The Economic legacy of Thatcher’s government

Margaret Thatcher became Prime Minister in 1979 at a time of political and economic turmoil. The inflation rate had reached over 25% just three years prior, unions were striking at every possible opportunity, the country was in a mess. At the same time, economic growth had stagnated with unemployment reaching a 30-year high of 7% in 1979. By the end of her tenure, economic growth had reached unprecedented levels and inflation stood at just 5%. Thatcher combatted these economic woes through effective fiscal and monetary management. High taxes that discouraged economic growth were slashed, welfare was reformed to promote economic stability and sectors that could be more efficiently run by the private sector were privatised. Contractionary monetary policies stemmed the high rates of inflation that plagued the previous decade. It is of little surprise that Thatcher consistently ranks as the most popular post-WW2 Prime Minister.

Tax-reform

One of Thatcher signature accomplishments was her tax reform. At the start of the decade, the top income tax rate stood at 83%. During her first budget as Prime Minister, this rate was slashed to 60%. At the same time, the basic rate of tax was also cut from 33% to 30%. These tax reductions didn’t have an immediate effect on promoting economic growth, due to interest rates being hiked to 17% to combat inflation. With this said, once inflation began to fall, interest rates slowly fell as the basic rate of income tax was reduced to 25% by 1988 – a 24% cut over her tenure. These tax reductions promoted economic growth through increased consumption. The initial tax reductions targeted towards higher earners promoted investment in the economy, as high-income individuals used their increased disposable income to invest in firms, thereby promoting economic growth. At the same time, the basic rate reductions introduced by Thatcher later in her term led to more disposable income for lower-income individuals. As those on lower incomes have a greater marginal propensity to consume, this boosted consumption greatly, thereby increasing growth and prosperity.

With this said, one of Thatcher’s less successful tax reforms was the proposal of a ‘poll tax,’ which ultimately contributed to her demise. The poll tax was a flat tax rate that applied to each adult resident, with a reduction for those on lower incomes. It was introduced to simplify previous local authority taxes, which were seen as complicated and bureaucratic. However, the poll tax was still viewed as too regressive and burdensome on the less well-off, resulting in its repeal shortly after its introduction.

Welfare

Thatcher also curbed the excessive government spending that took hold in the 1960s and 1970s. Welfare was reformed in a manner that encouraged work. Under the previous system, there was a loophole by which some workers could make a profit from short spells of unemployment, by claiming unemployment benefits. As a result, these reforms encouraged individuals into work as it was no longer possible to make more money off benefits than through work. At the same time, Thatcher’s government increased the number of ‘means-tested’ benefits. In 1979-80, means-tested welfare benefits comprised 9% of total spending on welfare; by the mid-1990s, this figure had risen to 22%. This had the effect of reducing fraud and abuse within the system, thereby reducing unnecessary government costs.

In addition, social housing became discouraged under the Thatcher government. Subsidies towards sub-standard, council housing were slashed drastically. This had the effect of encouraging private sector investment into the housing industry, increasing housing standards through greater competition and a profit incentive. The introduction of the ‘Right to Buy’ scheme by Thatcher greatly increased homeownership. This scheme allowed tenants of social housing units to buy their own homes at a discounted rate. Between 1981 and 1995, over 1.7 million of these housing units were sold. The result was a large increase in the number of homeowners. At the start of the 1980s, the homeownership rate stood at just 56%; by the end of the decade, this figure reached 67%.

Privatisation & Monetarism

Public sector inefficiency and poor standards had become a mainstay in British society during the 1970s. Thatcher sought to reverse this through privatising many state-owned industries that could otherwise be run more efficiently by the private sector. One of the most notable examples of this was the privatisation of British Airways in 1987. Under public ownership, the airline was mismanaged and found itself in a poor financial position at the start of the 1980s. Between 1979 and 1980, its net burden of debt increased by £1bn. These losses continued into the start of the 1980s, until 1983 when the airline finally made a profit. At the same time, passenger standards on the airline had been falling, highlighted by the airline’s falling passenger numbers. However, following privatisation, both of these trends reversed. The newly privatised British Airways spent its first few years shoring up its balance sheet in order to reassure investors. In addition, profits soured following privatisation. Between 1983 and 1987, profits were stable at around £150 million; these quickly increased, reaching over £600 million by 1997. This can be attributed to the greater passenger numbers that came with the improved service following privatisation, as the airline made efficiencies and cut unnecessary costs.

To tackle the high inflation rates of the 1970s, Thatcher’s government introduced contractionary monetary measures. In 1979, the base rate rose from 11% to 17%, in an effort to slow the growth of the money supply. This proved to be effective in curbing inflation as inflation quickly fell from 16% in 1980 to 4% by 1984. This marked a departure from the high inflation that caused falling living standards throughout the 1970s, ensuring that real wages rose for the first time in almost a decade.

Ultimately, the Thatcher administration successfully resolved the poor economic situation that had plagued the nation for several years. Through tax reductions, Thatcher promoted economic growth and prosperity. Her welfare reforms ensured that work always paid more than benefits, whilst promoting homeownership and greater housing standards. The privatisation of British Airways increased standards and simultaneously reduced waste and inefficiencies. Increasing interest rates halted the rampant inflation throughout the economy, ensuring that consumers didn’t face falling real wages. Her pro-growth economic policies gave birth to a period of unbridled prosperity, as the UK experienced economic growth for decades to come.