UK: THE TORY STORY.

UK: THE TORY STORY. - At this month's party conference, the Tories will be able to review the impact of 17 years in power. So how business-friendly have the Conservative actions over this period been?

by David Smith.
Last Updated: 31 Aug 2010

At this month's party conference, the Tories will be able to review the impact of 17 years in power. So how business-friendly have the Conservative actions over this period been?

Never say never in life, and in particular in politics. It may look for all the world as if more than 17 years of Conservative rule are coming to an unhappy end, and that this month's party conferences represent one of the final pre-election pieces in the jigsaw, but nothing is certain. Political parties have pulled it off against the odds before, and they will surely do it again.

That caveat aside, it has to be said that if the Conservatives do pull it off this time, the result will represent the greatest escape in their history. The signs are that a momentous period in British politics - not least the longest continuous period in office for a single party in modern times - is coming to an end. What will be the epitaph of the Conservative years, as far as business and the economy are concerned?

The challenge Margaret Thatcher took on when she entered 10 Downing Street on the morning of Friday, 4 May 1979 was a huge one. Less than three years earlier the country had been effectively bankrupt, and forced to turn to the International Monetary Fund for a financial bail-out.

Although that episode had forced the Labour Government into austerity policies, and shocked the trades unions into a period of restraint, deep underlying problems remained for the economy.

In March 1979, the Paris-based Organisation for Economic Co-operation and Development (OECD), reported on the British economy. Britain, it said, faced 'serious problems' of fundamental economic imbalances and impediments to growth. An incipient wage-price spiral dogged the economy, and threatened to do more damage. The best hope was that the Government and the unions could cobble together some sort of deal.

Few observers doubted that the UK economy was in a state of relative decline. Having acquired the 'sick man of Europe' label in the 1960s, Britain had done its best to live up to it. The sickness, indeed, appeared to have become terminal.

According to the OECD, profits, at just 5% of national income, were insufficient to sustain any growth in investment. Tax rates were punishingly high, with a top rate of tax on earned income of 83%, and a basic rate of 33%. The public sector appeared to be moving inextricably towards a bigger and bigger share of gross domestic product. Inflation, having topped 25% in the mid-1970s, had dropped to 8% in 1978 but was back in double figures by the time of the 1979 election and heading sharply higher.

Most of all, there was the power of the unions. Ironically it was these very bodies which, by launching the winter of discontent against James Callaghan's Labour Government, with a wave of strikes by health workers, refuse collectors, tanker drivers, food delivery staff, and even grave-diggers, had inadvertently propelled Thatcher to power. But few believed that the new Conservative Government could convert tough anti-union words into effective action.

Yet when she took the helm, Thatcher had three things on her side. The first was dogged determination and the unshakeable conviction that she and her Government were right. The second was the shift in the public's mood against the unions following the winter of discontent. The third, which was to provide her Government with a financial cushion for its actions, as well as occasional inconvenience, was North Sea oil.

The reform of industrial relations was only one plank of the intended transformation, however. The other goals the Tories set themselves were to have sound money and to control inflation; to reduce the role of the state and ensure sound public finance; and to develop an incentive-based tax system, with lower taxes overall and, in particular, significantly lower marginal rates of direct taxation. To these metrics, anyone auditing the Tory years should add the usual measures of economic success - growth and the level of unemployment, and Britain's relations with the rest of the world, encapsulated in the balance of payments. Let's take these in turn.

Industrial relations

Industrial relations and the transformation of Britain's reputation from that of a chronically strike-prone country to one where foreign companies want to come and do business ranks as the biggest Conservative achievement since 1979. In that year, a record 29.5 million working days were lost as a result of industrial action; the annual average for the past five years has been just 526,000. The story of industrial relations under the Conservatives divides neatly into two parts: before and after the 1984-85 miners' strike. Before the strike, it was by no means certain that the Government would win its battle with the unions, particularly the powerful public sector unions. After it, and after the 1986 Wapping dispute between Rupert Murdoch's News International and the print unions, the climate was transformed.

Reform was implemented in a series of laws, running from the 1980 Employment Act to the 1993 Employment Rights Act, which between them had five main consequences: they made it more difficult for unions to initiate industrial action; they severely restricted the closed shop; they made unions financially responsible for their actions; they enhanced the internal democracy of unions; and they reduced the unions' political role.

Exploitation of North Sea oil also played a pivotal role, not least during the miners' strike, with the black gold an indigenous, plentiful source of domestic energy supplies. (During previous disputes with the miners in 1972 and 1974, the National Union of Mineworkers had a stranglehold over the key source of domestic energy supply.)

Two other factors explain the Conservatives' ability to transform Britain's industrial relations. Changes in the structure of Britain's economy and the decline of manufacturing employment hit hard at the traditional power base of the unions which were less well represented in the emerging service industries, particularly financial services. The other advantage, of course, is having been long in government: the programme of industrial relations reform has spanned four parliaments. But politicians make their own luck, and the Conservative achievement in this area was and is a formidable one.

Score for industrial relations: 9/10

Inflation

Inflation was the economic enemy number one for the Conservatives and, initially, the means of controlling it, as outlined by ministers, seemed so simple. Inflation was too much money chasing too few goods. Limit the quantity of money and you controlled inflation. QED.

Unfortunately, what worked in the textbooks was not so easy to apply in a modern, credit economy which was being rapidly deregulated. Exchange controls were abolished in October 1979, rendering the previous restrictions on lending by the banks redundant. The corset control on bank lending was abolished, hire purchase restrictions lifted, and the banks allowed to move into the mortgage market. Small wonder, then, that the chosen measure of the money supply, sterling M3, surged higher and interest rates rose sharply too, to 17%, in a vain attempt to control it. Higher interest rates, foreign interest in the Thatcher experiment and the petrocurrency status of sterling combined to push the pound higher and higher until it peaked at $2.4 to the pound. The result was the first Conservative recession which, for manufacturing industry in particular, was vicious, with output falling dramatically, and the first shock wave of rationalisation going through companies like a dose of salts.

Denis Healey called it 'punk monetarism' but, in terms of the inflation goal, it worked. Inflation, as noted earlier, was rising strongly when the Conservatives took office, only to be pushed up by the decision to increase VAT to 15% in the first Howe budget, and by a mistaken commitment to honour the recommendations of a commission on public sector pay comparability. The wage-price spiral that the OECD had predicted appeared to be alive and well. Inflation hit 22% in the spring of 1980 which alongside recession meant Britain was experiencing 'stag flation'. But from then on the harsh medicine worked.

Within a year, the rate of inflation had halved. By the spring of 1983, conveniently timed for Thatcher's second election victory, it was below 4%. In the second Thatcher term, it averaged just over 4.5%, touching a low of just 2.4% in 1986. Then, of course, it all went wrong again.

'My central mistake was to underestimate the strength and duration of the boom of the late 1980s, and thus of the inflationary forces it unleashed,' Nigel Lawson recalled later. Taxes were cut into the boom. Interest rates were mistakenly reduced to stop sterling from rising too much or to compensate for the effects of the 1987 stock market crash. Once the boom had taken hold, only interest rates that echoed those of the early Thatcher years, in this case 15%, could bring it back down to earth. The result was stagflation again. Inflation rose to just under 11% in the autumn of 1990, at which time the economy had dived into its second serious recession of the Conservative years.

However, the record since then, in a benign world environment, has been better than anything achieved during the 1980s. A pragmatic and rather more transparent monetary policy has given the best sustained inflation performance since the 1950s. Although this does not wipe out memories of the errors of the late 1980s, it goes a long way to compensate for them.

Score for inflation: 7/10

Public finance and the role of the state

Sound public finance and reducing the role of the state went hand in hand as a policy objective. In 1979, Britain had an overgrown, inefficient nationalised industry sector that was costing £3 billion a year in subsidies.

Since then, privatisation, hardly mentioned as a policy goal in the early days, has been, like the reform of industrial relations, one of the Conservatives' big successes, a policy which Britain exported to the world. Two-thirds of the companies once owned by the state have, since 1979, been transferred to the private sector, equivalent to around 50 companies and one million or more jobs. As an exercise in withdrawing the state from a significant part of the economy, the privatisation programme has worked, and it is a permanent legacy.

The record on privatisation has not, however, been matched in the overall control of public expenditure. In 1978/79, the final year of the last Labour Government, general government spending excluding privatisation proceeds was equivalent to 42.3% of GDP. Last year, 1995/96, it was 42% of GDP. This year it should fall as a share of GDP but it will still be over 40%. Even to hold public spending constant as a share of GDP, the Government has cut back sharply on capital expenditure, with adverse consequences for such things as infrastructure.

Meanwhile, in spite of an early decision to delink pensions and other benefits from earnings (tying them instead to prices), a move which currently saves the Government £8 billion a year in social security spending, it is the costs which the Conservatives promised to control that have, in general, risen most sharply. Social security spending now totals more than £90 billion a year, a rise of 84% in real terms since 1979. Health spending has recorded a real rise of 70%, reflecting today's higher salaries and greater range of treatments.

The obvious symptom of the problem has been the PSBR. Under Thatcher, borrowing was gradually brought under control, to the point where, by the late 1980s, the public sector borrowing requirement had been turned into a public sector debt repayment, which peaked at nearly £15 billion in 1988/89. Since then, however, the story has been a disastrous one, with rising public expenditure running up against recession-hit tax revenues, the PSBR reached nearly £50 billion in 1992/93 and still remains high.

During this five-year parliament, public borrowing will have totalled some £180 billion, exceeding previous records by a multiple of several times. The privatisation successes have been marred by an indifferent performance in controlling overall public spending and, latterly, an appalling one as regards the PSBR.

Score for public finance and the role of the state: 5/10

Taxation

A failure to establish sound public finance has clear implications for the Conservatives' record on taxation, which has been a curate's egg.

On the plus side, there have been clear and bold moves to create an incentive-based tax system. The top rate of tax has been reduced from 83% to 40%, and the basic rate has been reduced from 33% to 24%. There have also been welcome reductions in corporation tax rates, down from 52% to 33%, financed by a reduction in capital allowances.

But the logic of the corporation tax reform - restricting allowances to pay for a reduction in the rate - has not been followed through in other areas. Conservative chancellors have not been able to resist the temptation to tinker, by introducing new tax reliefs, on profit-related pay and tax-exempt special savings accounts (Tessas), for example. Public perceptions have been not of a tax-cutting government, but of one that has sought to raise revenue at regular intervals. VAT, for example, raised to 15% in 1979 (from dual rates of 8% and 12.5%), was further increased to 17.5% in 1991 to pay for a reduction in another unpopular tax, the community charge or poll tax.

In short, since 1992, most tax logic has gone out of the window as the Government has been forced into emergency tax-raising action. Direct taxes have been raised (with higher National Insurance contributions and a freezing of income tax allowances), as have indirect taxes. New taxes have been introduced, on insurance, air travel and domestic gas and electricity supplies. The tax system is messy and confused and yet revenues are not proving sufficient to reduce the PSBR decisively.

Score for taxation: 5/10

Growth and unemployment

The Conservatives' growth record would have been excellent, were it not for the fact that the period included two serious recessions. Conservative ministers in the 1980s used to date their record from the spring of 1981, which marked the end of the 1980-81 recession, regarding that as the leftovers from the previous Labour administration. And, during the long upswing of the '80s, Lawson used to talk of having abolished the business cycle. For a time he appeared to have a point. But the 1990-92 recession, the longest since the 1930s, consigned that claim to the rubbish heap.

Meanwhile the post-1992 recovery has not exactly been notable for its strength.

The overall growth record, then, warts and all, is not an impressive one. From mid-1979 to mid-1996, growth has averaged just 1.8% a year. To put this into perspective, during that period the Treasury estimated the economy's long-term trend growth rate to be 2.3% a year.

Had growth in line with trend been achieved over this period, real GDP would in fact be more than 10% bigger than it actually is. To add another bit of perspective, growth averaged 2.3% even in the troubled 1970s. Nor can the Conservatives claim that they have achieved steady growth, since the boom and bust cycle of 1985-92 was the exact opposite.

Slow growth has taken its toll on the dole queues. Unemployment, on comparable figures, stood at 1.1 million when Thatcher took office, and doubled to 2.2 million during her first two years in power, before peaking at 3.1 million in 1986. The Lawson boom took it down to 1.6 million in 1990, before the subsequent recession saw the figure climb to a fraction under three million in the winter of 1992/93. Admittedly, the unemployment record of the 1980s was better than it looked, because the period was marked by a rapid growth in the workforce, notably in young entrants. And the more recent period, when Britain has won praise for the flexibility of its labour market, has seen unemployment fall more rapidly than in other European countries. Even so, the overall record cannot be said to be good.

Score for growth and unemployment: 4/10

External relations

As for external relations, there are few brownie points here either.

The current account, initially flattered by large net exports of oil as the North Sea came on stream in the early 1980s, giving a surplus of nearly £7 billion in 1981, widened alarmingly later in that decade, to a deficit of more than £22 billion in 1989. Under the Conservatives, Britain's traditional trade surplus in manufacturing also turned into a deficit. And, while recent performance has been better, reflecting the export performance of inward-investing companies based here, alongside a generally better export performance post-ERM and subdued consumer spending growth, Britain continues to run a current account deficit of about £5 billion a year. This even includes a deficit with countries like France and Germany, which should be handicapped by overvalued currencies.

Mismanagement of sterling's exchange rate also features heavily as a negative in the Conservative record. From the free-for-all of the early 1980s, when the pound was allowed to rise too high, to the 'shadowing the Deutschmark' episode of 1987-88, followed by botched membership of the ERM, Britain has rarely got it right, although again the post-ERM period, with stability at a competitive level, has been better.

Score for external relations: 2/10

The conclusion must be that there have been many good elements of the Conservative years, marred by others where the performance has been indifferent or downright bad. It has been a bumpy ride. Pride has often preceded a fall. In the late 1980s when the international organisations found much to praise about the British economy, we should perhaps have known we were riding for a fall.

That said, the Conservative years are ending, if they are ending, with the lowest sustained inflation performance in peacetime since the 1930s and a balanced economic recovery. The OECD, so critical in 1979, found plenty to praise in its 1996 report on Britain. The economy, it said, was becoming 'more flexible, competitive and less inflation-prone'. The prospects, it said, 'are good for continuing economic expansion and further reductions in unemployment, while maintaining low inflation'.

It may be that, after those 17 years in office, the Conservatives have finally cracked the secret of sustained non-inflationary growth. But it may also be that the knowledge has come too late for them to benefit electorally from it.

Scoreboard

Industrial relations: 9/10

Inflation: 7/10

Public finance and the role of the state: 5/10

Taxation: 5/10

Growth and unemployment: 4/10

External relations: 2/10

Greatest achievement: 'It will not surprise you if I say that the privatisation programme has probably been the most outstanding success of the Conservative years, not just in terms of the benefits it has brought to consumers in Britain but also in terms of our standing on the world scene. If you go to other countries, they talk of following the British example in privatising their state industries. If you're looking for one good thing, in my view that would be it.'

Greatest failure: 'On the not-so-good side, I think the tax regime is still quite burdensome. There has been a welcome shift from direct to indirect taxation but we have seen too many new taxes. Speaking from my point of view, both air passenger duty and the insurance premium tax were unwelcome.'

Greatest achievement: 'The very obvious one has to do with changes in the labour market, which have been fundamental and which have turned out to have had a far bigger effect than one would have dared hope at the time. It is a totally different world.'

Greatest failure: 'If there is one thing that has been completely maddening, it is the uniform business rate (UBR). It demonstrated an absolute refusal to have philosophical consistency in dealing with local government. Instead, ministers said: "We'll cap it, we'll run it, we'll centralise it". Companies spend much of their time appealing against the UBR and getting money back. It was the most extraordinary thing to introduce. When it came in, the whole idea that efficient, low-cost local authorities would be able to attract businesses by setting the rate at the right level, disappeared.

Instead, they were told what the UBR would be.'

Greatest achievement: 'What we have got is a sense of stability. We know what the rules are, and we know who makes them. You don't wake up in the morning and think: "Oh God, what's going to happen next"? When you cast your mind back all those years ago, things were constantly changing, there was tremendous uncertainty.'

Greatest failure: 'There is no doubt that where the Government has allowed things to go wrong is in the tremendous argument with Europe. The issue is not BSE or the single currency, it is that we are seen as being outsiders.

The only point of being part of Europe is being an insider. That is a tragedy for business and it is the Tory party - not the country - which has done this.'

Greatest achievement: 'Definitely the Conservative Party's early reduction of personal taxes which created tremendous incentives throughout the country.'

Greatest failure: 'The worst thing they did - or did not do - was fail to cut the cost of government sufficiently.'

Greatest achievement: 'From my point of view it has to be privatisation, and one particular aspect of it. It has set very demanding standards for industry for the better. Years ago the service side of our business set its standards according to the public sector. If they took eight weeks to install a telephone or four weeks for a call-out, our service department would take four weeks to mend a camera. Once privatisation came along, the standards of service improved, and those of us who were sharp enough in the private sector jumped the gun and started to improve what we did - getting a man out to do a repair on the day of the call, and so on. This has been good for business and good for the country.'

Greatest failure: 'The Government has allowed too much regulation to creep in in an uncoordinated way, from trading standards, Europe, etc. We have become massively over-regulated and the sum of the parts doesn't add up to a coherent whole. There is a massive amount of small print and needless bureaucracy.'.

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