The Downing Street Years, 1979-1990

The 1980s saw the rebirth in Britain of an enterprise economy. This was by and large a decade of great prosperity, when our economic performance astonished the world. Whereas Britain lagged behind other European Community countries in the 1960s and 1970s, our economy grew faster in the 1980s than all of them except Spain. Whereas most European economies in the 1980s grew more slowly than they had the previous decade, the British economy grew faster. From 1987 there were classic signs of ‘overheating’ and initial confusion about what monetary indicators were showing. Nigel Lawson’s shadowing the deutschmark meant that we did not take action early enough to tighten monetary policy. That is not to say that the surge of prosperity in these years was just or even mainly the result of an artificial consumer boom. It was more soundly based than that. The current account deficit which became a real problem must not obscure — indeed to some degree it reflected — the fact that industry was investing in the future during these years: in the 1980s British business investment grew faster than in any other major industrial country, with the exception of Japan. Profitability rose, and so did productivity. The improvement in British manufacturing industry’s productivity in the 1980s was greater than in any other major industrial economy. New firms grew and expanded. New jobs followed — 3,320,000 of them created between March 1983 and March 1990.

It is, therefore, as important to understand what went right in these years as what went wrong. Provided that the benefits are not reversed by a combination of imprudent management of the public finances and Euro-regulation, the fundamental improvements in the British economy in the 1980s will endure. Where the problem arose was on the ‘demand side’ as money and credit expanded too rapidly and sent the prices of assets soaring, particularly non-internationally traded goods like houses. This spiral was clearly unsustainable and had to break or be broken. By contrast the ‘supply side’ reforms were highly successful. These were the changes which made for greater efficiency and flexibility and so enabled British business to meet the demands of foreign and domestic markets. Without them, the economy would not have been able to grow so fast and deliver such improvements in profits, living standards and employment: in short, the country would have been poorer.

Trade union reform was crucial. The most important changes were those made between 1982 and 1984, which have already been described in some detail. But the process continued right up to the time I left office. The 1988 Employment Act, based on our manifesto pledges, strengthened rights of individual trade unionists against industrial action organized by their unions without a ballot and against the unions’ attempts to ‘discipline’ them if they refused to go out on strike. It also instituted a special commissioner to help individual union members exercise their rights and opened up trade union accounts for inspection. The 1990 Employment Act concluded the long process of whittling away at the closed shop, which had held so many in its vicious thrall in the 1970s. It now became unlawful to deny someone a job because they were — or were not — a member of a trade union. These reductions in trade union power, together with the reinforcements of individual trade unionist’s rights and responsibilities, were crucial to a properly functioning labour market, in which restrictive practices were overcome and unit labour costs kept down below the levels they would otherwise have reached. The abolition of that monument to modern Luddism — the National Dock Labour Scheme[88] — was another blow to restrictive practices.

Such reforms had a continuing and beneficial effect. It was not just that they allowed management once more to manage and so ensured that investment was once again regarded as the first call on profits rather than the last; they also helped change the attitudes of employees to the businesses for which they worked, and in which they increasingly held shares. So in my last year in office there were fewer industrial stoppages than in any year since 1935: under two million working days were lost in this way, compared with approaching thirteen million a year on average during the 1970s. Still too many, by the way.

But there were other changes aimed at improving the quality of the workforce by helping people to obtain the right qualifications and experience for the jobs now available. In my last year as Prime Minister some two and a half times as much — in real terms — was being spent by government on training as under the last Labour Government. Of course, there is always a danger that ‘training’ becomes an end in itself, with its own bureaucracy and momentum, particularly when public funds on this scale are involved. So I was keen that as much as possible of the administration and decision-taking in these great state-funded programmes should be decentralized. Training and Enterprise Councils (TECs) were set up from 1988 to take over responsibility for the delivery of these programmes. They consisted of groups of local employers, who knew more than any ‘expert’ what skills were actually going to be needed.

Another innovation in which I took a keen interest was the use of Training Vouchers — which because of the corporatist sensibilities of the training establishment I was always being urged to describe as ‘Credits’. Under this scheme, school leavers were given the choice of where they would use their voucher to purchase a certain amount of training from an employer, a local further education college or other approved body. The basic psychology was that of any voucher: when someone can exercise power over his own future he will take a closer interest in it than under any system of central direction. And there is absolutely no reason why those who are in receipt of state funding should be deprived of choice or responsibility. This idea was at the heart of the ‘empowerment’ approach of our 1987 manifesto reforms and is, perhaps, of even more pressing relevance today when the threat of welfare dependency is widely recognized.

Housing is vital to a properly working labour market.[89] If people cannot move to regions where there are jobs — ‘getting on their bike’, to quote Norman Tebbit’s immortal phrase — there will remain pockets of intractable unemployment. And the less willing or able they are to move, the greater call there will be for state intervention to force or bribe firms to go to commercially unsuitable locations to provide the jobs. The private rented sector of housing would be the ideal source of cheap, often temporary, accommodation of the sort that those seeking work are likely to want. After decades of rent control, however, private landlordism — almost uniquely in Britain — is popularly associated with exploitation and bad conditions. This meant that it was never possible to take the radical action needed to reverse the shrinkage in rented housing which has got steadily worse since the First World War.

In our 1987 manifesto we promised — and subsequently in our 1988 Housing Act introduced — some measures to revive the private rented sector. We further developed the two schemes — originally introduced in 1980 — of the shorthold tenancy (short lets at market rents, after which the landlord can regain possession) and the assured tenancy (also market rents but with security of tenure). These measures had some effect, at least halting the shrinkage in private rented housing; but there will need to be a sea change in attitudes if it is ever to grow to make a major contribution to labour mobility.

By contrast, council housing is the worst source of immobility. Many large council estates bring together people who are out of work but enjoy security of tenure at subsidized rents. They not only have every incentive to stay where they are: they mutually reinforce each other’s passivity and undermine each other’s initiative. Thus a culture grows up in which the unemployed are content to remain living mainly on the state with little will to move and find work.

So the great increase in private home ownership in my years as Prime Minister and the corresponding reduction of the public sector’s share of the housing stock was an important benefit to the economy. Attempts were made to deny this on narrow financial grounds. In particular, it was said that through mortgage tax relief too much of the nation’s saving has been channelled into bricks and mortar, too little into industry. This I never found convincing. First, it overlooks the fact that many people whose main means of saving is by buying their house on a mortgage would probably not otherwise invest their money in shares or set up businesses: however pervasive an enterprise culture is, most people are not born entrepreneurs. Indeed, buying a house is for many people the gateway to other investments. Second, the idea that British industry has fallen behind in recent decades because of a lack of investment is at best a half-truth. The fact is that much of the investment has been of the wrong sort and wrongly directed. What Britain lacked in the past was the right opportunities to make use of the investment available — because of low productivity, poor labour relations, low profits and bad management. What is true is that a high level of home ownership does need to be complemented by a sufficiently large private rented sector, as ours is not. On this score we were only half successful and the private rented sector is an area in which, given time, I would have liked to do more.

It was a different story with deregulation of business. Year after year — and with a further boost from David Young when he went to the Department of Trade and Industry in June 1987 — unnecessary regulations on business were identified and duly scrapped. David Young also shifted the emphasis of the assistance received from the DTI towards job creation, small firms and innovation. It was not just a piece of gimmickry when what had principally been a sponsoring Department for state-owned industries and heavy manufacturing was rechristened the ‘Department for Enterprise’. The importance of a continuing drive for deregulation is that otherwise reregulation is never far behind. All the pressures of modern living (or at least of modern politics) are for more controls — to protect consumers, to protect investors, to protect the environment and, increasingly, to protect powerful lobbies in the European Community. But the general truth gets lost that more regulation means higher costs, less competitiveness, fewer jobs and thus less wealth to raise the real quality of life in the long run.

All of these areas — trade union power, training, housing and business regulation — were ones in which in varying degrees we made progress in strengthening the ‘supply side’ of the economy. But the most important and far-reaching changes were in tax reform and privatization. Tax cuts increased incentives for the shop floor as well as the board room. Privatization shifted the balance away from the less efficient state to more efficient private business. They were the pillars on which the rest of our economic policy rested.

TAX CUTS AND TAX REFORMS

Nigel Lawson’s tax reforms mark him out as a Chancellor of rare technical grasp and constructive imagination. We had some differences — not least about mortgage tax relief which he would probably have liked to abolish and whose threshold I would certainly have liked to raise. But Nigel did not generally like to seek or take advice. Doubtless he felt he did not need to. His was precisely the opposite of the collegiate style which Geoffrey Howe before him practised. Nigel preferred to take me through his budget proposals when he already had them well worked out and without any private secretary present to take notes. He liked to do this over dinner at No. 11 one Sunday towards the end of January. Had I restricted informing myself of his plans to these formal occasions it would have been difficult for me to have any real influence; for to digest issues of such complexity over after-dinner coffee would put a strain on anyone’s system. But in fact, Treasury spies, realizing that this was an impossibly secretive way of proceeding with someone who after all was ‘First Lord of the Treasury’, furtively filled me in — with the strictest instructions not to divulge what I knew — before Nigel proudly announced to me his budget strategy. This at least put me in a better position to question the proposed fiscal stance or to object to individual measures.

But the fact remains that Nigel’s budgets were essentially his. And just as I hold him largely responsible for the errors of policy which threw away our success on inflation, so I have no hesitation in giving him the lion’s share of the credit for the ingenious measures in his budgets.

The distinctive marks of Nigel’s budgets were clarity and cleverness. Whereas Geoffrey Howe was instinctively a Chancellor who liked well-balanced packages of measures, Nigel Lawson liked a budget with everything based on one central theme and purpose. Geoffrey was always one to go for the prudent course, even if the effect was un-dramatic, whereas Nigel’s search for the brilliant solution to a fiscal problem could lead him to risk all on a winning streak. He was, indeed, a natural gambler.

But the 1984 budget showed Nigel at his brilliant best. He abolished the Investment Income Surcharge, which was a grossly unfair charge on often elderly savers, and finally got rid of the National Insurance Surcharge, which Geoffrey had already cut. But his most important reform was the phasing out of tax reliefs for business at the same time as he cut Corporation Tax rates, so improving the direction and quality of business investment and greatly increasing incentives for business success. Nineteen eighty-five was a less remarkable budget, but like that of 1984 raised personal income tax allowances well above inflation. In 1986 he made what I considered just the right political judgement by cutting the basic rate of income tax by one penny, which was in effect a statement that we would not ignore the basic rate in future budgets when there was more fiscal leeway. He also introduced Personal Equity Plans (PEPs) to encourage personal investment in shares as a way of encouraging popular capitalism. In 1987 he cut two pence more off the basic rate, but balanced what might have seemed a pre-election ‘give away’ with the incorporation within the MTFS of the objective of a PSBR of 1 per cent of GDP, as a standard of fiscal prudence.

More controversial was Nigel’s 1988 budget. I certainly had my doubts at the time. I felt — rightly — that the overall financial conditions had become too loose. Although it is monetary not fiscal policy which has the decisive role in controlling inflation it is right to look at taxes and borrowing too. Not only does the level of government borrowing influence the level of interest rates needed to exert monetary control; there is also an argument that if the private sector is borrowing too much and saving too little — which is what happened in 1988 and 1989 as the savings ratio fell to 5.6 and 6.6 per cent — you should make up for this by raising taxes and cutting government borrowing (or increasing government debt repayment).

I began by questioning the size — though not the kind — of tax cuts Nigel now proposed, partly for these reasons and partly because I felt — again rightly — that big income tax cuts in a climate of excessive consumer and business confidence may have a psychological effect, not directly predictable by the dubious science of economics, but real nonetheless. They might fire up what already seemed to be overheating. In fact, the figures which I saw on the eve of the budget for the very large public sector debt repayment (PSDR) or budget surplus — forecast in the budget at £3 billion (though the figure was distorted by privatization proceeds) — considerably reassured me. Moreover the budget surplus out-turn for 1988–9 was some £14 billion. I therefore believe that — with one apparently technical but in fact significant qualification — Nigel’s 1988 budget was a success. The cuts in the basic rate of income tax to 25 pence and the top rates to 40 pence provided a huge boost to incentives, particularly for those talented, internationally mobile people so essential to economic success.

The technical point which had such practical consequences was a change in the system of mortgage tax relief, by which the £30,000 limit would no longer apply to each individual purchasing a property but rather to the house itself. This removed the discrimination in favour of unmarried cohabiting couples. Though announced in April, however, it only took effect from August. This gave a huge immediate boost to the housing market as people took out mortgages before the loophole ended, and it happened at just the wrong time, when the housing market was already overheating. That said, the overall tax changes in the 1988 budget were of the right size and direction. If they had not been accompanied by a loose monetary policy, all would have been well.

By 1989 even Nigel’s usual apparently limitless confidence about our economic prospects had become dented. Monetary policy had been tightened sharply to cut back inflation. But what about fiscal policy? It was clear that the budget surplus was a reflection at least as much of the runaway pace of economic growth raising tax revenues as of underlying financial soundness; even so it was difficult to argue that such a large budget surplus should be increased still further.

And indeed when I saw Nigel for our usual discussion on Sunday 12 February, I found less difficulty than usual in persuading him to see things my way. I urged him to revise his Cabinet paper, to be less complacent, to drop the idea of a further one-penny cut in income tax (which I said would look wrong psychologically), to forget his proposal to remove the tax on the basic retirement pensions and to scrap the earnings rule instead.[90] I also said that there must be no loosening of monetary policy. He went along with all this: he then used some of the revenue in hand to make sensible changes in the structure of employees’ national insurance contributions.

But Nigel decided not to raise the excise duties with inflation, giving an artificial downward twist to the inflation figure, which enabled him to predict that inflation would rise to about 8 per cent before falling back in the second half of the year to 5.5 per cent and perhaps 4.5 per cent in the second quarter of 1990. However, by the second quarter of 1990 it was to reach not 4.5 per cent but approaching 10 per cent. The degree of inflation that shadowing the deutschmark had injected into the system was greater than anyone, including Nigel, had realized. But by 1990 Mr 10 per cent had departed and others were left to deal with the consequences.[91]

John Major was in some ways all too different from Nigel Lawson as Chancellor. It seemed strange to me that, having been a competent Chief Secretary, he did not feel more at home with tackling the difficult issues he now faced when he returned to the Treasury. But probably Nigel had made all the important decisions and John had not had much of a look in. As preparation for the 1990 budget, we had a seminar attended by John and me, Richard Ryder, the Economic Secretary to the Treasury, and officials. (Nigel would never have dreamed of such a thing before a budget.) It did not get us very far, which was not John’s fault: the problem was that by now none of us had any faith in the forecasts. I found myself in disagreement with John on only one issue: I stopped consideration being given to a new tax on credit. I had a good deal of sympathy with the proposition that banks and building societies had made credit too easily available and that this was leading feckless or just inexperienced borrowers into debt. But I never doubted that if we once tried to stop this by imposing a tax on it, all that general support which puritanical policies evoke in principle would soon turn into a hedonistic outcry as video recorders, expensive lunches, sports cars and foreign holidays moved out of financial reach. The tax would also have put up the RPI, though this would have been a once-and-for-all effect only. In fact, within the little room for maneouvre available in these circumstances, John Major’s only budget was a modest success, containing several eye-catching proposals to boost the woefully low level of savings. But by then it would take more than a sound budget — more even than a Prime Minister and Chancellor who subscribed to the same policies — to avert the political and economic consequences of allowing inflation to rise.

The fact that the return of inflation and then recession obscured the benefits of the tax changes Nigel Lawson’s budgets made does not mean that those benefits had evaporated. Inflation distorts; but, once tamed again, it turns out not to have destroyed the improvements in economic performance which lower and simpler taxes bring. Only one thing can undermine these supply side benefits: that is letting public expenditure get out of control, which puts up borrowing and which eventually requires tax increases that destroy incentives. When I left office both public spending and borrowing were under tight control. Indeed, we were still budgeting for a surplus. And during my period of office public spending fell as a share of GDP from 44 per cent in 1979–80 to 40.5 per cent in 1990–91. It has since risen to 45.5 per cent of GDP (1993–4) and public sector borrowing to around £50 billion, some 8 per cent of GDP. These figures bring strange echoes of the past. In politics there are no final victories.

PRIVATIZATION

Privatization, no less than the tax structure, was fundamental to improving Britain’s economic performance. But for me it was also far more than that: it was one of the central means of reversing the corrosive and corrupting effects of socialism. Ownership by the state is just that — ownership by an impersonal legal entity: it amounts to control by politicians and civil servants; and it is a misnomer to describe nationalization, as the Labour Party did, as ‘public ownership’. But through privatization — particularly the kind of privatization which leads to the widest possible share ownership by members of the public — the state’s power is reduced and the power of the people enhanced. Just as nationalization was at the heart of the collectivist programme by which Labour Governments sought to remodel British society, so privatization is at the centre of any programme of reclaiming territory for freedom. Whatever arguments there may — and should — be about means of sale, the competitive structures or the regulatory frameworks adopted in different cases, this fundamental purpose of privatization must not be overlooked. That consideration was of practical relevance. For it meant that in some cases if it was a choice between having the ideal circumstances for privatization, which might take years to achieve, and going for a sale within a particular politically determined timescale, the second was the preferable option.

But, of course, the narrower economic arguments for privatization were also overwhelming. The state should not be in business. State ownership effectively removes — or at least radically reduces — the threat of bankruptcy which is a discipline on privately owned firms. Investment in state-owned industries is regarded as just another call on the Exchequer, competing for money with schools or roads. As a result, decisions about investment are made according to criteria quite different from those which would apply to a business in the private sector. Nor, in spite of valiant attempts to do so (not least under Conservative governments) can one find an even moderately satisfactory framework for making decisions about the future of state-owned industries. Targets can be set; warnings given; performance monitored; new chairmen appointed. These things help. But state-owned businesses can never function as proper businesses. The very fact that the state is ultimately accountable for them to Parliament rather than management to the shareholders means that they cannot be. The spur is just not there.

Privatization itself does not solve every problem; though, as I shall show, it certainly exposed hidden problems which could thus be tackled. Monopolies or quasi-monopolies which are transferred to the private sector need careful regulation to ensure against abuses of market power, whether at the expense of competitors (if there are such) or of customers. But on regulatory grounds there are good arguments for private ownership as well: regulation which had, when in the public sector, been covert now had to be overt and specific. This provides a clearer and better discipline. And more generally, of course, the evidence of the lamentable performance of government in running any business — or indeed administering any service — is so overwhelming that the onus should always be on statists to demonstrate why government should perform a particular function rather than why the private sector should not.

Now that almost universal lip service is paid to the case for privatization it is difficult to recall just how revolutionary — how all but unthinkable — it seemed at the end of the 1970s. Our 1979 manifesto had been quite cautious on the subject, promising: ‘to sell back to private ownership the recently nationalized aerospace and shipbuilding concerns, giving their employees the opportunity to purchase shares’ and selling ‘shares in the National Freight Corporation to the general public’.

The depth of the recession meant that there was not much prospect of successful privatization in the early years, due to low market confidence and large nationalized industry losses. But, for all that, by the time of the 1983 election British Aerospace and the (now) National Freight Consortium were flourishing in the private sector, the latter after a spectacularly successful management and worker buy-out; Cable and Wireless, Associated British Ports, Britoil (a nationalized North Sea oil exploration and production company set up by Labour in 1975), British Rail Hotels and Amersham International (which manufactured radioactive materials for industrial, medical and research uses) had also in whole or in part been moved back to private ownership.

The huge losses of British Shipbuilding and the massive restructuring required of British Airways prevented their sale for the moment; though in both cases the prospect of privatization was an important factor in asserting tighter financial discipline and attracting good management. The British Telecom Bill — to privatize BT — had only fallen with the old Parliament and would be introduced with the new. The 1983 manifesto mentioned all of these as candidates for privatization as well as Rolls-Royce, substantial parts of British Steel and of British Leyland and Britain’s airports. Substantial private capital would also be introduced into the National Bus Company. And there was the repeated promise of shares offered to employees in the companies concerned. Perhaps the most far-reaching pledge, though, was that we would seek to ‘increase competition in, and [attract] private capital into the gas and electricity industries’. Gas was indeed privatized in 1986. The more complicated and ambitious privatization of electricity had to wait for the next Parliament.[92] In the 1987 manifesto both electricity and the water industry were the main candidates for privatization. So over these years privatization had leapt from fairly low down to somewhere near the top of our political and economic agenda. This continued to be so for the rest of my time in office. Why?

One reason I have already touched upon. Economic conditions improved and the prospects for privatization improved with them. But there is a further reason. Our privatization programme was constantly breaking new ground. Each industry posed its own special problems. Each flotation or trade sale raised separate issues. It is one of the disadvantages of being in the vanguard of reform — as the British who pioneered the industrial revolution know well — that the only experience you can learn from is your own. Gradually, the general emphasis switched from privatization of industries whose nationalization was justified only by socialist dogma, to that of public utilities where the arguments were more complex.

I was always especially pleased to see businesses which had absorbed huge sums of taxpayers’ money and been regarded as synonyms for Britain’s industrial failure pass out of state ownership and thrive in the private sector. The very prospect of privatization compelled such companies to make themselves competitive and profitable. Lord King turned round British Airways by a bold policy of slimming it down, improving its service to the customer and giving its employees a stake in success. It was sold as a thriving concern in 1987. British Steel, which had absorbed vast subsidies in the 1970s and early ’80s, re-entered the private sector as a profitable company in 1988. But it was perhaps BL (now known as the Rover Group) whose return to private ownership caused me most satisfaction — in spite of the almost endless arguments about how much its private sector purchaser, the once state-owned British Aerospace, had received.

Rover had by now a superb Chairman in Graham Day who had been making great efforts to do what I had always hoped would be done — dispose of surplus assets and increase the drive for higher productivity. But that did not mean that I was happy with the sort of figures the company’s Corporate Plans contained. It retained an apparently insatiable appetite for cash — it had absorbed £2.9 billion of public money in total since we came to office in 1979 — and the Government’s liabilities under the Varley-Marshall assurances remained at some £1.6 billion. The earlier anti-American hysteria about takeovers by foreign companies of our British car production meant that the prospects for sale of the main car business did not look promising,[93] though both Ford and Volkswagen continued to express some interest.

This was the position when, just before Christmas 1987, there were signs that British Aerospace might be interested in acquiring Rover. I was not immediately clear that British Aerospace’s was a serious offer. But it soon turned out that it was. There was an industrial logic in the acquisition, for the car business — if relieved of its burden of debt and provided with a substantial injection of new investment — would complement the rest of BAe’s business. Aerospace depends on gaining a few huge contracts at inevitably irregular intervals; cars satisfy a steadier market. And, of course, the sale to BAe would have one marked political advantage: the company would stay British.

David Young was subsequently heavily criticized for the way in which the deal was struck. In fact, he played a difficult hand with great aplomb. The special financial provisions of the deal only reflected the poor state of BL after years of state ownership and wasted investment. That the terms had to be revised reflected the new interest of the European Commission in probing the details of state aid to industry, rather than being a reflection on the basic soundness of the deal itself.

Only satisfied customers can ultimately guarantee the future of a business or the jobs depending on it and Rover could not be an exception to that rule. But the effects of the disastrous socialist experiment to which the company had been subject had now been overcome; and Rover was back in the private sector where it belonged.

PRIVATIZATION OF PUBLIC UTILITIES

British Telecom was the first utility to be privatized. Its sale did more than anything else to lay the basis for a share-owning popular capitalism in Britain. Some two million people bought shares, about half of whom had never been shareholders before. But the relationship between privatization and liberalization — that is opening up telecommunications to wider competition — was a complex one. The first steps of liberalization had begun under Keith Joseph who split British Telecom from the Post Office, removed its monopoly over telephone sales and licensed Mercury to provide a competing network. Further liberalization took place at the time of privatization.

But if we had wanted to go further and break up BT into separate businesses, which would have been better on competition grounds, we would have had to wait many years before privatization could take place. This was because its accounting and management sytems were, by modern standards, almost nonexistent. There was no way in which the sort of figures which investors would want to see could have been speedily or reliably produced. So I was well satisfied when, after the delay which had been caused by the need to withdraw the original bill with the advent of the 1983 general election, British Telecom was eventually successfully privatized in November 1984.

At the same time, a system of regulation was established under the control of an Office of Telecommunications (OFTEL) with the result that BT had to keep its price increases at a fixed level below the rate of inflation for a number of years. This was a quite new and — as it has turned out — influential departure. Not only did the ‘RPI minus x’ formula become the model for dealing with public utility privatizations in Britain: it has since been adopted overseas, for example in the United States.

The consequences of privatization for BT were seen in a doubling of its level of investment, now no longer constrained by the Treasury rules applying in the public sector. The consequences for customers were just as good. Prices fell sharply in real terms, the waiting list for telephones shrank and the number of telephone boxes in operation at any particular time increased. It was a convincing demonstration that utilities were better run in the private sector.

Many of the same issues arose in the privatization of British Gas, which had been a nationalized industry for nearly forty years. BGC had five main businesses. These were: the purchase of gas from the oil companies which produced it; the supply of gas, involving the transmission and distribution of gas from the beach-head landing points to the customer; its own exploration for and production of gas, mostly from offshore fields; the sale of gas appliances through its showrooms; and the installation and servicing of those appliances. Of these functions only the second — the supply of gas to consumers — could be described as a natural monopoly. But there were a number of considerations which argued against fundamentally restructuring or breaking up the business. The most important of these, curiously enough, was lack of parliamentary time. Consideration of privatization had inevitably been held up by the miners’ strike of 1984–5. Both the BGC and Energy Secretary, Peter Walker, were determined to privatize BGC as a whole and their full co-operation was essential if it were to be achieved as I wanted during our second term. There was much to be said for using the model of British Telecom rather than trying to come up with a fundamentally different one under these conditions.

Accordingly, at a meeting I held with Peter Walker, Nigel Lawson and John Moore on Tuesday 26 March 1985 I agreed that we should go for a sale of the whole business. The formula for regulation and the issue of liberalizing imports and exports of gas became the focus of much argument between Peter Walker who was prepared to accept a degree of monopoly as the price of early privatization on the one hand, and the Treasury and the DTI on the other who would have preferred stronger competition from the first. We were able to liberalize gas exports but I went along with most of Peter Walker’s arguments in order to achieve privatization in the available timescale. I still think I was right to do so because the privatization was a resounding success. (The problems of the monopoly power of British Gas are now being investigated by the Monopolies and Mergers Commission.) Four and a half million people invested in the shares, including almost all of the company’s 130,000 employees.

The privatization of the water industry was a more politically sensitive issue. Much emotive nonsense was talked along the lines of, ‘look, she’s even privatizing the rain which falls from the heavens.’ I used to retort that the rain may come from the Almighty but he did not send the pipes, plumbing and engineering to go with it. The Opposition’s case was even weaker than this, for about a quarter of the water industry in England and Wales had long been in the private sector. Of more significance was the fact that the water authorities did not just supply water: they also safeguarded the quality of rivers, controlled water pollution and had important responsibilities for fisheries, conservation, recreation and navigation. It was Nick Ridley — a countryman with a natural feel for environmental issues — who, when he became Environment Secretary, grasped that what was wrong was that the water authorities combined both regulatory and supply functions. It made no sense that those who were responsible for the treatment and disposal of sewage, for example, should also be responsible for regulating pollution. So the bill which Nick introduced also established a new National Rivers Authority. Privatization also meant that the companies would be able to raise money from capital markets for the investment needed to improve the water quality.

The most technically and politically difficult privatization — and the one which went furthest in combining transfer of a public utility to the private sector with radical restructuring — was that of the Electricity Supply Industry. The industry had two main components. First, there was the Central Electricity Generating Board (CEGB) which ran the power stations and the National Grid (the transmission system). Second, there were the twelve Area Boards which distributed the power to customers. (In Scotland there were two companies running the industry — the South of Scotland Electricity Board and the North of Scotland Hydro Board.) Some attempt had been made in Nigel Lawson’s 1983 Energy Act to introduce competition into the system. But it had had no practical effect. As a result the whole of the industry was based on monopoly. The CEGB had a monopoly nationally and the Area Boards monopolies regionally. The challenge for us would be to privatize as much as possible of the industry while introducing the maximum amount of competition.

I had an initial discussion about electricity privatization with Peter Walker and Nigel Lawson on the eve of the 1987 general election. I did not intend to keep Peter at Energy so there was no point in going into detail. But we did agree that the pledge of privatization should be included in the manifesto and be given effect in the next Parliament.

When Cecil Parkinson took over as Energy Secretary after the election he found that the department’s thinking had been strongly influenced by Peter Walker’s corporatist instincts — and by their recognition that Walter Marshall would be passionately opposed to the break-up of the CEGB of which he was chairman. The prevailing idea seemed to be that the CEGB and the National Grid would be floated as one company and the twelve Area Boards would be combined into another. This would have done no more than change a monopoly into a duopoly; but Cecil changed all this. He was subsequently the butt of much malicious and unjust criticism because of the changes which his successor, John Wakeham, had to make in his original privatization strategy, particularly in connection with the nuclear power stations. In fact, it was Cecil who took the bold and right decision to reject both corporatist thinking and vested interests by breaking up the CEGB and — most crucially — removing from its control the National Grid. The grid would now be owned jointly by the twelve distribution companies created from the old Area Boards rather than by the CEGB. Whereas under the old system the controller of the grid was also its near monopoly supplier, control would now be with those who had the strongest interest in ensuring that as much competition as possible be allowed to develop in power generation. These two decisions meant that competition became effective.

Cecil Parkinson was working towards this model over the summer of 1987 and in September we had a seminar at Chequers to look at the options. At this stage none was ruled out, but I insisted that all the legislation must be enacted before the end of that Parliament. Cecil continued to work up the plans and discussed them again with me and other ministers in mid-December. No one was attracted by solutions which retained a monopoly of generation for the CEGB or its continued ownership of the grid. The real question was whether the CEGB should be divided up into just two or as many as four or five competing generating companies. Nigel Lawson favoured the more radical option. The trouble was that it was difficult to see any of these companies being large enough to keep up the very costly development of nuclear power, which I regarded as essential both in order to ensure security of power supply and for environmental reasons.

There was also Walter Marshall to consider. Not only did I like and admire him. I also felt that we all owed him a great debt for having kept the power stations working during the miners’ strike. He was opposed to any break-up of the CEGB, but he might just be willing to go along with a two-way split in which the larger company retained the nuclear power stations. There was no way in which he would have stayed on if the CEGB had been split into four. I could not, of course, allow his views to be decisive: nor did I do so. But I hoped to obtain his and his colleagues’ co-operation in the difficult transition to the new privatized and competitive system. So at a meeting in mid-January I came down on the side of the solution that Cecil favoured. But I added that this did not preclude moving at some future time to the more competitive model which Nigel Lawson would have preferred.

Later that month I agreed that the split in capacity between the two new proposed generating companies should be 70/30. This was the plan which I tried to sell to Walter Marshall when he came in with Cecil Parkinson for a long talk one February evening. Walter — never averse to blunt speaking — did not conceal his disagreement with the approach we favoured. I agreed with him — as he knew I did — about the great importance of nuclear power. But I did not think that its prospects would be damaged by our plans. Again and again I insisted that whatever structure we created must provide genuine competition. I often found that straight talking pays dividends. On further consideration and after further discussions with Cecil, Walter Marshall said that though the CEGB would express regret at what we had decided he was prepared to make the system work. Cecil Parkinson’s plans were also strongly opposed by Peter Walker who suggested that it would take at least eight years before there was any chance of completing this competitive model of privatization. None of us was convinced by this. So on Thursday 25 February Cecil could make his statement to the House of Commons setting out how we intended to privatize electricity.

This, though, was by no means the end of the matter. As always, the prospect of privatization meant that the finances of the industry were subject to searching scrutiny, perhaps for the first time ever. And what came to light was extremely unwelcome. For environmental reasons and to ensure security of supply, I felt it was essential to keep up the development of nuclear power. The real cost of nuclear energy compared with other energy sources is often overrated. Coal-fired power stations pour out carbon dioxide into the atmosphere and no one has yet put a credible figure on what it will ultimately cost to deal with the resulting problem of global warming. But the fact remained that there would be an immediate extra cost from nuclear energy which consumers would have to bear. This was tolerable if not popular.

But in the autumn of 1988 the figures for the cost of decommissioning the now ageing power stations were suddenly revised sharply upwards by the Department of Energy. These had been consistently underestimated or perhaps even concealed. And the more closely the figures were scrutinized the higher they appeared. By the summer of 1989 the whole prospect for privatizing the main generating company which would have the nuclear power stations started to look in jeopardy. So I agreed that the older Magnox power stations should be taken out of the privatization and remain under government control. This was one of Cecil’s last actions at Energy and it fell to his successor, John Wakeham, to deal with the rest of the nuclear problem.

Alan Walters had been urging from the previous autumn that all the nuclear power stations should be removed from the privatization. As so often, he turned out to be right. It was never a matter of safety, which could perfectly well have been ensured in the private sector, but rather of cost. The figures for decommissioning the other power stations started to look uncertain and then to escalate, just as those for Magnox had done. John Wakeham recommended and I agreed that all nuclear power in England and Wales should be retained in state control. One consequence of this was that Walter Marshall, who naturally wanted to retain the nuclear provinces in his empire, decided to resign, about which I was very sad. But the other consequence was that privatization could now proceed, as it did, with great success, to the benefit of customers, shareholders and the Exchequer.

The result of Cecil Parkinson’s ingenious reorganization of that industry on competitive lines is that Britain now has perhaps the most efficient electricity supply industry in the world. And as a result of the transparency required by privatization we also became the first country in the world to investigate the full costs of nuclear power — and then to make proper financial provision for them.

PLANS FOR FURTHER PRIVATIZATION

I have already mentioned the impact electricity privatization would have on the coal industry. Clearly, a privately owned electricity industry would be much more demanding in the commercial terms it expected from the NCB than would a state-owned monopoly. But in any case I always wanted to have the coal industry return to the private sector. In November 1990, not long before I left Downing Street, John Wakeham and I discussed the prospects for coal privatization, though not the detailed means. I felt that a combination of trade sales to companies with mining interests with special terms for the miners to buy shares would probably be the best way forward. How many of the pits had a long-term commercial future was unclear. We were still mining too much high-cost, deep-mined coal — a situation which had come about because of the protected and monopolistic market the nationalized coal industry had enjoyed. So there would have to be closures.

But — both when Cecil was Energy Secretary and when John succeeded him — I never had regard to the commercial aspects alone. The memories of the year-long coal strike were unforgettably etched on my mind. I kept in touch with Roy Lynk, the Nottinghamshire leader of the UDM, who knew that he could speak to me, if and when he needed, and I made sure that both Cecil and John understood my feelings about the need to protect the interests of his members. First, I felt a strong sense of obligation and loyalty to the Nottinghamshire miners who had stayed at work in spite of all the violence the militants threw at them. And, second, I also knew we might have to face another strike. Where would we be if we had closed the pits at which moderate miners would have gone on working, and kept more profitable but more left-wing pits open?

I also refused to allow the NCB to sidestep the agreed procedure of referring closures to the independent colliery review body, which had been set up as part of the settlement of the miners’ strike. I had learned from hard experience that you must never allow yourself to be manoeuvred into taking drastic action on pit closures when a steady, low-key approach will secure what is needed over a somewhat longer period. In dealing with the coal industry you must have the mentality of a general as much as that of an accountant. And the generalship must often be Fabian rather than Napoleonic.

The other privatization project which I was considering at this time was that of British Rail. BR’s subsidiaries had already been sold. It was the main businesses we had now to consider. Cecil Parkinson and I considered how to proceed in October 1990. Cecil was keen to privatize the separate rail businesses — like Inter-City, Freight, Network South-East. I, for my part, saw attractions in the idea of a national Track Authority which would own all the track, signalling and stations and then private companies would compete to run services. But these were large questions which needed careful thought and economic analysis. So I agreed with Cecil that a working party involving the Treasury and DTI as well as the Transport Department be set up to study the issue and report back to me. That was as far as I could take the issue.

There was still much I would have liked to do. But Britain under my premiership was the first country to reverse the onward march of socialism. By the time I left office, the state-owned sector of industry had been reduced by some 60 per cent. Around one in four of the population owned shares. Over six hundred thousand jobs had passed from the public to the private sector. It constituted the greatest shift of ownership and power away from the state to individuals and their families in any country outside the former communist bloc. Indeed, Britain set a worldwide trend in privatization in countries as different as Czechoslovakia and New Zealand. Some £400 billion of assets have been or are being privatized worldwide. And privatization is not only one of Britain’s most successful exports: it has re-established our reputation as a nation of innovators and entrepreneurs. Not a bad record for something we were constantly told was ‘just not on’.