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10 September 2021

How the freak economics of the Thatcher years warped the boomers’ view on tax and house prices

Those who lived through the oil boom have a distorted sense of today’s economic trends. But they’re the ones driving the social care debate.

By Jonn Elledge

“To understand the man,” Napoleon Bonaparte is reputed to have said, “you have to know what was happening in the world when he was 20.” Boney turned 20 just as the French Revolution was kicking off, which makes sense, but I’m not sure this rule is flawless: when I was 20 Labour were unbeatable, the economy was booming and the world was at peace – all of which feels about as relevant to the current world and my opinion of it as The Chronicles of Narnia.

There is, nonetheless, the grain of a point here: we are all shaped by the times through which we live. Consider the baby boomer generation, born in the late 1940s or 1950s, who still dominate British politics today.

(A quick note before we get into this: Yes, I’m about to generalise about the experiences of an entire generation. Yes, I know that not everyone in that generation today votes Tory. Yes, I’m sure there are complicating factors that you/your parents/your favourite uncle faced, which I’m leaving out, and which I’m being terribly unfair by not mentioning. It is, nonetheless, legitimate to make generalisations when talking about broad social trends, so there.)

The boomers came of age in the 1970s, at a time of high inflation, industrial unrest, and a widespread breakdown in the relationship between management and labour. In 1979, just as they were entering their peak earning years, Margaret Thatcher came to power. Over the next decade, personal and business taxes fell, yet the actual tax take continued to hover at around 40 per cent of GDP.

At the same time, wages rose – at least, for those lucky enough to have them – home ownership expanded thanks to the right to buy policy, and house prices boomed. In 1975, the average house cost around £10,000. By 1990, it was over six times that. OK, the market then crashed – but not by anything like the amount needed to render your outstanding mortgage anything more than trifling. 

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[see also: How UK house prices have soared ahead of average wages]

If this had been your life experience, what might you conclude? That getting on the housing ladder might have been difficult, but definitely paid off. That hard work would be rewarded. That taxes can fall, without too many negative consequences. That things would generally get better.

Much of this narrative is nonsense, of course. The instability of the 1970s wasn’t caused by greedy unions, but by an oil shock, which sent inflation soaring: tough pay bargaining was largely just an attempt to keep up. 

The stability of the next decade was built on oil, too. In his new history of the British economy, economics journalist Duncan Weldon notes that it was the oil boom that allowed the Thatcher government to cut taxes. Norway invested its oil windfall in a sovereign wealth fund; the Thatcher government, in contrast, used its own to reshape the state, or (this is me, not Weldon) even to buy political support.

Other aspects of the Thatcher boom were equally unrepeatable. The proceeds of privatisation had the same economic logic as selling your stuff to pay for lunch. As to the housing boom, it was all very well while wages rose and inflation wiped out mortgage debt, but one of the Thatcher government’s big achievements was to then stamp on inflation: this century, house prices have continued soaring, but wages haven’t, and debt has not been inflated away. Not that the relationship between inflation and mortgage debt is especially relevant to the growing chunk of the population who feel they have as much chance of getting on the housing ladder as they do of flying to the moon.

[see also: Will anything ever stop the madness of the British housing market?]

We all know the Thatcher years weren’t a boom for everyone. But even those who benefited did so largely because of a series of unrepeatable windfalls. Yet we are all shaped by our experiences: if you were of the right age to suffer in the 1970s and benefit from the 1980s boom, little wonder if you think that inflation is a demon, hard work pays off, and there is no downside to tax cuts.

That generation – through size, geography, and propensity to vote – still dominates politics today, and provide much of the Conservative Party’s base. It is also driving the debate on how we fund social care. They’ve worked hard all their lives, and think they’ve earned some help with care costs too, because they’ve already paid into the system what they’ve taken out. In terms of the demands they’ve placed on the state so far, perhaps that’s true.

[see also: Boris Johnson is exploiting the public’s misunderstanding of National Insurance]

But as that generation reaches old age, the costs they incur are going to soar. That is something they have not paid for. So past attempts to solve the cost-of-care crisis, by the Brown and May governments, involved trying to claw back some of the unearned wealth many members of that generation keep locked up in their expensive homes.

To those who own those houses, though, that seems unfair: a house is a home, and they earned what they have through hard work. They think they’ve paid their share. 

Now consider someone coming of age in the 2020s, leaving education with a large pile of debt, watching their living costs rise even if their wages don’t, and now, thanks to the social care levy, looking at a marginal tax rate of over 40 per cent. What will they conclude about the world, I wonder.

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