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Thatcherism and Macroeconomic Policy

The 1981 Budget was a defining moment in the first term.

Geoffrey Howe, the Chancellor of the Exchequer, deflated the economy at a time of rising unemployment, breaking all the Keynesian rules, in order to reduce inflation and cut the Public Sector Borrowing Requirement.

From the mid-1980s, economic conditions were much easier and Nigel Lawson, Howe’s successor, was able to cut taxes, shifting the burden from income tax to indirect taxes.

There seemed to be no clear relationship between the money supply and inflation and Lawson largely abandoned monetarism.

The Government was determined to secure a permanent reduction in public expenditure.

The extra cost of unemployment meant that there was little success before the mid-1980s.

Thereafter, spending fell, not in total, but as a proportion of GDP, as economic prosperity increased the nation’s wealth. The biggest policy change was to drastically reduce spending on social housing.

The desire to reduce spending led the Government into a long battle with local authorities, particularly those controlled by Labour, over local expenditure.

Government grant was cut for those local authorities which the Government judged to be higher spenders and, when this was not completely effective, a system of rate capping was introduced which allowed central government to veto the tax level set by selected authorities.

Still not satisfied with this, Mrs Thatcher decided to support a flat rate local tax unrelated to income – the community charge or, as its critics called it, the poll tax – with the argument that if everyone paid local taxes then they would vote for local councillors who kept spending low.

The tax was hugely controversial and the Duke of Westminster resigned his membership of the Conservative Party because he felt that it was wrong that he paid no more than his gardener towards local services.