The Chancellors (28): Sir Geoffrey Howe

Geoffrey_Howe_3469229bSir Geoffrey Howe, 1979-83

Conservative, under Thatcher

Sir Geoffrey Howe has a rightful claim to be the single most important chancellor of the exchequer since Sir Stafford Cripps. If Cripps did most to create the post-war Keynesian, even Butskellite consensus, Howe did most to undo it.

Like Cripps, Howe was a lawyer. He was Welsh, son of native Welsh speaker: his father’s family were Labour or Liberal, his mother was a Conservative. He was educated at Winchester College, before reading Law at Trinity Hall, Oxford. He was called to the bar in 1952, and took silk ten years later. By then, he had built a lucrative practice, specialising in commercial and industrial law.

At the same time, he was drawn to Conservative politics, notably the Bow Group (of Tory modernisers), of which he became chair in 1955. Having twice contested the forlorn hope of his native Aberavon, he entered parliament in 1964. He lost his marginal seat in 1966, but won a safe seat in 1970.

73947He had already come to public notice as a lawyer. He was involved in the inquiry into the Aberfan disaster, in which 116 children (and 28 adults) had been killed when a coal tip had engulfed a school. Howe was genuinely appalled by what he learned about the attitude and incompetence of the National Coal Board. He led a 1969 inquiry into cruelty in a Cardiff hospital. Both cases left him sceptical of nationalised industry. He was no free market absolutist though. He led an inquiry into financial discrimination against women in 1970. He would later pass legislation making the tax system fairer towards women.

73953When Heath won in 1970, Howe was made solicitor-general. As such, he was responsible for the drafting and passing of the Heath government’s most important pieces of legislation. The Industrial Relations Act, 1971, was more Howe’s baby than Robert Carr’s, but Carr was the secretary of state for employment, and its failure would be laid at his door. As chancellor, under Thatcher, the approach to the unions would be very different. In the meantime, Howe had also been the parliamentary engineer of the European Communities Act, which saw Britain join the EEC. The commitment to Europe would, eventually, see Howe’s parting of the ways with Thatcher and, famously, her downfall.

That seemed a long way off in 1975. In 1972, Heath had moved him to the Department of Trade and Industry, under Peter Walker. On the surface, Howe seemed to be a conventional Heathite. However, like all Conservatives of that generation, Howe was scarred by the failure of Heath’s government. He didn’t run against Heath in 1975, but he did enter the second round, winning just 19 votes (he was genuinely ambitious). In the campaign, however, Howe proposed a policy of spending cuts and monetary discipline. A monetarist was born.

Thatcher recognised as much, and made him shadow chancellor. He hardly shone in the role, being consistently bested by Denis Healey. Howe’s rather leaden and mild mannered public speaking style hardly helped. Healey famously compared being attacked by Howe as like ‘being savaged by a dead sheep’. In fact, the two men were close friends, as were their wives. Despite his failure to sparkle, Thatcher kept him in situ. In part, that was testament to her weakness: on economic policy, she had few allies in the top brass. The true father of Thatcher’s monetarism was Sir Keith Joseph. He was brilliant, Howe was dull. However, Howe was a safe pair of hands; Joseph was anything but.

It is also worth remembering that the prime minister is, in fact, first lord of the treasury. Both Macmillan and Heath had taken the lead on economic policy. Howe’s permanent secretary, Sir Douglas Wass, would later claim that Thatcher took the strongest lead of all. By 1975, she had publicly embraced the new economic doctrine of the right, monetarism. The fundamental idea was simple. Inflation was caused by an excessively high money supply. Thus, inflation could be cured by controlling the supply of money. As an idea, it had the appeal of being simple. As policy, it would turn out to be bunkum, as Howe would find out. It assumed that it was possible to measure the money supply. It wasn’t.

The policies that were lumped together as monetarism were a mix of old-fashioned Treasury fiscal and monetary discipline, and free market economic ideology. The tightening of both fiscal and monetary policy had already come under Labour. Had Labour won, Healey or his successor would have also sought to impose a measure of deflation. What they would not have allowed was the sharp rise in unemployment that Howe and Thatcher did.

Healey had, with some initial success, pursued a pay policy. Inflation had come down, and so eventually had unemployment. However, in different ways, both Heath and Callaghan had been brought down by trade union resistance to pay policy. In 1979, Thatcher’s government abandoned any form of incomes policy beyond the public sector. Under Heath and Callaghan, the unions had sought and won wage rises that fueled inflation, what was known as the wage-price spiral. Healey had succeeded in disciplining the unions by consent, but that consent was withdrawn in 1978. Under Thatcher, the unions would disciplined by the reform of trade union law. Monetary and fiscal discipline had an ideological purpose too. Thatcher believed that the state was too large. Spending, taxes and borrowing were too high. There were too many government controls.

Healey had taken the brakes off in 1978, and the wage-price spiral was kicking in with inflationary pay rises in the private sector. In an attempt to assuage public sector workers, the Labour government had appointed the Clegg Commission to make recommendations about pay levels in the public sector. Jim Prior persuaded Thatcher to declare her government would accept Clegg’s findings, so as not to alienate public sector voters. As a consequence, the public sector pay bill would rise by 12%: Howe had to pay for that wage rise.

73952The pay hike was, of itself, inflationary. The government were also committed to reducing the rate of income tax. In his first budget, Howe cut the top rate from 83p in the pound to 60p, the basic rate from 33p to 30p. That was, once more, inflationary. Furthermore, Howe committed the government to cutting the Public Sector Borrowing Requirement. Howe had a fiscal hole to fill. Some of that hole could be filled by the rapidly growing revenues from North Sea oil. Some might be found by cutting spending (though the government had made commitments to increase spending on the police and defence, for example). There was still a hole.

It would be filled by VAT. Labour had run a scare story that a Conservative government would double the VAT rate. Thatcher had pledged that her government would never double VAT. Instead, Howe raised it from 8% to 15%. From his, and Thatcher’s point of view, it had a number of advantages. Indirect taxes are regressive, meaning that poorer people pay a higher proportion of their income in tax. However, they are not visible much of the time. High income taxes, they also believed, served as a disincentive. If tax had to be found, and it did, better to come through the indirect route. The problem was, though, that the VAT rise put prices up and was, for a year at least, inflationary. At the same time, price rises would cut the level of demand. The recession that followed was hardly accidental.

The most radical measure in Howe’s first budget was the abolition of exchange controls. This was designed, fundamentally, to allow the free movement of capital. It was already the norm in some countries, and the single market would come to enforce it by law in the EU. It came, though, with some unintended consequences. The first was that it would make any prospect of measuring or controlling the money supply recede even further into the far distance. The second was that it the markets and the pound even more vulnerable to the vast movements of capital that would see the stock market crash in 1987, sterling crash in 1992 and the crash of 2008.

In 1980, Howe adopted the Medium Term Financial Strategy, which set targets for the next for years for the PSBR and the money supply, as measured by the broad money variant, M3. As a method of managing the economy, it was doomed to fail, because nobody could accurately measure M3. It had another purpose, though: Howe hoped it would act as a restraint on political demands to ease monetary and fiscal policy, rather as the IMF had under Healey. Given the preponderance of Wets (Heathite moderates) in Thatcher’s first cabinet, that made political sense as the recession deepened and Thatcher’s unpopularity mounted. It also served to keep the prime minister on board.

The real problem was the return of stagflation, this time with a vengeance. Inflation reached 18% in 1980; it fell thereafter, but remained stubbornly high and it did not fall below 5% until 1983. Unemployment rose remorselessly: from 2.2m in 1980, reaching 3m in 1982 and 3.25m the following year. With unemployment rising, public expenditure rose too. The Treasury forecast that the PSBR would reach £13bn. Thatcher was determined that there would be no repetition of Edward Heath’s U-turn. At the 1980 party conference, Thatcher famously declared ‘You turn if you want to, the lady’s not for turning’. Howe’s 1981 budget made that explicit: in the face of the worst recession since the war, it was sharply deflationary. Taxes went up: excise duties went up, a windfall tax on the banks was imposed, and personal allowances were frozen (a de facto rise in income tax). There was opposition from the Wets, but it was feeble and uncoordinated. Howe’s course was set, for good or ill.

If that was the headline policy, the more telling issue was monetary, not fiscal. In the 1981 budget, Howe cut interest rates. Sterling fell thereafter. Faced with that, Howe was forced to raise interest rates, ultimately to 16%. Meanwhile, public expenditure continued to go up: rising by 6% in real terms over the lifetime of the first Thatcher government; the tax hike (tax as a percentage of GDP) rose more steeply, from 34% to 40%. Deflation ruled.

What Howe could not achieve was anything resembling control of the money supply, which consistently overshot its targets (insofar as the figures meant much in any case). Meanwhile, the value of sterling declined from $2.45 in 1980 to $1.54 in 1983. At first, the PSBR had acted as the surrogate discipline for the money supply. Howe would come to look to another vehicle: Europe’s Exchange Rate Mechanism. It would be that, and its associated issue of the European Community that would famously lead Howe to break with Thatcher. But that is another story (see the post on Howe as foreign secretary, here).


Sir Geoffrey Howe was the longest serving member of Thatcher’s cabinet, and one of the most important chancellors of the 20th century. He would be one of nine men, since 1906,  to have been both chancellor and foreign secretary. It is too easy to see him as the monetarist revolutionary and destroyer of the post-war consensus, but there is a degree of truth in the cliché. He oversaw the countries deepest post-war recession, seeing 3m unemployed, but also initiated the recovery from it. He was also the initiator of the freewheeling consumerism and capitalism of the ‘eighties: the chancellor who abolished exchange and hire purchase controls. Thatcher, like so many, would come to underestimate him at her peril.





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