The Thatcher government’s radicalism was evident even in its early days, with the cabinet discussing abolishing income tax and replacing it with a poll tax even as it struggled to get inflation and the public finances under control, newly published documents reveal.
Previously confidential papers released on Thursday underline how the governor of the Bank of England, the head of the civil service and the chief secretary to the Treasury opposed the government’s plans in 1980 to lay out tight guidelines for public spending and adopt a strict target for the money supply.
They also make clear that Gordon Richardson, the governor, was not consulted about the changes to monetary policy.
As the British economy tumbled into its deepest recession since the 1930s, the government unveiled plans for a targeted reduction in the money supply and in public borrowing.
A Treasury paper by Douglas Hague, an economic adviser to the government, recorded the urgency with which the government viewed cutting spending, arguing it was a necessity to avoid a death spiral as an unproductive public sector ended up taking up a larger and larger share of gross domestic product to produce the same amount of services.
“We must, quite simply, begin to dismantle the public sector as we know it,” he wrote.
“We must raise productivity where we can and abandon activities entirely where we cannot. Otherwise continuing inflation and rising taxation will destroy us. Increasing the welfare state in its present bureaucratic form, we have, with the best of intentions, but appalling lack of foresight, built the ultimate Doomsday Machine.”
At the same time the government was determined to get a handle on the problems with the “supply side” of the economy by cutting taxes and letting enterprise rip. Geoffrey Howe, chancellor, wrote in a memo on December 6, 1979: “The overriding priority is to reduce inflation.” He said the weakness on the supply side was “acute” and “the single most important contribution we can make is to reduce taxation at all income levels”.
The chancellor noted: “Stabilisation of our expenditure plans at their present levels is not enough. Unless we reduce plans further we may not be able to avoid serious damage to our taxation objective and the risk of even higher interest rates.” Minutes from a 9am cabinet meeting the next day show the government discussing how it needed to go further to eradicate the deficit.
“More dramatic solutions might be considered,” the minutes note. “Income tax could be abolished altogether and replaced by a modified poll tax on the line of the national insurance surcharge, collected directly from employers.”
Although the idea seems to have gone no further – Lord Howe confirmed in an e-mail to the Financial Times that it was not seriously discussed – the consideration of a poll tax as early as 1980 that would have been much more extreme than the later poll tax or community charge, which only applied to local government charges, indicates the ideological radicalism of the Thatcher government.
The newly available documents also reveal that the plans for a targeted reduction in the public sector borrowing requirement and to reduce the growth of the money supply – set out in the 1980 budget as the so-called “medium-term financial strategy” – were adopted against the objections of Mr Richardson and Robert Armstrong, then cabinet secretary, and John Biffen, then chief secretary to the Treasury.
Richardson was angry at not having been consulted in advance about the upheaval in policy and said the monetary targets would prove an “unnecessary straitjacket”.
Meanwhile, John Biffen said the targets “assume some mechanistic relationship between the public sector borrowing requirement, monetary aggregates and recorded inflation. I do not believe such a relationship can be thus demonstrated.”