For good or ill, the modern British economy was forged in the 1980s. The deregulated labour market, the dominance of the City, the north-south divide, the privatised public utilities, high levels of personal debt, the chronic trade deficit and the key role played by the housing market are all legacies of the decade when Margaret Thatcher was prime minister.
It was perhaps appropriate, then, that Jeremy Hunt paid homage to the 80s in his autumn statement with frequent name checks of Nigel Lawson, Thatcher’s chancellor for six years after 1983.
Hunt has only been chancellor for five minutes and so it is too early to pass judgment on him, let alone whether he will match his predecessor for significance. He will be relieved that the autumn statement received a better reception from the financial markets than did Kwasi Kwarteng’s mini-budget (a low bar to clear, admittedly) and Hunt can claim some credit for sequencing his measures to limit the damage to the economy when it is especially weak.
There has been plenty of focus on the 7% cumulative drop in living standards in the 2022-23 and 2023-24 financial years predicted by the Office for Budget Responsibility, and rightly so. If the forecasts are correct, there will have been nothing comparable since modern records began.
Arguably, though, the recessions of the early 1980s and 1990s were more brutal, because today everybody is taking a hit to their spending power while in those previous downturns the pain was concentrated among those who lost their jobs. Unemployment is set to rise over the next 18 months but to nowhere near the double-digit levels seen for most of the 1980s and again in the early 1990s. Britain still bears the scars of the mass joblessness of that period.
But while Hunt had a plan for the short term – hug the markets close, defer most of the austerity until after the next election – it is not immediately obvious that he and Rishi Sunak have a plan for the long term, let alone a vision for the kind of Britain they want to see. Sunak and Hunt have a blueprint for reducing the deficit but it goes little further than that. One senior Labour MP aptly summed up the state of the government when he said Britain currently had two chancellors but no prime minister.
An example of that was the decision to extend vehicle excise duty to owners of electric cars in 2025. Incentives matter, and one incentive for switching from petrol or diesel cars is not having to pay road tax. Demand for electric vehicles – given the squeeze on household budgets – is unlikely to be especially strong for the next year or so but people may start to think about making the switch as the economy starts to pick up in 2024 and 2025.
To be sure, the loss of fuel duty when all cars are electric is a big headache for the Treasury, which stands to lose £30bn of revenue a year by 2040 on some estimates. But the long-term solution is road pricing, not cash grabs that will slow up a necessary transition to cleaner vehicles.
There are many accusations that could be thrown at Thatcher and Lawson, but the lack of a plan is not one of them. Their strategy was to deregulate and allow market forces to operate freely. It involved reducing the power of trade unions and selling off state-owned industries. Lawson was keen not just on cutting taxes but on making the tax system simpler.
In the end he blew up the economy with an extraordinary boom-bust that led to a prolonged period of 15% interest rates, record home repossessions and 3 million people on the dole. But as John Muellbauer and David Soskice note in a new essay, the 1980s experiment changed Britain profoundly. “The 1980s were a highly consequential as well as divisive decade, which changed the facts on the ground and shifted the political economy of the country in ways that we are still living with,” they say.
One feature of the period was the symbiotic relationship between housing policy and financial deregulation. Banks freed from limits on their lending were only too willing to provide the mortgages for those keen to buy their discounted council homes under right-to-buy legislation. The supply of new homes fell sharply because the stock of socially owned properties was not replenished. Rising house prices in the more prosperous parts of the country limited labour mobility. Britain had a new economic model but it was inherently unstable, inherently unproductive and inherently unfair.
As Muellbauer and Soskice point out, it was in the 1980s that the idea became embedded in British middle-class culture that housing wealth, ramped up through high levels of borrowing, could act as a cash machine.
This is more than a history lesson. There are similarities between the current crisis and the state of Britain when Thatcher arrived in Downing Street in 1979: high inflation caused by repeated supply side shocks, and a sense of pessimism that longstanding economic weaknesses will ever be addressed.
The model that Thatcher created collapsed in the global financial crisis of 2008-09 and nothing has taken its place. Conservative governments since 2010 have talked about their mission to green the economy and level up, but have promised far more than they have delivered.
Only twice since the second world war – the Clement Attlee-led government in 1945 and Thatcher in 1979 – has an administration come to power in Britain with a plan for fundamental change and stuck to it. For the rest of the time, the tendency has been to muddle through and hope for the best. Hunt and Sunak appear to be firmly part of that tradition.