going badly wrong and he knew he was entirely and solely responsible.’ Nigel, like the rest of us, underestimated the depth of the recession to come in Britain and internationally, and believed he could see it out. The argument that he ‘got out just in time’ only came to look plausible much later.
In the first few weeks of my chancellorship my approach to inflation was well received, but months later when the policy really got to grips with the beast it was thought to be callous. Everyone paid lip-service to the principle of cutting inflation, but the hard-edged policies to do so were another matter entirely. But to me, bringing down inflation was pivotal, my constant objective and not an optional extra – and later this was the primary reason for our entry into the ERM. Nigel Lawson had advocated entry as early as 1985, securing the support at the time of Geoffrey Howe, Willie Whitelaw, Leon Brittan and Norman Tebbit. But Margaret – reinforced by Alan Walters’s arguments – said no.
Had there been another route open to us, endorsed, as ERM membership was, by business groups and commentators, I would have been delighted. But there was not. The ERM offered the lodestar we needed and, for all the finger-pointing after ‘Black Wednesday’ in 1992 (see Chapter 14), it worked. I disagree with those who say that inflation would have been tamed successfully by our interest-rate policy alone. But that lay ahead. Now, as chancellor, the problem before me was clear, even if the solution was not. Economic policy was falling apart and needed a new anchor.
Uncertainty over EMU and the ERM was rising, and so was the political temperature within the Conservative Party. The dispute over exchange-rate policy still had the potential to tear the government apart. Europe was a ticking time-bomb. Within days of my appointment as chancellor, Geoffrey Howe, the Deputy Prime Minister – in what Margaret Thatcher later described as a speech of ‘calculated malice’ – stressed that we should honour our obligations to Europe over the ERM. Yet another Cabinet split was signalled. Nigel’s resignation speech attacked the Prime Minister’s whole style of government, reflecting the quiet opinion of a growing number of Tories.
I was also confronted with more immediate problems. The Autumn Statement announcing public spending allocations was only weeks away. The budget would have to be framed in very constrained conditions, and no real work had yet been done on it. And the Community Charge was a millstone that could not be shed, so great was the Prime Minister’s commitment to it. Like every minister I had to make a conscious effort to avoid infuriating Margaret by referring to it as the ‘Poll Tax’. I didn’t always succeed.
On the Sunday following Nigel’s resignation the Prime Minister gave an unconvincing interview on Walden, the influential political programme hosted by Brian Walden, a former Labour MP. Nigel appeared on the programme a week later. They flatly contradicted one another while the Labour Party looked on in delight. As Margaret and Nigel set out their different interpretations of events it was an early illustration of the total disregard for the wider Conservative Party interest that was to become commonplace where European policy was concerned, and was to place the government on the rack.
In Cabinet one of my first tasks was to present a paper Nigel Lawson had prepared on ‘competing currencies’, which was an alternative to the Delors plan for EMU. Whereas the Delors plan was prescriptive and involved the arbitrary abolition of traditional currencies, Nigel’s paper advocated a gradualist, market-led coordination of economic policies across Europe. It was ingenious and inventive – and Cabinet readily accepted it – but even at the time, I think, it was clear that it was never going to work, because in a competition between the pound and the deutschmark, the German currency, with its greater depth, liquidity and credibility, was always going to win.
The scheme received a mixed reception when I presented it at my first ‘ECOFIN’, the EU’s regular monthly meeting of economic and finance ministers, on 13 November 1989. Unfortunately it came too late, and was seen in Europe as a wrecking tactic. The episode illustrated the alarm we felt over our European partners’ continuing enthusiasm for a single European currency. EMU was revived in the mid-eighties by Hans-Dietrich Genscher, the German Foreign Minister, and his French counterpart, Roland Dumas. It was then taken up by Jacques Delors, but would have got nowhere without strong German and French support. The ‘competing currencies’ proposal would not be the last time we tried to head off this Delors-inspired initiative, because of what we saw as its destructive power where our own economy was concerned. Nor was it the last time we were rebuffed.
Back in Britain, the party and the press were keen to learn what I intended to do. Their chance came two days later when, on 15 November, I delivered the Autumn Statement – my first substantial parliamentary appearance as chancellor since Nigel’s resignation. The events of the previous month meant that rather more attention was paid to my performance than might normally have been the case, but at least the annual spending round, which culminated in the Statement, was a part of the Treasury’s work I felt fully at home with. As chief secretary, I had worked with Nigel on his Statement. Now I delivered a package largely prepared by my successor in that job, Norman Lamont.
The forecasts in the Autumn Statement were the first acknowledgement that the economy was slowing down, and they attracted a good deal of attention. As it happened, the forecasts were wrong. It is notoriously difficult to make predictions when an economy is turning either to growth or recession, and most of the forecasts, although gloomier than many expected, were less gloomy than they should have been.
In the three weeks since my appointment I had had only a limited chance to put my mark on the Statement. But that didn’t occur to many journalists, who told their readers that by boosting spending and predicting hard times ahead I had single-handedly broken with the Thatcher – Lawson tradition. In fact it was the economic situation which did the breaking, for most of the spending increases were involuntary, being required simply to keep services at their current level as demand grew. I had not gone off in a new direction, but simply responded to circumstances. Indeed, had Nigel not left, he would have delivered a Statement along similar lines. What’s more, had he had his way on entry into the ERM when he first proposed it, the conditions I inherited might have been somewhat less dire.
The biggest increase in expenditure was on the NHS, and this was largely determined by the needs of the NHS reforms (see here). Financing these reforms was later to be cited as an indication that I had uncorked public spending and thus inflation. In fact this expenditure helped to mitigate the effects of the subsequent recession. The further spirals in inflation resulted from the continuing fall in sterling and the inexorable upward rise in prices that was the legacy of the late-1980s boom.
At the time, the Autumn Statement was well received, politically and economically, but soon after it sterling again came under pressure as a result of political and economic events. A Conservative backbencher, Sir Anthony Meyer, roundly attacked Margaret Thatcher in the Queen’s Speech debate after the State Opening of Parliament on 4 December. He announced the following day that if no one else challenged her leadership, then he would.
Tony Meyer was a loner, a fierce pro-European and a paternalist left-of-centre Tory. It was courageous of him to challenge a well-established prime minister with overwhelming parliamentary and national support, but everyone knew that his challenge would fail. And so it proved, as, after a cursory campaign, the Prime Minister romped home with 314 votes to thirty-three against, with twenty-four spoilt ballot papers and three abstentions. But the fact that there was a contest at all was significant. The challenge gave the markets a jolt, too. By late December sterling had fallen steadily to around DM2.72, thus damaging hopes of lower inflation and, as a result, of a reduction in interest rates.
The Autumn Statement was followed by renewed pressure for an increase in interest rates, which Norman Lamont, the Chief Secretary, supported. Economically, the case was finely balanced, but politically I thought there was no argument for it, and I refused. This was not because I subordinated interest-rate decisions to political considerations, but because given the mood in the markets and in Parliament an increase in rates would not have had the economic effects intended. It would add to the atmosphere of crisis, create political panic, ignite yet greater dissatisfaction in Parliament, and so rule out any good it might have done.
Margaret Thatcher knew that an increase