The Chancellors (29): Nigel Lawson

Nigel-Lawson-budge_466Nigel Lawson, 1983-89

Conservative, under Thatcher

lawson npgNigel Lawson was probably the man best qualified to be chancellor of the exchequer in recent times, though it might be thought that he was some way short of being the best. The son of a commodity trader, his Jewish family had original come from Latvia (as so many Jewish families did, they Anglicised their name: Leibson became Lawson). He was educated at Westminster and then Christ Church, Oxford, where he got a first in PPE. He went on to become a leading financial journalist for the Financial Times, before becoming City editor for the Sunday Telegraph and then editor of the Spectator.

He entered parliament in 1974, and when Thatcher won power in 1979, she made him financial secretary to the Treasury. By then, he was a convinced monetarist. In the 1981 reshuffle, he entered the cabinet as the minister for energy. The government were lining up the gas and electricity industries for the privatisation to come. Lawson, as an economic Dry (as opposed to a Heathite Wet), was seen as being ‘one of us’.

When Howe moved from the Treasury, Lawson was the natural heir. In a reforming government, led by a prime minister who veered between political caution and radical instinct, the chancellor’s remit grew ever wider. Attempts to rein in public expenditure still saw spending go up, notably on health, education and welfare; the overall tax hike went up with it. By 1986, inflation had fallen to below 3%. In the same year, however, unemployment peaked at 3.4m. Thereafter, it began to fall, but inflation began to rise again, reaching 8% in 1989.

In part, Lawson got lucky. North Sea oil and gas revenues peaked in 1984-85. This helped ensure that the balance of payments remained in surplus in the mid-‘eighties, and the tax revenues from that oil helped pay for the increases in spending noted above. Those revenues were also supplemented by the receipts of privatisation: in 1985-86, privatisation (notably the sale of British Gas, see below) raised £2.6bn; in 1988-89, those revenues soared to £7bn.

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Lawson faced a dilemma. As financial secretary, he had come to realise that monetarism had an abiding flaw: how could the Treasury measure the money supply? The measure Howe had adopted, broad money, or M3, was proving deeply problematic. For all the government’s attempts to bring M3 down, it consistently overshot its targets. In 1985, Lawson abandoned the M3 target, and adopted narrow money (notes and coins), known as M0, as his measure. It was equally problematic, tending to undershoot its targets. It was his inability to measure the money supply that saw him increasingly attracted to the exchange rate as a measure of sound money: if the pound was stable, that meant the markets believed that the money supply was stable too. The political consequences of that judgement would, in the years to come, be profound.

Lawson wanted to reform the tax system, but his attempts to do so were often frustrated by Thatcher. His most important tax reform came in 1988, when he cut the top rate of income tax from 60% to 40% (Thatcher wanted it cut to just 50%). The significance of that measure was also dwarfed by what were, in effect, three supply side reforms in the mid-‘eighties. One was the creation of the European single market, very much a British-led initiative, which opened up markets in the European Community (you can read about it here). Lawson was not central to that process, but the creation of the Exchange Rate Mechanism would be central to Lawson’s resignation in 1989.

The second set of reforms were the privatisations of a whole raft of British industry, from British Airways, to electricity, gas, British Telecom and coal. In part, it was a revenue raising measure, as noted above. Ideologically, this was meant to create a whole class of shareowners: the most famous advert, ‘Tell Sid’, coined for the sale of British Gas, encouraged ordinary people to invest. They did. However, the need to sell off so many shares in one go, and do it successfully, meant that they were sold at a discount. The share prices rose rapidly, and a nation of Sids flogged them off sharpish. Rather more the profit realising democracy than the property owning one envisaged, less people’s capitalism and rather more peoples’ capitalising on the chance of a quick buck. What it did do, was put a substantial injection of capital into an overheating stock market and. with it, an overheating housing market.

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The third great reform was, in effect, a result of an agreement between the City and the government. In 1986, the Big Bang saw Britain’s financial markets deregulated and trading switch from floors to screens. By 1987, stock markets around the western world were booming. None more so than London. The first half of 1987 saw the FTSE 100 rise by 47%. The age of the Yuppie (young upwardly mobile professional) and the barrow boy traders (in contrast the bowler-hatted city gents of yore), was born. In the words of the movie Wall Street, which came out in 1987: ‘Greed is good’.

1552The Lawson boom had serious, if temporary, check in October 1987, when world markets crashed. London soon recovered, and the boom continued. Unemployment began to fall in 1987, though it was still 2m when Lawson left office. Some parts of the economy, notably in the southeast, saw sharply rising house prices, consumer spending and a feel-good factor, notably satirised by Harry Enfield’s ‘Loadsamoney’ (left).

Lawson, however, was worried. Inflation was creeping back up, and the monetary policy was still beyond effective control.  Lawson had already tried to persuade Thatcher to opt for membership of the new European Exchange Rate Mechanism when it was created in 1985. After Thatcher’s third election victory, in 1987, he returned to the issue. In 1981, the pound had been worth 4.5 Deutschmarks; by 1988, it was down to three. In part, Lawson wanted to maintain sterling’s value as an objective in itself. However, he also saw it as the best available means of forcing the government as a whole to adopt monetary and fiscal policies that would control inflation. To that end, Lawson wanted Thatcher to agree to Britain joining the ERM. In lieu of that, he began to de facto attempt to maintain sterling at a rate of DM3.

Professor_Sir_Alan_ArthurBy then, Lawson’s relationship with Thatcher was deteriorating sharply. In part, it was personal. Lawson had a very good election in 1987, and Thatcher began to see him as a potential rival. Then, Thatcher was no economist. To bolster her own position in her argument with Lawson over the ERM, she became increasing reliant upon the arguments of an academic economist, Professor Alan Walters (right), who had been giving her private advice on economic policy since 1983. When he pressed the issue in May 1989, she told him never to raise the matter of the ERM again. By the following month, with a European summit looming, Lawson and Howe managed to extract a vague commitment to join at an undefined moment in the future when the single market was deemed complete.

To extract even that, Howe and Lawson had threatened to resign. Thatcher, though, struck next. In July, she abruptly moved Howe from the Foreign Office. He was made deputy prime minister, lord president of the council and leader of the House of Commons: everyone knew it was a demotion, though. Meanwhile, in May, Thatcher had officially appointed Walters as her special economic adviser.

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Rising inflation, and the need to shadow the Deutschmark, had led Lawson to raise interest rates: by 1988 to 11%, to a whopping 14% by May 1989. On 5th October 1989, the Bundesbank raised their rates by 1%. Lawson persuaded Thatcher that Britain should follow suit. The timing, with the party conference coming, was politically unfortunate. That weekend, the papers said that Walters had opposed the interest hike. Lawson was, to the Daily Mail, a ‘bankrupt chancellor’. Then, the Financial Times dug out an old article Walters had written the previous year calling upon the government to stay well clear of the ERM, and stating that he had Thatcher’s support in that policy. With sterling fragile, and Lawson’s always over-sensitive regard for his own dignity undermined, he demanded that Walters had to go. Thatcher refused: it would make her appear weak. Lawson resigned.

It could have badly damaged Thatcher. In the longer run, it would. At the time though, Lawson was seen to have quit when the going got tough. The Lawson boom was, like those of Barber’s and Maudling’s, reckless and unsustainable. House prices had soared. The Big Bang had led to a massive boom in credit. With deregulation, there was little the government could do little to control credit other than hike up interest rates. Like too many of his predecessors, and perhaps Gordon Brown later, he fell to the besetting sins of chancellors in good times: a desire not to rock the boat, and over-optimism. In his wake, he would leave more than one accident waiting to happen, in the form of the house price slump, the ERM and Black Monday and the recession of the early ‘nineties.

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When Sir Geoffrey Howe resigned and made the speech that brought about Thatcher’s fall, Lawson was sat beside him. Lawson supported Michael Heseltine for the leadership in 1990, but was leaving front-line politics: he took a peerage in 1992. Then, he famously lost five stone and published a best-selling diet book. Two of his children are well-known public figures: Dominic is a journalist, Nigella a TV cook. He has also become a climate change denier. Having once been pro-EU, pro-ERM and voting for the pro-European Heseltine, Lawson has gone on to become a Brexiteer. (Interestingly, both he and Norman Lamont, chancellors who were badly burned by the ERM, both became Brexiteers).

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Only two chancellors since 1906 have served for longer than Lawson’s six years (Gordon Brown did ten, Lloyd George seven). Lawson remains, like Maudling and Barber before him, tainted by the temptations he to which in the end he succumbed to easily. Keynesianism and Stop-Go might have been dead, but the allure of an unsustainable boom led him to leave a dangerously overheated economy. The country, and the party, would pay the price in the end.

Here is Lawson being interviewed by the BBC’s Robin Day, shortly before his resignation:

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