(Article published in Spanish in Actualidad Economica magazine, June 2014
supplement: "El Espectador Incorrecto - Una mirada liberal al mundo")
While Continental Europe is still struggling to recover from the deepest economic crisis since World War II, UK business confidence is reaching historic highs. With an expected GDP growth of 2.7% for 2014 and unemployment trending down towards 7% well earlier than planned by the Bank of England itself, the UK’s economic health is striking. The streets of London are buoyant, with retail sales booming. And importantly such confidence in the future is not limited to London but can also be felt across the country, as confirmed by a recent national survey (Grant Thornton’s UK Business Confidence Monitor – Q1 2014). The roots of such economic success go back to the Margaret Thatcher years.
While Continental Europe is still struggling to recover from the deepest economic crisis since World War II, UK business confidence is reaching historic highs. With an expected GDP growth of 2.7% for 2014 and unemployment trending down towards 7% well earlier than planned by the Bank of England itself, the UK’s economic health is striking. The streets of London are buoyant, with retail sales booming. And importantly such confidence in the future is not limited to London but can also be felt across the country, as confirmed by a recent national survey (Grant Thornton’s UK Business Confidence Monitor – Q1 2014). The roots of such economic success go back to the Margaret Thatcher years.
It seems normal to anyone living in Britain today to shop in
supermarkets at any time of day or night, to get cash at the bank’s counter or
the post office on Saturdays, to switch electricity supplier in a few clicks
after being alerted by the incumbent supplier itself that there is a cheaper
offer with some competitors, to travel to anywhere in Europe for a fraction of
a typical flight ticket, even to start a new business in a day. What a contrast
with the UK of the 1970s and early 1980s, which Bank of England was qualifying
as “the sick man of Europe”! Britain was paralysed by constant strikes, streets
were empty after 6pm with most shops closed by then, Europe was making fun of
lazy and lousy Britain. The country’s decline seemed unstoppable and both
politicians and the British people seemed resigned to it.
Free markets, flexibility in employment laws, tight control
of government spending, tax cuts for business and individuals, even for top
earners... Such pillars of Ms Thatcher’s economic programme are hardly
contested today by either Conservative or Labour leaders, who over the years
have, one after the other, admitted being “Thatcherites”. Margaret Thatcher
reportedly considered that her biggest victory was to have brought the Labour
Party to end-up backing her economic policies. Ms Thatcher’s reforms now appear
so obvious and natural that it seems that nobody can contest them anymore.
Nevertheless, the intense debate re-ignited at the time of
her funeral last year shows that her legacy remains hugely controversial. As if
British people were shameful of what they have become: successful and
wealthier, but greedy and selfish?
While the Iron Lady obviously did not do everything right
and too often seemed hermetic to people’s complaints, one has to admit that she
has transformed her country to an extent that no other European nation has
lived over the past 40 years.
Ms Thatcher’s eleven years in power were particularly
ground-breaking in three major economic aspects:
First of all, government spending was cut dramatically and
budget deficits were kept under control for the first time since the War, even
turning to a surplus in the late 1980s. Ms Thatcher considered a national
humiliation that her country had to request a loan from the IMF in 1976. She
decided that the fight against public spending should be the country’s top
priority. The only areas intentionally preserved from cuts were police, defence
and the National Health Service. After reaching 44.6% of GDP just as Ms
Thatcher came to power in 1979, public spending was cut back to 39.2% by the
end of her three terms in 1990. This despite having to face two recessions in
the meantime. Even more significantly, the control of budget deficits became
the new norm so that State spending continued to drop in the 1990s, even under
Tony Blair’s New Labour governments, in a clear contrast with most major
industrialised economies. At the end of the 1990s, Britain had reduced public
spending almost to the level of the US, well below any other large European
country. Interestingly, Ms Thatcher managed to reverse the trend of Budget
deficits while at the same time drastically cutting taxes. She was convinced
that the country was being paralysed by the heavy weight of taxation, which was
not only preventing corporates from investing but also was creating an assisted
mentality and was killing any entrepreneurial spirit. Taxes had reached levels
of up to 83% of income. She capped the marginal tax rate at 60% to start with,
then 40%, and cut the common tax rate from 33% to 30%, while raising VAT. And
she would refute accusations of favouring the rich, convinced as she was that
you need to incentivise those who are ready to take risks, invest and create
jobs. The reduction in Budget deficits was financed not only by spending cuts
but also by a £50bn privatisation programme. Emblematic companies like Jaguar,
British Telecom, BP, British Gas, British Airways, British Aerospace were either
sold or privatised. But here again the National Health Service was kept under
State ownership and control.
Another key aspect of Ms Thatcher’s era is how the stringent
reforms underpinned individual wealth, against all odds. Since 1980, GDP per
capita has increased more in the UK than in the US, Japan, Germany or France. While
the UK’s GDP per capita had been lagging all major industrialised nations in
the three previous decades, the situation started to reverse during Ms
Thatcher’s terms and Britain took the lead in the 1990s and 2000s. Such
statistics are the best answers to those who blame her for having increased the
gap between the rich and the poor, as the whole population in fact got
significantly wealthier. A good illustration of this is how the most modest
segments of the British population gained access to the property market.
Through her famous “Right to Buy” scheme, Margaret Thatcher led the State to
sell 1.5 million council homes at large discounts so that the poorest could
acquire the properties they were living in.
The scheme was clever as it helped restore public finances, generating £18bn
over the period. And it made Ms Thatcher hugely popular among popular classes!
But if there was one achievement to keep in mind from
Margaret Thatcher’s eleven years in power, it is how she has converted Britain
to free markets. Her economic principle was to limit the State’s functions to
the protection of individuals while the markets would take care of the rest,
under the control of strong independent regulators. She profoundly believed in
people’s sense of responsibility and therefore in private enterprise. She
abolished currency exchange controls and cut State subsidies to industries. She
deregulated finance, but also most utilities services, including telecoms,
power and gas supply. While largely criticised in its initial stage, notably
due to an initial boost in unemployment numbers, the process quickly proved to
be a significant incentive to innovation and competition. In her view, economic
freedom would lead to growth and job creation, which is pretty much what
happened. UK regulators have not been questioned since then and are well
respected today for their role to limit free market excesses. They are not only
independent from the central government but also careful of interests of both
private operators and final users. The British society gradually gave up its
assisted mindset to adapt itself to the notion of sound emulation through
competition. This has been the source of major progress and growth in the UK
economy and still today represents one of the country’s key strengths relative
to its peers internationally.
So Margaret Thatcher inherited from a stagnant economy, a
huge, costly and inefficient public sector, a population discouraged by
confiscatory tax levels and structural unemployment. Not so dissimilar to
Europe today is it…? Now we know the
recipe to success. But we are running late so let’s not wait, Margaret
Thatcher’s era was 25 years ago!
Jean-Hugues de Lamaze
Economist and Fund Manager in London
