Andy McSmith: Osborne's vision of the future, circa 1981

There were two sides to the Thatcher/Howe legacy. North of Watford, people are more likely to remember her for the devastating level of unemployment
Click to follow
The Independent Online

The long shadow of the Budget of 1981 is hanging over us. It is not an event that has gone down in popular mythology, but it is firmly embedded in the mythology of the Conservative Party. Margaret Thatcher believed the three great tests of her mettle that defined her as a prime minister were the miners' strike, the Falklands War, and the 1981 Budget. Nigel Lawson wrote, in his memoirs, that "she saw as her government's finest hour, her equivalent of the Battle of Britain, to which her mind was always harking back, as having been the 1981 Budget".

That Budget cemented not just her reputation but that of the chancellor who delivered it, Sir Geoffrey Howe, which is why it proved so lethal for Thatcher when Howe turned against her at the end of the decade. Kenneth Clarke, the senior member of the present Cabinet, was no fan of Thatcher, but looked to Howe as his mentor and role model, and will tell you that the 1981 Budget was one of the greatest acts of political courage he has ever witnessed.

The present Chancellor, George Osborne, was a schoolboy back then, but is sufficiently steeped in Conservative Party culture to know all about this legendary Budget. As public opinion is being softened for the unprecedented cuts in public spending that will be set out in detail next month, you may be sure that Osborne is hoping that the 2010 autumn statement will do for his political reputation what the 1981 Budget did for Thatcher's and Howe's.

Thatcher and Howe were the first Western politicians in half a century to fly in the face of Keynesian economics. You do not need an economics degree to know that John Maynard Keynes wrote that when economies are in recession, governments should increase spending to stimulate employment and growth, running up debt if necessary.

Thirty years ago, the Thatcher government was grappling with the dual evils of rising unemployment and high inflation. Having adopted the new monetarist doctrines emanating from Chicago University, Thatcher and Howe decided that they could let unemployment rise, because the soundness of money was what mattered – even though inflation was partly of their making. The Labour government had, at great political cost, pulled inflation down into single figures from the peak it reached in the mid-1970s. The incoming Tory government had ramped it back above 20 per cent by putting up the most basic costs such as heating bills and rent and by awarding public sector workers a 25 per cent pay rise to avoid another "winter of discontent".

In 1981, at a time of rising unemployment, Howe informed a stunned House of Commons that he was imposing a package of cuts and tax rises that took £4bn a year out of the economy, in order to do what Osborne is now seeking to do: cut the level of government borrowing. It was brutal surgery, but it achieved its purpose. By the end of 1982, inflation was at its lowest level since the 1960s. Living in an age of near zero inflation, we forget what it was like to live in an economy where everything cost appreciably more than it had only months earlier.

Everybody was affected by the constant fall in the value of money. Those on fixed incomes, such as pensioners, were hit hardest. In 1970, a loaf of bread cost less then 9p; in 1980, it cost 37p. Most goods quadrupled in price in that decade. The reason there were so many strikes is not that trade union leaders had gone mad. It was because the only way they could stop their members' living standards from falling was by forcing employers to award double-figure pay rises.

Late in 1979, British Steel offered its workers a 6 per cent pay rise, which in real terms was a pay cut. The steel union was one of the least militant in the TUC, but thus provoked, it opened the new decade by calling a national strike, which won it a 16 per cent increase. When inflation was rampant, going on strike made sense. It is often supposed that Thatcher's sensational election victory in 1983 was attributable to the Falklands War and the chaos in the Labour Party. I suspect the voters were actually rewarding her for removing the demon of inflation from their lives.

But there were two sides to the Thatcher/Howe legacy. North of Watford, people are more likely to remember her government not as an agent of economic stability, but for the devastating level of unemployment that accompanied it. Unemployment was already too high when Thatcher came to power, but for her entire 11 years in office, it was never as low as it was in May 1979.

By 1986, the official unemployment figure was over three million. Speaking in the Commons during the banking crisis in 2008, the veteran Conservative MP Sir Peter Tapsell referred back to the events of the early 1980s, and denounced the Thatcher/Howe strategy as "intellectually and economically illiterate". He went on: "The 1981 Budget is the reason why now, with the collapse of our financial industry, we do not have a proper industrial base." That is remarkably polite compared with what people from the economically devastated areas of the north had to say about the Thatcher years.

George Osborne's problems are not as complicated as those that confronted Howe 30 years ago. The present Chancellor has one big problem: the level of government debt. He will, I suspect, reduce it with the same ruthlessness that Howe exercised. But, politically, what we are going through now does not begin to resemble the inflation and industrial and social unrest of 1981. People will tell opinion pollsters that they agree that government debt must be reduced, but they are answering what, for them, is an abstract question.

Government debt is not something we experience in daily life. But millions will directly experience the cuts in public spending and the rise in unemployment that will follow as George Osborne's surgery takes effect. He may hope that the political class will acknowledge him as the Chancellor who put public finances in order, but in the world outside, he is likely to be remembered, rather like Thatcher, as the man who destroyed a million jobs.

Andy McSmith's 'No Such Thing As Society: A History of Britain in the 1980s' is published by Constable on 16 September, price £14.99