report and subsequent changes in policing policies, there were riots once again in 1985.

This gave police offciers permission to stop and search suspected persons if they thought they might commit a crime. Balck people and those from ethnic minorities believed that the police unfairly targeted them. Shortly before the Brixton riots Operation Swamp, which aimed to reduce street crime, 1,000 people were stopped in 6 days. Sus law was then repealed later that year.

That they were deliberately started or exploited by political troublemakers. Tebbit famouslyspoke 'He didn't riot, he got on his bike and looked for work and kept looking'. Tebbit was one of the tough guys in the cabinet. He was portaryed as satire as 'spitting image' as a leather clad, cosh wielding enforcer, who was one of Thatcher's staunchest supporters, who urged her not to allow the riots to deflect her from her policies. Such support kept her going when she said 'this Lady's not for turning'. This was calculated as an act of defiance against the 'wets', ministers such as Francis Pym and James Prior, who were worried by the effects of monetarism, had wanted this policy to be abandoned.

It lead to investment and regeneration in some areas. Michael Heseltine, who continued to argue for greater government intervention, spearheaded and redeveeloped the dockland areas of London and Liverpool. In London, the Canary Wharf development on the old West India Docks became the second most important financial district in the country after the City of London, a symbol of the shift to the service industries.

Overall the economic realignment that resulted from Thatcher's economic policies depended on perspective. Britain looked a different place depending on whether you were in Sheffield or London. The factors that caused most toruble were the poor job prospects in the inner city areas, the 'sus law', and the high incidence of unemployment among school leavers. This caused social and economic problems for Thatcher during her time as PM.