Like Reagan, Thatcher was often called a neoliberal. This was because of her support for lowering taxes, lowering government spending, supporting free trade, and getting inflation under control.
In the 1979 Conservative Manifesto, Thatcher put forward her proposals, which led to the neoliberal tag being applied.
This is what Thatcher stated in the manifesto:
- To master inflation, proper monetary discipline is essential, with publicly stated targets for the rate of growth of the money supply;
- A gradual reduction in the size of the Government’s borrowing requirement is also vital;
- The State takes too much of the nation’s income, its share must be steadily reduced; and
- We also attach particular importance to the development of trade and private investment through such instruments as the European Community’s Lomé Convention.
Throughout the 1970s, the United Kingdom had become the sick man of Europe. The problem was so bad that in 1976, the UK had to take out a loan from the IMF.
These loans are often associated with developing countries, such as Argentina, but it isn’t long since the UK relied on one too.
The economic backdrop is what allowed Thatcher to come into office and reform the British economy, but was she a neoliberal? Did she follow through with the proposals she put forward?
Did inflation fall under Thatcher?
During the 1970s, the UK had to deal with stagflation, meaning that inflation was high at the same time as unemployment.
This was a problem for economic policy makers who had little experience in dealing with this phenomenon. Normally when unemployment is high, inflation is low, and vice versa.
When Thatcher took office, inflation in the UK was the highest in the G7.
The only country that had inflation close to the UK, when Thatcher took office, was Italy. Italy’s inflation rate was still under 15%, compared to the UK where inflation was greater than 15%.
Inflation did fall during Thatcher’s time as Prime Minister, however, towards the back end it rose considerably again. It also took some time to start falling. In the first two years of Thatcher as Prime Minister, inflation peaked at 21.8%.
Throughout her 11 years in office, UK inflation was often higher than other countries in the G7, and by the end, the UK once again had the highest inflation.
When Thatcher left office, inflation was at 8.9%, over four times the target that central banks aim for.
Unemployment continued to be an issue as well. Unemployment continued to be over 10% until 1987, so if the aim was to deal with stagflation, it’s unclear whether Thatcher’s economic policies actually did that.
Neoliberals are concerned about inflation because high inflation distorts price signals in the market, and it can quickly turn into a far more serious problem which becomes almost impossible to deal with.
Whilst Thatcher did manage to get inflation down from its peak, it remained an issue throughout her premiership, with it becoming a serious issue towards the back end of her reign. It partly contributed to Nigel Lawson’s resignation in 1989.
Did Thatcher cut government spending?
Government spending as a percentage of GDP declined, but actual public spending increased whilst Thatcher was Prime Minister.
When she became Prime Minister, spending was under £100 billion a year. By the time she left office, spending had increased to over £200 billion a year.
As a percentage of GDP, spending only began to fall from 1983 onwards. Spending as a percentage of GDP was originally 44.6%, and fell to 39.2% by 1990.
Social security was an area of spending that went up considerably under Thatcher. It went up by over 33% in Thatcher’s 11 years as Prime Minister.
As a percentage of GDP, spending on unemployment benefits almost doubled in the first seven years of Thatcher’s Government.
During her 11 years as Prime Minister, public spending was not cut once. The pace of growth was slower than previous years, but to say public spending was cut is incorrect.
Furthermore, a budget surplus was never recorded under Thatcher, which meant that government debt continued to rise over her premiership.
Neoliberals want to reduce the size of the state, but that didn’t happen under Thatcher, and in some instances such as welfare, it expanded.
Did Thatcher cut taxes?
The myth that Reagan cut taxes is perhaps one of the biggest myths surrounding his presidency. Thatcher’s record on tax is very hit-and-miss.
Some taxes went up, other taxes went down, and some new taxes were introduced.
The 1981 Budget raised taxes by £4 billion. This included a new 20% tax on North Sea oil, a windfall tax on bank deposits, a large increase in alcohol and tobacco duties, and a freeze in the Income Tax thresholds. The latter acts as a tax increase, because inflation was running high.
In other years, VAT was increased, alongside Fuel Duty and National Insurance Contributions.
On the other hand, other taxes were cut. Income Tax rates were cut, and the personal allowance, which is the threshold before you pay any Income Tax, began to rise in line with inflation.
Thatcher also expanded the tax relief on mortgage interest, which was a huge giveaway to the middle-class who had benefited from her Right To Buy scheme.
Corporation Tax rates started to fall as well, but this was counteracted by removals of various exemptions, so it was neutral overall.
One of Thatcher’s main aims was to reduce the tax burden of the state. On this metric, she failed. As a percentage of GDP, tax receipts increased from 33.7% in 1979 to 34.9% in her final year. In the 1984/85 fiscal year, tax receipts accounted for 37.6% of GDP, the highest rate since the 1950s.
Ahead of the 1979 Election, Thatcher promised to reduce how much the state took in taxes. Whilst there were some tax cuts, mainly in Income Tax, there were also tax rises in VAT and National Insurance, which are the two other main sources of tax revenue for the state.
Simplifying the tax system was certainly welcome, but neoliberals would like to see taxes go down across the board, rather than increasing. Furthermore, the tax increase via freezing the thresholds may be good politics, but it hurts the poorest in society most thanks to inflation and fiscal drag.
Did Thatcher support free trade?
This is an area where Thatcher and the neoliberals come together. Thatcher was a key proponent of the European Single Market which supports the free movement of goods and capital.
This helped to reduce significant trading barriers between neighbours, which helped to support economic growth. It also forced UK companies to be more productive, as they were competing with firms from across the European Continent. If they wanted to stay in business, they had to innovate and get better.
As well as supporting free trade between the UK and Europe, Thatcher also supported the Lomé Convention. This Convention was an agreement between European countries and 71 African, Caribbean and Pacific Countries.
It helped to provide aid and reduced barriers to trade with these 71 countries. This supported economic growth in the 71 countries, whilst providing cheaper goods for European consumers.
A similar scheme is now present within the EU, called Everything but Arms. The idea is basically the same, supporting free trade between the developed and the developing world.
Unlike Reagan who shied away from free trade, Thatcher embraced it. Rather than letting manufacturers lobby her to introduce trade restrictions, she made them compete on the international stage.
As a result, manufacturing output increased considerably during her 11 years in office, despite the number of manufacturers reducing in numbers. The unprofitable had been replaced by the profitable.
Free trade is a pretty central tenant of neoliberalism, and in this area, Thatcher was firmly consistent with neoliberal ideology.
Thatcher is often cited as one of the first neoliberal leaders across the world, alongside President Reagan. Overall, Thatcher is closer to a neoliberal than Reagan was, but that was primarily due to her strong belief in free trade.
Government spending and tax revenues increased throughout her 11 years. It was the Poll Tax that contributed to her sharp fall from power after all. Taxes were simplified, but large swathes of taxes were increased and inflation was also allowed to act as a revenue raiser.
The UK Government continued to spend more than it raised in taxes. Government debt would have increased quicker, had it not been for the various privatisations that occurred under Thatcher.
Whilst inflation did fall from over 20%, it remained on the high side throughout her premiership, and by the end, the UK had the worst inflation in the G7 again.
Thatcher was definitely a capitalist, and her reputation as a neoliberal is down to the rhetoric used during her political campaigns. A closer look at what happened during her time as Prime Minister suggests that she wasn’t a neoliberal in most economic policy areas.