Thatcher's economic legacy

Margaret Thatcher's economic legacy was prompted by the 1976 Labour government's capitulation to the IMF – but she took it much further.

It is ironic that Margaret Thatcher’s funeral is to take place at St. Paul’s in the City of London. The world around Wren’s great monument is beginning to unravel as a result of the liberalisation forces she helped unleash. Banks are bankrupt, thousands of jobs lost, and the City’s hard-won reputation for honour and fair play is now in tatters.

The most fundamental economic action of the Thatcher era was to intensify the liberalisation of the financial sector. This was dictated by the City and endorsed by early monetarist economists.

The 1970s inflation was caused originally by this liberalisation and expansion of credit, at domestic and international level: too much money chasing too few goods and services. The Lawson boom of the late 1980s in the wake of attempted government retrenchment came as the money supply again became unhinged. Since the start of the liberalisation of finance at the end of the 1960s, the world economy has been on a roller-coaster, driven by repeated cycles of financial excess, inflations, economic failure and retrenchment. The almost unanimously celebrated 1992-2007 boom was an illusion made possible only by a debt inflation of a more severe kind than that of the 1930s.

As the debate over her legacy rages, economists are loud and united in the claim that Thatcher "fixed" the economy. Economists like Professor van Reenan of the LSE make vague assertions about improvements to the supply side, or to competitiveness. These hark back to arguments deployed by the original monetarists – Samuel Brittan of the FT; Brian Griffiths now of Goldman Sachs and an adviser to the Archbishop of Canterbury; and Peter Jay, ex-economics editor of the BBC. They were arguments used to justify liberalisation, and these policies caused the economy to deteriorate in every conceivable way.   

An examination of the post-war economic experiences of Britain was included in a 2010 PRIME report, "The Economic Consequences of Mr Osborne". 1976 is a key date: the point at which the Labour Government allegedly yielded "Keynesianism" to the IMF’s "reforms" that preceded and anticipated Thatcher’s policies. 

The most obvious economic headlines pre- and post-1976 are:

  • Unemployment averaged 2.3 per cent a year before reform and after 1976 rose to average 7.7 per cent a year;
  • GDP growth was 2.7 per cent a year before reform and 2.2 per cent a year afterwards; and
  • Income distribution narrowed almost every year before reform. 

And then the real transformation occurred. "The scale of the rise in inequality over the '80s was unparalleled both historically and compared with most other developed countries" according to the IFS in a 2011 report.

It is also a myth that the Golden Age that preceded liberalisation was burdened by an overreliance on the state, or the public sector. 

Before Thatcher came to power, the UK had a thriving manufacturing sector. In 1970, 33 per cent of the economy was accounted for by manufacturing. Today that proportion is 10 per cent. Before Thatcher, the owners of firms felt confident to invest: in real terms, capital investment grew by 4.6 per cent a year before her reforms and only 2.6 per cent afterwards.

Economic activity extended beyond the state and traditional manufacturing; there was a golden age of theatre, of design and of course of popular music. Britain could afford healthcare and education for all; secondary and higher education was free; a safety net protected the few that had no work, and a working pension system looked after the old. 

Contrary to the economic profession’s consensus, since reform, the size of government has grown as a share of the economy:

  • The broadest measure of the size of government, general government expenditure as a share of GDP, grew from 37 per cent to 41 per cent, post Thatcher.
  • In terms of the public finances, public debt measured as a share of GDP fell by an average of 5 percentage points a year in the period before Thatcherism. It rose by 1.3 percentage points per year in the period afterwards. 

This growth is of course not the positive result of more government spending on goods and services or of government investment. Rather, it represents the costs of the failure of reform. As the economy deteriorated, the cost of welfare and interest payments rocketed. 

In all this debate economists forget what the economy is for. It is not for the rich, or just about "growth" or "competitiveness". Rather, it provides an outlet for human creativity, and meets humankind’s deep desire to work. It creates frameworks that nurture and protect the young, the vulnerable and the old; that ease the adversities and enhance the pleasures of life for all those that live within it.

On these terms the reforms promoted by the economics profession and implemented by Thatcher have failed the people of Britain – catastrophically.  

The Conservative front-bench, featuring Margaret Thatcher, in 1976. Photograph: Getty Images

Ann Pettifor is director of Policy Research in Macroeconomics and Douglas Coe is a researcher with PRIME

Getty
Show Hide image

Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

***

Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.