What impact did the Thatcher years have on Britain’s economic structure - Assignment Example

After any economical crisis, such as that which occurred in Britain during the 1970’s, it is usual for a restructuring of the economy to take place. Thatcherism was the way out of the crisis which was available at the time. She abandoned the post-war consensus and imposed her own ideas on she thought the economy would work best. During the Thatcher years the main contributor of national wealth shifted from the secondary to the tertiary industry. This de-industrialisation was partly due to a universal trend among developed countries, partly due to an ongoing trend in the UK, but also due to policies enacted by Thatcher.

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The financial sector was a major beneficiary as a result of this shift. Financial deregulation was one of the Thatcher government’s main policies. She wanted to reduce the amount of control held by the government over the financial sector of the economy – such as banking, finance and insurance. Neo -liberal theory relies on the rule of the market place to regulate the economy and any restriction or regulation on market principles would result in a reduction of efficiency.

Policies included the abolition of exchange control in 1979 which widened the possibilities of lending, and the abolition of the banking corset in 1980 which enabled banks to use interest better to their advantage. Because of this deregulatory approach, the growth of economic activity, employment and profits increased massively in the financial and business sector. Competitiveness also grew rapidly and resulted in the most successful bodies growing at a faster rate than before, while less successful ones were dropped by the wayside.

The rapid growth of the successful firms meant that the percentage share of national income produced by the financial sector grew from 11. 1% in 1974, to 13. 2% in 1984, and by the end of Thatcher’s government the contribution was 19. 2% (Artis,1996,p5). However, it is important to note that this growth was also due to a worldwide growth of financial activity, so it wasn’t solely down to Thatcher’s policies. A decline in manufacturing was a universal occurrence but it happened at a faster rate in Britain and it’s the only country to show a consistent fall between 1960 and 1988.

The government had a direct cause on this through reduced spending on manufactures. Since 1960 Britain’s investment in manufactures has been the lowest of all the G7 counties. The industry contributed to 30. 1% of national income in 1974, and 24. 5% in 1984 (Artis, 1996,p5). Although that wasn’t exclusive of the Thatcher government, she did continue the trend. Another reason for it was because people had more money in their pockets due to cut taxes: consumer spending rose by 30% in the 1980’s, but manufacturing output only rose by 7. 8% so it did not satisfy public demand.

Thatcher’s government mishandled the exchange rate of sterling which exacerbated the problems of the industry. The poor industrial relations that she had with the workforce was also a factor. She did not wish to invest large amounts of money on training and educating workers. During the Thatcher years we saw a huge shift in the focus of the economy. Whereas the post-war consensus had been based on Keynesian ideology with the main impetus on full employment, monetary policy in contrast focused on defeating inflation at the dire expense of mass unemployment, which did not bother the Conservatives – it was a price worth paying.

As Nigel Lawson MP stated ‘We set as the overriding objective of macro-economic policy the conquest of inflation'(Johnson,1991,p27). Keynes had argued that the state of the economy was affected by the level of public spending and taxation. Milton Friedman,one of the early monetarist thinkers, argued that it was not this but the money supply that mattered, and that changes in the money supply cause a change in product prices (inflation). Thatcher abandoned Keynesian economics in 1979 and instead used monetary policy in order to bring down inflation.

It is believed by monetarists that by using interests rates as the main tool, inflation can be manipulated: if the money supply is decreased through raising interest rates then inflation should not rise. The experiment was a failure, the money supply grew at about twice the rate set by the government. Ironically inflation did decrease although obviously not as a result of monetarist policy. Keynesian economics aimed to avoid boom and bust cycles through manipulating demand, but Thatcher’s government thought they were natural and should be left alone.

This meant Britain experienced a recession in the mid 1980’s, then a short-lived boom in 1987-88, and then a depression again. The switch to monetary policy brought with it other shifts in Britaini?? s economic structure. Government spending was reduced in order to prevent it exceeding public income. If this happened, there would be an increase in the money supply. In contrast to Keynesians, monetarists were not prepared to stimulate the economy by investing money it might not have.

The 1979 Budget showed this, as its main aim was to reduce the budget deficit, unlike prior attempts which allowed a deficit in order to keep unemployment low. By the mid 1980’s the first surplus budget in post-war history was announced. Closely linked to the policy of reducing government spending is the third strand of Thatcheri?? s monetary policy. She saw a need for a free-market economy with minimal government intervention, or laissez-faire. The only role that government should play is the control of the supply of money in the economy.

Instead of the government setting policies, the market should decide the level of things like wage settlements. Again, this was a major break from Keynesian thinking. Thatcher thought an orientation towards the needs of the market would modernise the economy and society, ridding Britain of uncompetitive structures and encouraging entrepreneurial spirit. Up until now, Britain had had a mixed economy, with a similar share of both public and private firms and bodies. Thatcher completely reorganised it into a private market-based economy through her seemingly endless programme of privatisation.

This encouraged the free-market economy by increasing the size of the private sector while decreasing the size of the public sector, therefore allowing market forces more influence in the economy. It also allowed the government to raise money without the need for borrowing, and this money was not placed into the money supply so inflation would not rise. This was a major reason for the budget surpluses in the 1980’s. Many nationalised industries such as electricity, and gas were privatised under Thatcher, something which never would have happened under the previous government.

She was even criticised by former Tory Prime Minister Harold MacMillan for ‘selling off the family silver’. By 1988 the government had sold off nearly $58 billion worth of its assets (Green,1989,p226). The amount of home owners increased massively with the sale of council houses and ‘right to buy’. This resulted in house prices dropping because there were so many on the market. Many people who had bought houses in the south-east of England in 1987 found a few years later that their homes were worth much less than what they owed on their mortgage and that they had ‘negative equity’.

It also resulted in a shortage of rented property because councils could not use the money made from selling to build new houses. This meant many people had to be housed in Bed and Breakfast hotels when they had their homes repossessed in the early 1990s recession which was expensive for the government and caused even more of a strain. In taxation policy Thatcher switched the emphasis from direct to indirect taxation. This meant that rather than an individual paying most of their taxes based on their income, it was paid when buying goods with VAT. Income tax was lowered from 33% in 1978 to 26. % in 1989, while indirect tax in National Insurance Contributions rose from 7. 7% to 9%, and VAT almost doubled to just under 17%. (Johnson, 1991,p143). Income tax is always paid in relation to earnings to make it a fair game. Although the rich still paid more tax during the Thatcher years, tax cuts benefited them greatly as most of the cuts were made to middle and high income earners, who’s income tax fell from 86% to just 40%. This encouraged foreign and domestic investors to set up their ventures in here during the years of the booming economy in the late 80’s.

Because of tax incentives on borrowing, the use of personal savings dropped to its lowest level in a while in 1989. Thatcher had an impact on unemployment levels which rose from 1 million in 1979, to 5 million by 1986 (Johnson,1991,p237) and then decreased. During the 1980’s there was a world-wide recession which contributed but it was also down to measures taken by the government. Trade unions’ bargaining power was reduced through law reforms which made it easier for employers to lay-off workers.

During the recession of the early 80’s the government had refused to use macro-economic policy to bring down unemployment because they thought if the supply of money was allowed to rise then inflation would return, and they believed that the labour market was best left to sort itself out. In their last term, the government was able to lower the level of unemployment through various changes. The real cost of labour to employers was reduced, encouraging them to take on more staff and payroll taxes were cut by the abolishment of the National Insurance Surcharge and by a reduction in contributions paid by lower-paid workers.

In 1989, unemployment figures had been brought down to just under the 1980 level. During a recession, when the economy is slow and many people are out of work, there is a greater need for social security benefits. This caused a strain on the welfare state. What made it worse was that, because Thatcher had sold off so many council houses, people having their homes repossessed had to be housed in expensive Bed and Breakfast hotels which cost the government even more money. Thatcher completely changed the face of the National Health Service.

It had been an established comfort since the Beveridge Report, that the NHS should be free at the point of delivery. Thatcher introduced prescription charges and dental charges. She also introduced internal markets into the NHS through the idea of Fund Holding GP’s. GP’s who were ‘efficient’ and were left with a surplus left over at the end of the year would be able to reinvest that money into their practice. Those who did not use their money so ‘wisely’ would go bankrupt and have to be shut down.

GP’s would buy operations from hospitals with their funds, so the ‘survival of the fittest’ also applied to hospitals. Margaret Thatcher and her government completely restructured Britain’s economy. The main contributor to national wealth shifted from secondary to tertiary industry and she changed the whole focus of the economy by switching from Keynesian demand-centred policy, to monetarist supply-centred economics. She privatised nearly all of Britain industries and made huge tax cuts. She also changed the face of the welfare state.