Lawson's Break with Thatcher Over Her Free Market Zealotry

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Lawson is almost always introduced as Thatcher’s chancellor — but he was instrumental in her downfall. And once again, the tobacco- and oil-funded Institute of Economic Affairs (IEA) and its radical free market ideology was at the heart of the debacle. 

Margaret Thatcher’s chancellor Lord Nigel Lawson’s last public engagement as chancellor was at the Institute of Economic Affairs (IEA), where he was joined by Sir Geoffrey Howe: “It was a happy if piquant occasion,” Lawson would remember.

“Here were the two ministers who, of all Margaret’s cabinet colleagues, had probably done most over the previous ten years to roll back the frontiers of socialism.”

Secretly, however, both Lawson and Geoffrey Howe were on the verge of breaking with Thatcher.

Howe confirms: “What Nigel and I knew — but our friends and the IEA did not — was just how badly frayed now were the bonds that had once bound the three of us together.”

“The situation, Nigel told me that day, was becoming ‘preposterous’ and he was ‘close to the end of his tether’.”

Lawson had that year delivered the annual keynote speech for the now-called Hayek Lecture.

He used the opportunity to defend his record of deregulation in the financial markets: “The abolition of the corset and other controls on the behaviour of the banks and building societies has greatly increased the flexibility of the financial markets and widened the choices available to consumers.”

“And coupled with that, the changes associated with the Big Bang have given the London markets the freedom they need to maintain and enhance London’s role as the financial centre certainly of Europe, and possibly the world.”

The IEA lecture was sponsored by the newly privatised British Airways.

Market Absolutism

Ironically, it was the free market absolutism of the IEA that was the root cause of Lawson’s dramatic and tempestuous falling out with the prime minister.

Thatcher, following the advice of Sir Alan Walters of the IEA, wanted to leave the value of the pound entirely at the whim of the markets.

Lawson, perhaps influenced by his civil servants at the treasury, believed this ideological orthodoxy would be ruinous for the country and was then spending millions of taxpayers’ money buying up the pound to ensure it kept its value.

Lawson wanted Britain to join the European Exchange Rate Mechanism (ERM) which would involve its governments collectively protecting their currencies against speculators and the markets.

The prime minister simply refused. Back in November 1985, Lawson persuaded everyone in the cabinet that Britain must join — everyone except Thatcher.

“If you join,” Thatcher hit out, “you will have to do so without me.”

According to Lawson: “There was an awkward silence, and the meeting broke up.”

The row had a profound effect on the chancellor: “I was extremely depressed.” Lawson had a choice. He could give up on his ERM ambitions or defy his prime minister.

“I gave the green light to a secret mission I had planned in advance in the hope of a favourable outcome of the meeting. Accordingly, on 7 December, Peter Middleton, Geoff Littler and (from the Bank) Anthony Loehnis went on a highly confidential visit to Bonn to discuss contingency planning in the event of Britain deciding to join the ERM.”

Lawson would recall a further major row with Thatcher: “Joining the ERM, as she saw it, had become a battle of wills between her and me. But it was the ominous ‘I must prevail’ that was still ringing in my ears as I left the room.”

The split between the two most powerful ministers of state was beginning to leak. More seriously, the boom initiated by Lawson’s deregulation and sell offs was starting to dangerously overheat.

By the time of the Conservative party conference in October 1989, interest rates had hit 15 per cent.

“A financially deregulated economy, while more efficient and dynamic, is also probably less stable,” Lawson later admitted.

But this was not going to wash with the voters, or the MPs, at the conference, fearing the loss of their seats.

In the same month Lawson shocked his colleagues by announcing his resignation, seriously undermining his government and unleashing a series of events that would lead to Thatcher’s downfall.

Thatcher wrote to Howe who had been in the Commons: “I am the bearer of bad news. Nigel has decided to resign as Chancellor and I have not been able to dissuade him in spite of intensive efforts. It is a great shock — he has been such a good Chancellor.”

Unassailable

During a television interview she kept saying: “Nigel was Chancellor, Nigel’s position was unassailable, unassailable.”

Lawson observed that she used the word “unassailable” so many times that “it acquired a new and ironic meaning in Westminster parliamentary discourse”.

The reaction to Lawson’s betrayal was robust. The Sun ran the headline “Good Riddance”. The Daily Mail screamed “This bankrupt Chancellor”.

Lawson, the first chancellor to resign in three decades, was accused of betraying his prime minister, betraying his party and betraying the British people.

Lawson over the next few months was able to reflect on his decade as chancellor. He had transformed Britain into a veritable tax haven, with lower corporation tax than any developed country in the world: “Companies would on the balance enjoy substantial reductions in their tax bills,” he would boast.

He halved and then halved again the tax on shares, feeding a frenzy of speculation in the City of London.

In 1988 he had slashed income tax from 60 to 40 per cent for Britain’s highest earners. He removed all taxation on home sales for the first £30,000 and fuelled the housing boom. He unleashed “a credit revolution” and subsequent heated economy.

Value Added Tax, a regressive tax hitting the poorest hardest, was increased. “Nigel the Tax Terminator” would be his favourite headline in any newspaper during his time at Number 11.

House prices, as all newspapers love to report, went through the roof with increases reaching 22 per cent above inflation.

He then cut taxes on corporate donations to charities, such as those by BP and British American Tobacco to the IEA.

Lawson can also claim credit for ending Britain’s nuclear programme.

He prevented the sale of nuclear plants to the private sector when he realised the cost of clean-up was astronomical.

Thanks to his intervention, the taxpayer would pay the multi-billion pound bill for the legacy of the nuclear experiment.

Led Astray

“The moral of the whole episode is twofold,” according to Lawson. “First, that Ministers can always be led astray by scientific experts. Second, that the dangers of state ownership are greater than even the Thatcher Government had realised.”

Lawson’s greatest mistake, he would accept, was failure to control the boom.

As chancellor, he turned his back on “the discredited neo-Keynesian idea of cutting the Budget deficit by raising tax rates to curb a boom” claiming that it would have “merely destabilised tax rates”.

He also failed to use interest rates to control the market: “My central mistake was undoubtedly to underestimate the strength and duration of the boom of the late 1980s, and thus of the inflationary forces it unleashed,” he wrote in his memoirs four years after his resignation.

“At the start of that resurgence I described it on one occasion as a ‘blip’, an unfortunate expression in the circumstances and one which I was not allowed to forget.” He added: “Looking back, it may be argued that I should have deliberately gone in for shock treatment, and raised interest rates much more sharply in the early stages… Hindsight is a wonderful thing.”

Lawson’s resignation had come at considerable personal cost. The former chancellor would have to move out of Dorneywood where he had spent “eighteen happy months” funded by the taxpayer enjoying the house, its extensive grounds, swimming pool and dedicated staff.

There would be no more nights out with finance ministers watching “highly trained and unfailingly solicitous geisha girls”.

Nor would he be able to raid the Government Hospitality Service wine cellars and enjoy claret “of such splendour that [the French finance minister] Balladur talked longingly about it whenever he saw me for months afterwards.”

From now on, Lawson would concentrate on making money for his own personal treasury. And he would turn to the mass privatisation of Eastern Europe to make his fortunes.

At the end of his political career, what was it all about? “There was one basic principle which guided my own efforts,” Lawson tells us. “The Tory belief should be the opposite one: that income or property belongs to the people who earn it or who have legitimately acquired it, and that a case has to be made for taxing it away.”

“When the trumpets and drums are silent, and the last revisionist tract is off the Press, this is the abiding rift which remains between Left and Right.”

Photo: Google Creative Commons

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