Enoch Powell famously said all political careers end in failure and that was certainly true of Nigel Lawson, whose death at 91 was announced on Monday. His six-year spell at the Treasury ended with the economy stricken by a classic British boom-bust cycle, which left unemployment at more than 3 million and record number of home repossessions.
That said, only a handful of chancellors have a lasting legacy when they leave office, and Lawson was one of them. Like Gordon Brown – another of the rare breed of politicians who made a difference – he had a clear idea of what he thought needed to be done to make the economy work more effectively and pursued his goals in a single-minded fashion.
Lawson set out his beliefs in his Mais lecture of 1984. In a speech that turned the postwar economic consensus on its head, Margaret Thatcher’s second chancellor said that traditionally macroeconomic policy (the big picture stuff involving interest rates and tax) had been designed to deliver growth and full employment, while micro-economic policy (the nitty-gritty stuff such as regulation and price controls) had been used to keep inflation in check.
He argued the reverse should be the case: the job of macroeconomic policy was to keep inflation in check while micro-economic policy should be used to boost growth and employment. The raft of supply-side measures he was prepared to use included the privatisation of nationalised industries, the big bang reforms of the City of London, and a relentless focus on cutting tax. His aim in each budget was not just to cut tax rates but to abolish them altogether.
And, for a while, all went well. Inflation – helped by a collapse in the oil price – came down to little more than 2% by 1986 and strong growth made it possible to cut income tax by two percentage points ahead of the 1987 general election.
Shortly afterwards, the tide turned. Defying the political convention that governments take unpopular decisions following election victories, Lawson used his spring 1988 budget to announce a massive giveaway, reducing the top rate of income tax from 60% to 40% and cutting the basic rate from 27% to 25%. He also announced that couples would no longer be able to claim double mortgage tax relief after the summer. The upshot was a colossal spending spree, a housing bubble as couples sought to beat the mortgage deadline, a record trade deficit and rising inflation.
Matters were not helped by Lawson’s decision to “shadow” the deutschmark, a policy that required interest rates to be raised or cut in order to keep the pound stable against the German currency. Interest rates were cut in the spring of 1988, at a time when the economy was overheating, to 7.5%. By the time Lawson resigned in October 1989 after a clash with Thatcher and her economic adviser, Alan Walters, over the chancellor’s exchange rate strategy, they had doubled to 15% and a deep recession was baked in.
In a sense, Lawson’s arrival at the Treasury symbolised the end of the long 1970s – the period stretching from Labour’s aborted reform of the trade unions in 1969 to the year-long miners’ strike that began in 1984 – and the start of the 1980s proper.
In the late 60s, the UK was a country based around manufacturing, nationalised industries, full employment and strong trade unions. A measure of Lawson’s influence is not just that under his economic stewardship Britain became a country dominated by the financial sector, where large parts of the state were sold off, organised labour was weakened and the gap between rich and poor widened. It is that, fundamentally, not much has changed since.
