Bang!: A History of Britain in the 1980s (37 page)

Thatcher had long maintained that unemployment would fall once inflation was slain. This proved to be the case, though the time lag between the
creation of relatively
stable prices and job creation demonstrated that it was no simple or direct equation. The proportion of the workforce that was unemployed increased – albeit at ever slower rates – in
almost every month of the Conservative government until the summer of 1986. But when the fall eventually came, it was dramatic in scale, plunging in the following three years as precipitously as it
had risen between 1980 and 1982. During 1989, it was down to 6.3 per cent, a level last seen in 1980. The damage, however, had already been done, particularly to the long-term unemployed and the
disfigured communities they inhabited. What was more, pockets of high joblessness remained in the hardest-hit areas. Even in 1989, the unemployment rate remained at 10 per cent in the north of
England, over 9 per cent in Scotland and over 7 per cent in Wales. In Northern Ireland, it was 15 per cent.

The scale and seeming immovability of three million on the dole was also the reason why a political party committed to cutting both public spending and the overall burden of taxation achieved
neither goal. Excluding the effects of North Sea oil, the tax burden as a proportion of GDP had risen from nearly 35 per cent in 1979 to over 39 per cent in 1981/2 and though it was sliding below
37 per cent when Thatcher fell from power in 1990, this was still more than 2 per cent higher than when she had arrived in Downing Street. Looked at from the angle of marginal tax rates, and
including National Insurance surcharges, the record looked better – falling over the decade from 53 per cent to 44.5 per cent, though hardly justifying the rhetoric of creating an economy
invigorated by low taxation.
²⁸
The real effort to cut the tax burden came in the three years after 1986, when unemployment finally took a dive and
general government expenditure (which included debt repayment but excluded proceeds from privatization), which had soared towards 47 per cent of GDP between 1982 and 1985, plummeted below 40 per
cent by 1989 as growth in the private sector roared ahead.

That the government in the second half of the eighties belatedly looked like delivering its promises on taxation and the size of the state emphasized what it might have been able to achieve if
unemployment had not cast its dark shadow over public spending in the first half of the decade. During the entire lifetime of the Thatcher government between 1979 and 1990, the British economy (as
expressed by GDP) grew by almost one quarter (23.3 per cent). After the effects of inflation are taken into account, the state still spent nearly 13 per cent more at the end of the eighties than it
had done at the end of the seventies, even though the amount represented a proportionately smaller share of the total economy due to the greater rise in private sector activity. Within the overall
increase, priorities had changed markedly. The burden created by unemployment, social change and an ageing
population was underlined by the expansion of the social security
budget by almost one third (31.8 per cent) and the sums spent on employment and training schemes by exactly one third. This continued the long-term trend by which the welfare state assumed the
lion’s share of state expenditure: 43 per cent of total government spending in 1951/2, 47 per cent in 1971/2, 52 per cent in 1981/2, and 56 per cent in 1987/8.
²⁹
During the eighties, spending on the National Health Service also increased by almost one third, though because the costs brought about by more old people, higher
expectations from medicine and the expense of new treatments and equipment were greater than the general rate of inflation, rising levels of health spending did not translate precisely into better
hospitals or shorter waiting lists – hence the ongoing popular assumption that the Conservatives under-resourced the NHS, and the widening gap between health spending in the UK as a
proportion of GDP and the higher levels of its major European competitors. It was in the area of other formerly expensive calls on the public purse that the government really did make serious cuts.
Privatization and an end to wide-spread industrial subsidies ensured the trade and industry department’s budget fell by 38.2 per cent in real terms, while with the end of the council house
building programme the housing budget fell by more than three quarters (67 per cent) over the decade.
³⁰

For all the transatlantic comparisons made between Thatcher and Reagan, the Treasury had a far more Victorian attitude towards matching taxation with spending in order to balance the budget than
did its American counterpart. At the core of ‘Reaganomics’ was a belief in the Laffer curve – a theory popularized in the mid-1970s and (rather imprecisely) attributed to the
economist Arthur Laffer, which held that there was an optimal rate at which taxation gathered the maximum amount of revenue. Setting a higher rate was seen as self-defeating, because the
corresponding disincentive to make money would yield less tax revenue. Where that optimal point was located remained a matter for debate, though the ‘supply-side’ economists were in no
doubt that it lay at a point considerably lower than had been set during the 1970s, a conviction that ensured that (unlike in the more hesitant UK) American marginal tax rates were slashed by one
quarter between 1981 and 1984. The total tax revenue raised did indeed increase, but so did government spending. The result was spiralling US national debt. Where Thatcher and her Chancellor
believed that taxes should not fall until spending and borrowing constraints had balanced the budget, Reagan fell back on the claim that if US taxes were raised in order to cut the deficit,
Congress would merely find additional ways of spending the money rather than reducing the debt.
³¹
In contrast, by the time of his 1987 budget, Nigel
Lawson was able to boast not only that the PSBR had fallen below £4 billion, or 1 per cent of GDP, but that in the coming year there would be a PSDR, or public
sector
debt repayment, whereby the government would actually repay some of its debts out of an overall budget surplus of nearly £3.5 billion. As the international edition of
The Economist
pointed out, ‘such an outcome could hardly have been dreamt of in 1979’.
³²
That a British government was finally repaying debt rather
than acquiring more of it exemplified what Thatcherism owed to Gladstonian Liberalism. It also proved to be a fleeting moment, rather than a new dawn, in the nation’s financial history, as
the legacy was duly squandered. Indeed, the scale of the deficits run up in the first decade of the twenty-first century, alongside the increasing tax burden needed to cover the interest payments,
highlights how Gordon Brown’s strategy differed from that both of Nigel Lawson and of Lawson’s American counterparts – managing to bequeath the debts of Reaganomics without
delivering the corresponding fiscal stimulus.

The North Sea Oil Bonanza . . . and Where It Went

That the British state was in a position to fund for several years the unemployment benefits of three million jobless and to support millions more dependent on low incomes and
unfunded pensions, while at the same time cutting the budget deficit, certainly seemed remarkable. But it was made possible because of a stroke of geological good fortune which allowed the Thatcher
government to use up the tax proceeds from North Sea oil in a short-term dash to balance the books. It was a petroleum bounty that had not been available to the Labour administrations of Harold
Wilson and James Callaghan, and it existed only on a much diminished basis for the successive Major, Blair and Brown governments which followed in the twenty years after 1990. As such, it poses the
question whether the Thatcher government’s claim to have turned round the British economy was really just a quick fix, achieved by squandering oil proceeds which would have been better
invested for the long-term benefit of future generations.

It is easy to see why those who had struggled to turn the British economy around in the 1960s and seventies looked on enviously at Thatcher’s good luck in coming to power at the very
moment that North Sea oil production soared. In the mid-1960s, Britain had been on the verge of bankruptcy, with sterling propped up only through emergency financial guarantees from Washington.
Even this lifeline did not prevent the politically damaging devaluation of 1967. Now, oil could be used to prop up Conservative plans in the same way that American financial support underwrote
Labour’s expansion of the state in the sixties. Whatever Thatcher’s strategic desire to walk arm in arm with Reagan, ‘black gold’ proffered what no British government had
been able to enjoy since the outbreak of the Second World War – an end to economic dependency upon the United States.

The North Sea certainly seemed to turn the British economy’s reliance on petrol from a curse into a blessing – though, as it soon transpired, something of a
mixed one. The soaring price of oil, compounding the industrial unrest of 1973, was a factor in bringing down Edward Heath’s government in 1974. At the outset of Thatcher’s first term,
disagreement between members of the oil-producing cartel OPEC risked turning the screw a second time. The Islamist revolution that deposed the Shah of Iran was quickly followed in 1980 by the
outbreak of a bitter and protracted war between two major OPEC members, Iran and its neighbour Iraq. The consequence was a threefold hike in the world oil price, which threatened Western economies
with ever higher energy costs and mounting inflationary pressures. For competitors like France, Germany and Italy, this was unequivocally bad news. But the United Kingdom was fast turning into as
much a producer as a consumer of the valuable commodity, becoming for the first time in its history a net exporter of oil in 1981. The only major Western economy to be self-sufficient in oil, by
1983 Britain was producing 60 per cent more than it was consuming.
³³
Against the higher price paid by industry and by motorists at the petrol pumps
came the advantage of swelling Treasury coffers, since (in the short term at least) the higher the price, the greater the taxable profit.

Whether the taxman’s gain was more important than the consumer’s loss was questionable, given that oil revenue helped fund the unemployment benefits that were a consequence of higher
energy costs burdening industry and putting employees out of work. The addition to the cost of living also increased hardship. As described in chapter three, an inflation rate heading back beyond
20 per cent was countered by a tight monetary squeeze. The accompanying high interest rates pushed up the value of sterling, a currency that soaring oil production in the North Sea was already
helping to overvalue. The consequence was an uncompetitively high exchange rate. As the chairman of the car manufacturer British Leyland, Michael Edwardes, put it in his South African twang to
delegates at the CBI conference in 1980: ‘If the Cabinet do not have the wit and imagination to reconcile our industrial needs with the fact of North Sea oil, they would do better to leave
the bloody stuff in the ground.’

Oil had been struck in the North Sea in 1969. Over the two following years, the discovery of the Forties and Brent fields in British territorial waters suggested that deposits existed in such
quantities as to be worth the vast cost of extracting them from up to 9,000 feet below the seabed. With regal ceremony, the first pipeline to bring oil ashore from the Forties field was turned on
in 1975. In the ensuing decade, Scottish and northern English shipyards became the sites of gargantuan oil platform construction work, in what the commentator Andrew Marr has described as
‘the most extraordinary civil engineering project in Britain since the Victorians began the railways in the
1840s’.
³⁴
Between 1980 and 1985, around 6 per cent of total UK fixed investment was being spent on oil and gas extraction. Thus those who lamented the failure to repair the crumbling
infrastructure of early eighties Britain only saw part of the picture. Huge private investment was going into yards in remote Highland locations like Nigg Bay and Ardersier, where whole workforces
were brought to build a new offshore infrastructure to power the country’s future prosperity. The United Kingdom had become the first industrial nation at the end of the eighteenth century,
thanks to innovation and the accessibility of vast local supplies of coal. Twice blessed – or so it seemed – the same country was now able to supplant its diminishing coal reserves by
bringing up from even greater depths the energy source powering the modern age.

The comparison between oil and coal shaped the government’s attitude to the industry’s development. To Thatcherite minds, the post-war history of the coal industry –
nationalized, heavily subsidized, over-manned, inefficient, wholly unionized, strike-prone, its politicized union leaders proving a perpetual thorn in the side of Conservative administrations
– demonstrated precisely what path the oil industry needed to avoid. Instead of state control, international capital flowed in and American expertise was decisive in bringing projects to
fruition. By the beginning of the eighties, there were twenty platforms and over twenty thousand workers out in the North Sea working on the rigs. Those who toiled there needed to be tough as they
were marooned on an elevated and windswept pad above crashing waves in conditions aptly described as akin to ‘outer space with bad weather’. It was not deemed an environment for women,
consisting as it did of hard, manual labour and off-shift immersion in the culture of the canteen and the porn video. Typically, the men were employed by contractors rather than directly by the oil
companies. The absence of trade unions certainly suited management, but was also acceptable to some of the workers who tended to be hard-headed and individualist by nature. Many of the most
experienced among them had previously worked in the oilfields of the Middle East and were prepared to accept the risks and long hours for the large sums of money being offered to them, particularly
in the most dangerous jobs like deep-sea diving. Thus, in terms of rewards, rig workers were far removed from coal miners. What was more, offshore workers who did agitate to be represented by a
trade union were speedily sacked.