This article was published in El Confidencial on April 4th 2013
“The single currency will be fatal to the poorer countries because it will devastate their inefficient economies”. Margaret Thatcher in 1990.
In the late 70s, Britain was suffering from three problems that will seem quite familiar to any European today: rampant unemployment, a bloated public sector and a confiscatory tax policy. Henry Kissinger even said “Britain is a tragedy – it has sunk to borrowing, begging, stealing”.Margaret Thatcher had all the cards stacked against her. Woman, of humble origin, and unwilling to agree and accept what was imposed as consensus by the powers-that-be. But she won. And the revolution she led has changed the world to the better .
When Thatcher came to power, inflation exceeded 20%, the country was in the hands of the International Monetary Fund, on the verge of bankruptcy, and economically kidnapped by crony sectors, not just the unions, but also a business class that was extremely dependent on the state . Socialism with privileged oligarchs. Does this sound similar to Europe today?
The United Kingdom was “the sick man of Europe”, according to the Bank of England. Government recipes were always the same. Raising taxes, maintain the welfare state and “stimulate demand” spending, only to raise taxes again, when they failed.
When Margaret Thatcher left power in 1990, she left a country that was once again a world leader, a strong and dynamic economy, with independent regulators, and where the words entrepreneur and success are not insults. A country where starting a business is done in a day for the cost of two happy meals , which created SMEs that today are global leaders.
In her years in power, real income per capita rose +34%, also for the poorest segments. This with two recessions, a war and 11% unemployment. She lowered taxes (from 83% top marginal rate to 40%) but kept tax revenues at 40% of GDP, and what’s most important, she slashed public spending from 44.6% of GDP to 39.2%.Did she leave a perfect economy where everything is golden? Not at all. But her track record puts to shame any global leader of our time and more importantly, we forget where Britain came from.
Much has been said of the unions in the 70s and their power (“tea and sandwiches in Downing Street,” they called it), but not of their economic impact. The constant strikes in the UK in the mid-seventies created a double economic impact: recession, discontent and deterring investment capital from putting money into the country. Investing in England was a guaranteed tax hell. Does this sound familiar to Europeans today?There are things that Thatcher’s government made that we ignore today because what existed before seems simply unimaginable. Capital controls. Yes, the UK maintained exchange and capital controls since the 40s. Today, free capital movement is seen as logical and normal. Thatcher changed this in two months .
Taxes that reached 83% of income in some cases. Do you remember those albums recorded by the Rolling Stones or The Who in exotic countries during the seventies? It was not made to travel and see the world. It was to escape the tax-man. The United Kingdom was a tax hell. Does this sound familiar to Europeans today?
Austerity, low taxes and attracting capital
Thatcher did what today is deemed as allegedly impossible: implement austerity, lower taxes and attract capital. And changed a tax hell into a thriving economy in a few years.
Critics always say that her years in power included two recessions, and it is true, but nobody says how long it took to get out of them. Half the time than in comparable countries in Europe. Whenever we speak of the Thatcher years critics tend to forget what was happening elsewhere.
Critics talk of rising inequality in the UK during her tenure. Again, forgetting where Britain came from and the base from which it started.
Basic wages increased well above inflation, disposable income and wealth grew for the poorer classes. During the years of Thatcher governments, the percentage of women working rose in double digit. It was a country where people knew that if they tried hard and put effort, they could win. Equality? No, freedom. And citizens value it. The hundreds of thousands of immigrants who come to this country every year know that they can thrive and grow.Sure they may fail. But also, interestingly, immigrants value the UK’s social assistance system.
The privatization of public companies on the verge of bankruptcy was one of the pillars of the economic policy of the Thatcher era. But privatization was more than a way to regain control over the deficit and reduce debt, it was a way to improve management. What is really important, and also ignored because we take it for granted, is that Thatcher introduced truly independent regulators to ensure that market rules are both fair and transparent .
Forgetting where Britain was in the late 70s is part of the unfair analysis frequently made of the Thatcher era. Life expectancy increased by almost three years between 1980 and 1990, more than the OECD average. Interestingly, it was the privatization of many non-essential services that allowed the government to focus on improving social security. Was it wonderful by 1990? No. Not even today. But again, we cannot forget where it started.
Critics also ignore what is inflation, the silent tax, and its devastating effect on the economy. In 1979 inflation was taken for granted, as something “inevitable”. Lowering inflation from 21% to 12% was a real success that cannot be attributed to the North Sea oil alone, as some do. Moreover, this oil became an attractive investment when Thatcher governments understood the importance of attracting capital.
And that’s where Margaret Thatcher was, and is, a resounding success. The United Kingdom became one of the countries with the highest positive financial account. Understanding the difficulties of the economy and letting competition and high added value sectors flourish was also a historic change. Not through intervention, not using economic crony-ism Of course, the City was essential. Thatcher contributed to its development as a global economic engine. Today the City of London provides the country with more tax revenue than Scotland .
Thatcher did not reduce public spending in absolute terms, but massively as a percentage of GDP. But she contained it in an exemplary manner. Her austerity was attacking political spending, subsidies, the enormous costs of a bloated state. In the UK one does not see politicians with twenty advisers chauffeurs, butlers and staff.
Another success of Thatcher was to change the political class. Today we see front page news, resignation and public scorn when a politician spends 200 pounds on unjustified items.
Of course, where Thatcher was an absolute visionary was rejecting the single currency and European interventionist advances. Today it seems normal, even typical English, but at the time the Iron Lady had to fight fiercely against her own party and the opposition to defend the pound, economic independence and resist being engulfed by a European Union that already showed signs of quasi-Soviet central planning.
I have spent many years living in Britain. The figure of Thatcher continues to generate controversy and diverse opinions, like all great leaders. She made mistakes, of course. Many. But in my opinion, as an outside observer, the greatest legacy of the Iron Lady is that today, in this country, almost no one, whether labour, liberal, conservative or independent, defends the interventionism that plagued the country in the seventies. Because voters know that does not work. Because nobody wants to return to that desolate Britain. The principles of economic freedom and open market are now part of the DNA of a country that a few decades ago was extremely intervened by government.
No, Margaret Thatcher was not perfect. And she could not apply everything she supported. But the citizens of the United Kingdom and the world owe her for defending freedom, hard work, competition, and being an example of how you can thrive without privileges, leading her country out of the fate of being the “sick man of Europe”.
Whenever I travel around Europe I hear that the principles of austerity, open markets and freedom cannot be applied because “Europe is made this way”. The United Kingdom was made “that way” too. Thanks to Margaret Thatcher, it will probably never go back to that model.