FOREWORD
Mrs Thatcher became Prime Minister of the United Kingdom in 1979 after five years of the Labour governments of Wilson and Callaghan. Ever since the war, both major parties had in government pursued strongly interventionist economic and social policies aimed at sustaining the welfare state in a mixed economy. By 1979 it was hard to believe that these policies would succeed. Although most people's standard of living had improved between the 1950s and the early 1970s, there had been little improvement since; and Britons, long used to the sight of rich Americans, now had to endure rich French, Germans, Japanese and Arabs. Economic and social rot had set in.
In these circumstances, the radical Toryism espoused by Mrs Thatcher seemed to many people more like a cleansing gale than a mere breath of fresh air. She would sever the sprawling tentacles of the state, cut down overweening and over-mighty union barons, stop inflation, restore family values, halve taxation, achieve full employment and build some aircraft carriers. (Some people in Australia may, just, be able to recall a similar feeling of glad confident morning when Malcolm Fraser was swept into office in December 1975 with what amounted to a mandate to undo the policies of Whitlam.)
Nearly seven years after the Thatcher triumph, less has been achieved than was promised. The government now appears to have lost impetus if not direction. The general election due in 1988 is already casting its shadow into the Cabinet room.
Australia faces many of the same problems as Britain. The economy is rigid and uncompetitive in many areas, and the welfare and tax systems sap incentive. Policies similar to Mrs Thatcher's are needed to release Australians' productive and entrepreneurial talents. How do we implement them when the "Iron Lady", so often seems unable to?
Richard Wood here looks at the achievements and failures of the Thatcher government, and draws lessons for Australia.
John Nurick
WHAT BECAME OF THE THATCHER REVOLUTION:
LESSONS FOR AUSTRALIA
This is my first visit to Western Australia. I landed at Perth in "winter" and now understand why Western Australia is called the "lucky state"! I can only say as a visiting Cane Toad that there can be no excuse for whinging about the "severity" of the Perth "winter", the generous hospitality of my hosts and of all whom I have met, or about the scenic qualities of the environment, both of city and countryside.
Looking at the economic experience of the last two decades, however, Australia seems to have become a somewhat less lucky country. I have noted that in 1958 Australia was the fifth richest OECD country in per capita terms, but that it has now slipped to nearly 20th in the ranking.
Clearly the "British disease" of relative economic decline is not confined to the United Kingdom. Australian experience would tend to suggest the contrary: that the British disease, rather like AIDS, has the ability to develop and spread rather rapidly in a new host. Fundamentally, this is because if a country adopts the same general sort of economic and social policies as those which led to Britain's decline -- and also has many cultural and institutional similarities with the UK, as Australia does -- then the same outcomes will generally obtain. Under similar circumstances, similar (misguided) policies tend to produce similar consequences.
Britain was, of course, the first "lucky country" in the economic sense, in that it achieved the first industrial revolution.
Not much more than a century ago, Britain had the highest standard of living in the world -- higher even than Australia's -- and produced two-thirds of the world's energy. Britain then produced half the total world output of cotton cloth and of iron, and was the predominant exporting nation in the world economy. The City of London was the undisputed and unparalleled centre of world finance.
Although the relative decline of the UK was inevitable as other economies grew and caught up, the pace of the decline since the Second World War may only be described as catastrophic. In 1979, the then British Ambassador in Paris wrote a secret valedictory dispatch to his master the Foreign Secretary, noting that:
income per head in Britain is now, for the first time for over 300 years, below that in France ... [T]he prognosis for the foreseeable future is discouraging. If present trends continue we shall be overtaken in Gross Domestic Product per head by Italy and Spain well before the end of the century.
Since coming to power as Prime Minister in 1979, Mrs Margaret Thatcher has sought to reverse the decline of Britain by tackling its causes. What lessons may usefully be drawn from the experience of Britain under the governance of Mrs Thatcher if Australia is to tackle its own version of the British disease with success? It is this question that I want to address.
THE BRITISH DISEASE
What has been the nature of the British disease in Britain? There have been several key features.
- First, sluggish and indeed slowing economic growth, most especially noticeable in the 1970s but discernible at least since the war.
- Second, creeping, sometimes mounting to galloping, inflation. In 1974 we hit a peak of nearly 30 per cent inflation of wages, and over 20 per cent increase in the price level. Again in 1980 we had a 20 per cent per annum inflation rate.
- A third thing which became very prominent during the 70s in Britain was the growth of government spending and taxation, leading to a fiscal and international borrowing crisis in 1975-76.
- A fourth factor involved in the British disease which became very prominent in the 1970s was the abuse of trade union power. Britain currently has a lower level of unionisation (approximately 45 per cent of the workforce) than Australia (approximately 55 per cent), but it is highly unionised compared to France or the United States.
I think all of these things are also general features of the sort of problems Australia has been suffering over the past 10 to 15 years. Another similarity of the 1970s situation in Britain with what is happening in Australia today is that between 1974 and 1979 the UK had a sort of Accord between the Government and the unions. In Britain it was called the Social Contract but essentially it was a corporatist policy similar to the present Accord in Australia. I would predict now that the Accord in this country will eventually break down as it did in Britain. The pressures are that such an agreement between unions and government must break down because it is a contract which is unenforceable. There are too many parties to such an unenforceable contract for it ever to be a workable policy in the long run.
Another initial point that must be mentioned, and to which I shall return, is that a central way in which the tide was turned in Britain was through the power of ideas. The institute of Economic Affairs was set up in 1957 as an educational and research institute, and it took about two decades (I'm sorry to say) to get new -- and indeed old -- truths about the workings of the economy into circulation in the media and also into the minds of politicians. One seemingly so influenced by the Institute of Economic Affairs was a certain Margaret Thatcher.
Against this background of rising taxation, rising government spending, slowing economic growth, a "social contract" which was not working, and the abuse of trade union power in Britain during the 1970s, Mrs Thatcher came to power in 1979 on a tide of resentment against those phenomena and with new ideas circulating in the political market. Her major policies were quite explicit (at least as developed in platform rhetoric). She intended to roll back the Leviathan State, to cut government spending, to quell inflation by monetary control, to cut taxation, to deregulate the economy and check -- if not reverse -- the growth of union power.
SOME LESSONS OF THE THATCHER EXPERIENCE
What I shall do now is provide you with a potted history of what actually happened so that some of the lessons may be learned in advance here. Eventually the same general sort of policies will undoubtedly have to be tried in Australia. There is only one cure for the British disease, just as there is only cure for smoking. If you want to stop smoking you have to give up smoking. If you wanl to stop the British disease you have got to give up the policies which lead to it. That holds true for Britain and Australia and all other countries.
So let me tell in brief what has happened in the UK since 1979. It has been a matter of both success and failure; a mixed bag. Quite obviously not everything goes right in politics as in other aspects of human life.
The first episode of Thatcher government was her first term as Prime Minister, from 1979 to 1983. She had a fairly decent majority of over 40 in the House of Commons of over 600 seats. The first and principal goal the Government set itself was to try to stop (or at least considerably reduce) inflation, and to this end the government announced a "medium-term financial strategy" in 1980. This meant the adoption of a pre-announced, phased reduction in monetary growth targets and the size of the budget deficit, over a four year period.
What actually happened was a bit mixed on this front. On the side of monetary policy, it proved more difficult to control monetary aggregates than had previously been assumed to be possible. Roughly speaking, however, most of the main money aggregates were brought down, (1) and the inflation rate as a result was brought down from a high of just on 20 per cent in 1980, to about 5% today. Again the Government succeeded in bringing down the budget deficit which had in 1976 amounted to some 10% of Gross National Product. It is now about 2% of GNP and so it is not really out of line with what a lot of other countries are doing by running tightish fiscal policies.
But the central problem which has appeared with this medium-term financial strategy is that the Thatcher government introduced tighter monetary and fiscal policies against a background of a rigid labour market and a sclerotic economy, and such monetary/fiscal policies plus the sclerosis induced by government regulation adds up to one thing. It's called unemployment. The British unemployment rate is running at just over 13 per cent of the labour force.
Thus the problem has been that monetary control and fiscally tight policies have brought down the inflation rate at a severe cost in high recorded unemployment. So one first lesson to be learnt is that if you seek to control inflation by "monetarist" means, and to behave as Milton Friedman might tell you to, it is vitally necessary to deregulate the labour market at the same time, if not before, to avoid the economic side-effects which are likely to come about. That, indeed, is lesson number one of the Thatcher experience, and one of immense relevance to Australia, with its byzantine system of labour market regulations revolving round the conciliation and arbitration system.
The second thing the Thatcher team tried to do in the first term of office was to cut government spending in order to be able to cut taxation while bringing down the budget deficit. In 1980 they had a plan for a minor pruning of government spending amounting to about four percentage points of its volume over a four-year period. What actually happened over that four-year period is that government spending grew by 8 percentage points in volume. Spending increased so much that Britons had to suffer the largest tax rise in their peace-time history in order for the budget deficit targets to be roughly achieved. (2)
So the second lesson is that it is easy to talk about cutting government spending but it's damnably difficult to do. That is especially the case if the economy is sclerotic, because with mounting unemployment there will be mounting welfare payments and expenditure on "retraining" and "job creation" schemes. That factor has accounted for a considerable part of the growth in government spending in Britain over recent years. With a lot of people on the dole or in make-work schemes, government spending has been forced up. So again the lesson to be learned from this experience is that in order to tackle the government spending problem you have got to deregulate the economy, especially the labour market, so that re-absorption of the unemployed does not generate further growth of government spending.
The one great success on the deregulation front between 1979 and 1983, which was crucial (along with the Falklands war) in the winning of the 1983 election by Mrs Thatcher, was the sale of municipal council housing, which by now has involved over half a million homes. This proved to be a privatisation measure which was immensely popular. People wanted to own their own homes and, at a political level, it was probably crucial in turning many people away from voting Labour towards voting Conservative. This raises the point, which I shall come back to, that privatisation can be made into highly popular, and thus highly practical, politics,
1983 AND ALL THAT
But undoubtedly the Falklands war was the most important factor of all in Mrs Thatcher's massive electoral victory in 1983. A war tends to create a psychological climate of national camaraderie and solidarity. If you win it as well, that helps considerably. And it was a staggering win -- the figures show that this was the most outstanding British battle success since the battle of Agincourt against the French in the 15th century. Mrs Thatcher had militarily demonstrated the metal of which she was made. At the 1983 election, she was confirmed in power on a tide of national approbation of her iron steadfastness, with a majority in Parliament of some 143 seats, the largest majority since 1945.
What has happened since 1983? Has the Thatcher "revolution" gone on? Partly yes and partly no. The government had always said in reply to free market critics, "Well, you are absolutely right, we should have deregulated at a rapid pace during our first term, but we had to tackle inflation first. We are going to leave the deregulation side to our second term in office; that is when we are really going to tackle the deregulation issue. And that is also when we are really going to cut taxes and cut government spending. We had to tackle the inflation problem first and deal with that before getting to the other issues."
A new Chancellor, Mr Nigel Lawson, was installed, and he was on paper strongly in favour of cutting government spending and taxation. Unfortunately that hasn't happened, and government spending has continued to mount. Now, the government talks instead about a so-called "consolidation strategy". This really means the idea of pruning government has been abandoned in favour of allowing spending levels to be maintained in real terms.
The Government implicitly admits that it cannot cut government spending due to the immense pressures from all the organised lobbies and fiscal interest groups which are always pressing for extra largesse. But it hopes, if it is lucky, to hold the line against further growth as a percentage of GDP. (By 1984 government spending had reached about 53 per cent of GDP at factor cost.) So there has been some back-tracking on cutting government spending and therefore cutting taxation. That is a central failure of Mrs Thatcher's second term, from a classical liberal point of view.
A second thing that Chancellor Lawson sought to do was to make the tax system more neutral. By reducing the number of loopholes, it was hoped to make people's investment and other choices of economic action depend more on their merits and less on their tax consequences, with consequent gains in economic efficiency. Mr Lawson tried to do that gradually, by removing one loophole after another, and he ran in slow motion into the same sort of problems that seem to have caused the downfall of the recent Australian Tax Summit. That is, if you block any particular loophole, some interest group screams. As he was blocking them one at a time it maximised the political flak to which he was exposed, because every particular group affected by the threatened removal of the tax relief or loophole (for example, the pension funds) was able to get up and bellyache about it without any counter-clamour. Here again political resistance to change eventually caused a government climbdown on major reform. Tax reform leading to eventual tax neutrality between activities now seems to be off the agenda in Mrs Thatcher's Britain. This has been another major failure to introduce what is from a classical liberal perspective a necessary reform.
PRIVATISATION
There have been two major success areas, I think, since 1983. Firstly, on privatisation. In its first term of office the Thatcher government managed to sell off less than £1.8 billion of "public" assets to the private sector. Small beer really. General government spending in Britain is running at about £146 billion per annum so £1.8 billion is only a drop in the ocean. Since 1983, however, the Thatcher government has managed to sell off about £6 billion worth of "public" sector assets, including a large chunk of British Telecom -- which was the biggest share flotation in history. The programme has been a success in a number of ways.
First, it became very popular among the general public to buy these shares. Share ownership is now extending in Great Britain from a small "elite" of private clients, and from the pension funds, to a much wider section of the population.
Second, in the privatised concerns we are seeing the efficiency advantages of private ownership coming through. All the concerns which have been privatised have done well and have often turned their situations round from loss to profit.
The Thatcher government has a further very extensive -- if not massive -- programme of privatisation in hand up until 1988, including British Airways, the National Bus Company, Rolls-Royce, the Royal Ordnance Factories, the British Airports Authority, and -- most important of all -- the complete transfer to the private sector, by sale of shares, of British Gas. This last sale, it is estimated, will yield in 1986-87, between £6 billion and £10 billion.
Privatisation has proved to be politically very popular. Nationalisation and state ownership have always been politically unpopular in Britain, with opinion polls recording about 75% of people against. On the grounds of extending share ownership, achieving greater efficiency, and maintaining political popularity, the Thatcher government has scored a major success with its privatisation programme. Here, surely, is another lesson for the future of Australia.
THE TRADE UNION PROBLEM
The other major area in which Mrs Thatcher and her ministers have been successful is in challenging and outfacing union power. (3) In their first term of office they passed two Acts of Parliament which slightly qualified the legal immunities enjoyed by British trade unions -- but only slightly. The unions tried unsuccessfully, to frustrate the operation of the Acts. (4)
The real union challenge to Mrs Thatcher's rule, however -- and it was a direct and open challenge -- came in February 1984 when the president of the National Union of Mineworkers, Mr Arthur Scargill, (an admitted Marxist who is Moscow-trained and has spent long periods of time in the Soviet Union), tried to call out on strike the mineworkers, who are a key group in the energy sector in the British economy.
Some curious things happened.
- First, the miners were split. Why? Because Mrs Thatcher had very cunningly offered -- via the National Coal Board -- that no one need lose his job if the mining industry was cut back. They would employ anyone who wanted to stay on, in another job in another place, but they were going to close down inefficient mines,
- Second, very generous redundancy payments were offered to anyone who would voluntarily leave the mining industry. And it was these terms which split the miners. Some wanted to stay and others wanted to go. The split was fairly predictable. The profitable pits wanted to accept the offer and the highly unprofitable pits wanted to reject it. Here, you must remember that we have got an average cost of producing coal at the pit-head in the UK of about £35 per tonne for deep-mined coal, compared with a cost of about £17 per tonne for comparable comparable deep-mined coal in Australia. Even including shipping costs, Australian coal is between £5 and £10 cheaper per tonne. We have had a burden of extremely unprofitable pits in the British coal mining industry as a result of extensive subsidisation over many years.
The National Union of Mineworkers historically has achieved the reputation of being the most powerful union in the British labour movement for a number of reasons. The miners started the General Strike of 1926. In 1972, they developed and utilised mass secondary picketing -- this was not your ordinary picket where the striking workers picket their workplace, it was miners picketing power stations and other places where coal was used or transported -- and the police could not stop it. In 1974 they had another mass strike -- again involving violent, mass secondary picketing -- which actually led to a general election explicitly on the issue of 'who runs the country, the government or the unions? People voted that the unions seemed to run the country -- and so the Labour Party got into power once again.
What happened in the recent confrontation was quite different. Mrs Thatcher won the campaign against the striking miners and the thugs. How? Well, firstly she had suffered a bit of a defeat in 1981 when Arthur Scargill had demanded a trebling of operating subsidies to the coal mines. That time, Mr Scargill had her over a barrel, and she gave in. But what the Government then started to do was to build up very large stocks of coal at the pit-heads and at the power stations for the next time round -- which everyone knew was coming. They knew there was going to be another "coal war". Arthur Scargill had been given his danegeld in 1981 and would be back for more.
The strike duly began in February 1984. It had been preceded by a six months overtime ban, and Mr Scargill confidently predicted that the lights of Britain would go out within six weeks and that the elected government would be brought down. Mr Scargill is an expert student of American union tactics of flying squadrons, flying pickets, and that sort of thing, and his goon squads are skilled in the use of clubs, nail guns, Molotov cocktails and the like. He has a private army of four to five thousand thugs which he deployed against anyone who opposed him during the strike. On past experience one would have thought that the government would cave in or the lights would go out, or both -- and Mr Scargill would win.
After one year and one month, however, the lights had still not gone out. This was, firstly, because certain coal miners kept on working (about 30 per cent of them) and others went back to work as time went on; secondly, because the police were mobilised nationally in order to put down the rampaging mobs who were attacking working miners; and thirdly, because of the large stocks of coal at the power stations which had been built up for just this situation. (5) Also, there was more importation of coal, often through small ports in a clandestine fashion, in order to keep the coal stocks high. Eventually Scargill had to concede defeat and the striking miners returned to work. That was a major victory for the government, and a shattering blow to confidence in the notion that unions, or at least the miners, can bring down an elected Government in Britain (as it had commonly been assumed that they could). Whether this is a lesson directly applicable to Australia is a moot point. Certainly the union problem is deeply embedded in Australia and in some respects (particularly through its interconnection with the wage-fixing system) may even be more serious here than in the UK.
Overall, however, we come back to the problem that the British Government has got to deregulate but it has not deregulated fast enough. It is now starting to talk about deregulation, of shopping hours and wage-fixing councils for example, but it is only two years till the next election is due in Britain, which is a little bit late to start doing deregulation comprehensively. Labour market deregulation remains the kernel of the problem both in Britain and Australia.
"ENTERPRISE CULTURE" OR "DOLE CULTURE"?
Another problem concerns the enterprise ethic versus the welfare state ethic. The message has been hammered home well to the British people that we must return to being an enterprise culture. That has been the consistent message of Mrs Thatcher and her Chancellor, Mr Nigel Lawson, that we will either sink or swim in this world of international competition. Their theme has been that we will "swim" only if we can generate goods and services that other countries want, and do it at competitive prices. And if we can't do that then no one in the world owes us a living, and we are likely to become the first industrialised peasants of the Western world. They have managed to get that message across, and the response it caused amongst the British people is in one way striking. Births of new enterprises are now increasing quite rapidly.
In the last four years the United Kingdom has had the highest rates of new enterprise formation that we have ever seen historically; and this "birth rate" has mounted year by year. At the same time, however, it has been restrained by what you might call the "welfare culture" or "dole culture" into which many British people have now sunk. At the bottom of the income scale, many people in Britain face 100 per cent marginal rates of "taxation", and if they can be on the dole and get as much, or almost as much, money as they can get in work, many people choose to be out of work (and sometimes to work in the black economy as well, on the side, so that they are even better off). This "welfare culture" makes the reintroduction of an enterprise culture that much more difficult. To change social attitudes is not something you can do overnight. It may be possible to change the attitudes of some people quite quickly -- say the "leading" five per cent -- and they might turn out to be the entrepreneurial leaders of the future. But to turn around a whole society in a couple of years, when once a substantial minority has absorbed and accepted the ideas of the dole culture, is evidently a much more difficult thing indeed. Britain still has a long-run problem in this regard, I would surmise that contemporary Australia has exactly the same difficulty of a deeply embedded dole culture.
TALKING TOUGH AND ACTING SOFT
The British Conservatives also have political problems in that a lot of people are getting "fed up" with Mrs Thatcher's personal style. She does indeed tend to be rather intimidating, and that goes for whoever she is dealing with: presidents, prime ministers, or whoever. It sometimes seems she is endlessly lecturing the entire population. In fairness you must admit she is presenting a message which has to be presented. There is no such thing as a free lunch; and the British do indeed have to return to an enterprise culture.
The point is that having been in office as a powerful prime minister for so long there is now perhaps increasing resentment of Mrs Thatcher, or at least her abrasive style. The Government is also in the middle of its term of office and there is a sort of mid-term blues effect in operation. The Conservatives recently slipped to third place in the ratings, although public concern about inner-city riots have since restored them to first place. Perhaps the harsh lesson to be absorbed by some future Australian Prime Minister (Mr Howard, perhaps?), who is seeking to reverse economic decline by allowing markets to work, is that he may not be much thanked for such efforts. Change is resisted by vested interests, or by a bemused and conservative electorate.
This, however, brings us back to the vital role of winning the battle for ideas, on a broad, public front, as the necessary precondition for public acceptance of new, market-oriented policies. No Prime Minister, Australian or British, however courageous, is likely to embrace wholeheartedly such an economic strategy unless he or she can feel confident of (at least a sufficient measure of) public support. Here, I am sure that the role of independent think-tanks, will prove to be crucial in changing ideas ~- as was and remains the case with the Institute of Economic Affairs in London.
Another lesson for a future, market-oriented Australian Prime Minister in this regard is that it is really rather pointless, if not entirely counterproductive, to talk hard about deregulation but to act soft. This is the mistake that Mrs Thatcher has made. Her platform rhetoric and advocacy regarding the case for the market economy, the abuse of union power, the need to regenerate an enterprise culture, and so forth, has usually been admirable. But her government's actions -- with the recent exceptions of the speed of privatisation and the defeat of Mr Scargill -- have often been at best inadequate and at worst pitiful.
There is little point in talking hard and acting soft. Mrs Thatcher's hard talk has allowed her to be portrayed as "uncaring" -- in some depictions, a virtual "Beast 666" -- by her political opponents, while the timorous acts of deregulation have failed to usher in an new era of sweeping market-generated change.
In this connection the lesson to be learned in Australia is that if a policy of deregulation is to be adopted, then the Government doing it should work on the principle that it may as well be hanged for a sheep as for a lamb.
CONCLUSION
The general, overall conclusion is simply this. Once a country has caught the British disease it is very, very difficult to reverse or cure it by a softly softly bit-by-bit approach. It is far better to deregulate the economy comprehensively and broadly and quickly (as Ludwig Erhardt did in West Germany in 1950); and if possible, in your first term of office. Otherwise you just drag out the economic and political problems and make the agony last longer. If the Thatcher Government had deregulated sharply and swiftly in its first term of office, and if it had faced the unions in its first term of office, it wouldn't have the problems it has now. In particular, the British economy would be in better shape on the employment front.
So when Australia comes to have to tackle its own case of the British disease by market deregulation -- as eventually it will have to -- the way is to do it without delay; to do it quickly, and to do it comprehensively. Such a package approach to deregulation is a far better way of doing things than the bit-by-bit approach that Mrs Thatcher has mainly adopted. The reason is that the package approach puts all groups, all vested interests, in the same boat. It puts the farmers, the miners, the manufacturers, the high-tech lobby, the welfare lobby, everyone, in the same position. They will find they have all got to adjust. They will realise that everyone else has to adjust too and that it is not just them being picked on by the government. This sort of strategy will make it much easier to "sell" a free market approach to the economy and to introduce the necessary measures of deregulation.
ENDNOTES
1. Initially, central emphasis was laid by the Bank of England and the Treasury on containing the growth of Sterling M3 (a broad measure of the UK money supply). This emphasis was abandoned in mid-October 1985, due to the erratic behaviour of M3, in favour of a more flexible array of measures of money-market tightness.
2. For further and detailed discussion see J. Burton, Why no cuts?, Hobart Paper 104, London, Institute of Economic Affairs, 1985
3. The nature of the union problem in relation to the British disease is examined in J. Burton, "The British disease and trade unionism" in J.T. Addison & J. Burton, Trade unions and society: some lessons of the British experience, Vancouver, Fraser Institute, 1984, pp 1-24.
4. In contrast to the confrontation between the unions and the Heath (Conservative) government of 1970-74 over the 1971 Industrial Relations Act. The Act was stymied by intransigent union opposition and eventually repealed at union insistence in 1974.
5. Another important factor was the ability of the Central Electricity Generating Board to reduce its coal consumption by stepping up its use of oil and nuclear power stations. The CEGB had been secretly planning such tactics well before the Scargill strike occurred.
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