Last week I did something rather odd, spending an entire day discussing a 30-year old budget. The witness seminar, hosted by Lombard Street Research in conjunction with Churchill College, Cambridge, examined in detail the 1981 austerity budget, in hindsight the turning point for the Thatcher government and famous for, among other things, provoking a protest letter from 364 economists, including a young Mervyn King.
The point about these witness seminars is that they include many of those intimately involved in the policy decisions.
So I learnt that so upset was Margaret Thatcher about imposing big tax increases on the electorate (mainly in the form of freezing personal tax allowances at a time of high inflation) a resignation letter was drafted for her in Downing Street.
I also discovered that Theresa May, the home secretary, turned her hand to offbeat poetry. One of the Thatcher government’s big problems was controlling the money supply, sterling M3. May, at the time a junior Bank of England official, composed an ode to “this wayward mistress” M3.
The significance of the 1981 budget was that, to bring down public borrowing, it imposed a huge fiscal squeeze on the economy at a time of recession. It was the equivalent of the government unveiling big tax hikes and spending cuts two years ago in 2009, when the economy was still in the grips of its worst post-war downturn.
When Sir Geoffrey (now Lord) Howe presented his budget in March 1981, the consensus was not just that the economy was deep in recession but that it was deepening. It turned the conventional Keynesian remedy, providing a stimulus to lift the economy out of the mire, on its head.
March 1981, through luck or good judgment, turned out to be the low point for the economy. It embarked on a nine-year upswing which gathered strength as it went on, and that 30-year old budget has entered the folklore as the cruel-to-be-kind action that rescued Britain’s reputation from its “sick man of Europe” status, and persuaded business – and eventually consumers – the country was back on track.
Even if he does not say so explicitly, George Osborne will have the spirit of 1981 in mind when he addresses the Tory conference. He may also be thinking of the Major government of the 1990s, of which he had direct experience, when chancellors Norman Lamont and Kenneth Clarke, undertook a tough programme of deficit reduction, including unpopular tax increases and prolonged spending cuts, eventually eliminating the budget deficit without killing off the recovery.
Every recovery in the modern era has been accompanied by a significant fiscal tightening. It happened in 1976, when the conditions of Britain’s International Monetary Fund bailout included deep spending cuts, and in the 1980s and 1990s.
Not only did the economy bounce back but it did so strongly, regularly posting growth rates of 3% or more (sometimes significantly more) during these recoveries, even in the face of these fiscal squeezes.
The Office for National Statistics will give us its first big rewriting of history this week when it publishes its Blue Book revisions to the national accounts but it will be surprising if those revisions yet give us anything the kind of growth rates Britain enjoyed in the past.
The fundamental point remains, and it was asked repeatedly at the seminar. How much of the 1981 experience is transferable? If the economy was able to grow with the fiscal brakes firmly on in the past, why should it be different this time?
Participants at the meeting, I should say, were generally cautious about drawing too many analogies. Sir Alan Budd said he was not sure there were any parallels between then and now.
The differences, indeed, are not hard to identify. Thirty years ago there was no banking crisis; indeed the government was in the process of relaxing controls on lending. The banks were moving into the mortgage market and hire purchase controls were about to be removed.
There was no eurozone crisis for the obvious reason that there was no euro. Its forerunner, the European exchange mechanism, had just come into being. Little did we know then where it would lead us.
Debt levels were much lower. Britain’s household debt, in today’s prices, was about £200 billion, a seventh of present levels. The long boom in credit was just beginning, rather than gasping for breath having been badly crunched as now.
In some respects, however, things are a lot better than they were then. The growth figures for the recoveries of the 1980s and 1990s, and after the IMF crisis of 1976, are just that, figures. They do not tell the story of how hard, how fraught, it was.
In the 1980s, for example, it took until 1986, six years after the austerity budget, before unemployment turned down. That is why some signatories of the letter from the 364, notably Steve Nickell, maintain they were right to sign it.
The 1990s, which looks like a model recovery against the headwinds of tax hikes and spending cuts, often did not feel like it. I recall, three or four years into the upturn, Clarke confiding that he doubted whether voters would ever believe in the recovery. The Tory government, meanwhile, was engaged in self-immolation.
Maybe it is early days but it does not feel like that now. The coalition government is holding together remarkably well. People are impatient for stronger growth but they are also resigned to the fact that there are no easy remedies after a financial crisis on the scale we have been through, indeed are still going through.
Voters are equally sceptical about apparently easy solutions like the five-point plan presented by Ed Balls, the shadow chancellor, to the Labour party conference last week, built around a temporary Vat cut.
They know, deep down, the deficit has to be brought down. Businesses know that too, and they know that the slowdown we have seen in recent months reflects a range of factors of which tax hikes and spending cuts are but a minor part. The differences are many but the spirit of 1981 lives on.
This post originally appeared at David Smith’s EconomicsUK and is reproduced with permission.