Introduction

Few historians, commentators or politicians are guilty of underestimating the significance of the 1981 Budget. The risk is surely the other way, if one dare write that in a volume dedicated to the event. But it is curious that the literature on the actual framing of the Budget is so much dominated by a relatively narrow (though important) issue, namely the slugging match between No. 10 and the Treasury over the exact size of the planned public sector borrowing requirement, which took place in what was then the eleventh hour in budget-making terms, during the last days of February 1981, over sums well within the Treasury’s margin of error in estimating the PSBR.¹ The purpose of this chapter is to gain a longer perspective by examining what one might call the Budget’s prehistory, and drawing out some of the implications for the thinking behind it. It looks at the evolution of policy in the last half of 1980, a period of some confusion and fluidity (to put it politely), culminating in the Autumn Statement of 24 November 1980 – a much less well remembered event that came close to entering the historical record under the unhappy, and very unThatcherite, designation of a ‘mini-budget’.²

The original focus on the final weeks of budget making largely came about because it suited the book, or books, to treat it so. As one of the small team involved in the writing of Margaret Thatcher’s The Downing Street years, completed in the summer of 1993, I recall the uncomfortable pressure placed on us by the knowledge that her principal colleagues were racing to bring their recollections to market, with Lawson publishing his brilliant memoir The view from No. 11 just ahead of her, and Howe serving up a Conflict of loyalty not long afterwards.³ Alan Walters quietly advised us by fax, phone and visit how best to parry and return attack, with Lawson his bête noire. For many years these accounts were the only ones drawing on original documents, and, naturally enough, they shaped the literature. In this battle of the books, the making of the Budget was presented as a conflict between No. 10 and the Treasury, each claiming credit for what they took to be a turning point in economic policy and performance while denying it to the others, or at least restricting their share. But, in playing up the argument over paternity, the fallings-out during Thatcher’s last government – still painfully recent when the memoirs were written – were being allowed to condition the reading of earlier times.

One should not underplay tensions within the Conservative leadership, including those between Treasury ministers themselves, but the following account places less emphasis on that aspect. The story looks a little different on a longer focus. One discovers some surprising positions on fiscal policy within government, even settled critics of the monetarist experiment, such as the Bank of England’s Deputy Governor, Kit McMahon, and Permanent Secretary Sir Douglas Wass, sometimes favouring a tighter fiscal stance. On the monetary side, the situation was rather different, but, again, there is more to say than the paternity framework allowed.

Overshooting monetary targets in the summer of 1980

Over the summer of 1980 it became ever harder to fit economic and monetary developments within the framework of policy. The Medium-Term Financial Strategy had been announced as recently as March, targeting £M3 growth at 7 to 11 per cent for 1980/81. Following the removal of ‘the corset’, Minimum Lending Rate was cut by one percentage point on 3 July on the premise that £M3 figures were improving, but when the numbers appeared in early August they showed a 5 per cent increase over the month. Meeting Howe on 4 August, the Bank’s Governor, Gordon Richardson, admitted ‘£M3 had grown grotesquely’, attributing only one-third of the increase to the unwinding of corset distortions.⁴ Nigel Lawson ‘thought the rate of monetary growth too high but saw no reason to believe that a sudden upturn was at hand’.⁵ In fact, the increase in August itself was 3 per cent, with the annualised growth rate over the previous six months reaching 26 per cent, making the £M3 target practically unachievable less than halfway through the financial year.

On a monthly basis the PSBR was also overshooting the MTFS projection of £8.5 billion by a very significant amount. There were hopes that later months would undershoot, but in the event they did not. The outturn was a painful £13 billion. Meanwhile, untargeted and unprojected, but far from unwatched, sterling reached the $2.40s in early September, finally peaking at $2.4495 on Friday 24 October.⁶

Holidaying in Switzerland in late August, the Prime Minister lunched with Professor Karl Brunner, who told her that her monetary policy was right but implementation woeful, casting the Bank as chief villain. Thatcher returned to No. 10 in hanging mood. Apprised of the August money figures, she summoned Richardson and castigated the Bank for becoming a ‘lender of first resort’ (Brunner’s exact phrase) and being ‘simply unwilling to implement Government strategy’.⁷ In her eyes the clearers were just as guilty, if not more so, because she saw them as natural allies who were letting her down: ‘The clearing banks did not seem to be deeply attached to the Government strategy. Indeed they were shovelling money out… She felt that the centre-piece of Government strategy was being undermined by her own supporters.’⁸ There were a series of such meetings, long remembered by bruised senior staff at the Bank.⁹ Following the one on 18 September, Richardson was sufficiently aggrieved at his treatment to raise it with No. 10 on the phone, and he planned to discuss it with the Cabinet Secretary too.¹⁰ Only with difficulty did Howe dissuade the Prime Minister from summoning the clearers.

The Bank of England’s response

The records show that, alongside the monetary overrun, the focus of Thatcher’s angst was the high level of sterling. This was a topic on which she and the Bank found some agreement. Scouting a way ahead for the Governor after the 18 September meeting, McMahon rejected the notion that the affronted Bank should offer an apologia for its conduct of monetary policy (as Charles Goodhart and Christopher Dow had suggested), and instead proposed building on the common ground:

At the meeting the Prime Minister had pressed strongly for inflow controls, in the form of differential interest rates, for which she believed there to be a Swiss precedent. McMahon firmly rejected these, as subject to ‘enormous loopholes’, perverse effects arising from resulting expectations that high interest rates would persist, and the fact that they had not been successfully operated ‘except to defend or achieve an explicit exchange rate target and then only as an ancillary to massive intervention’:

The Treasury’s response

There were strong echoes of this thinking in parts of the Treasury. Inflow controls were generally rejected, with the head of the Overseas Finance Division, Sir Kenneth Couzens, describing them as ‘a leap in the dark’, using arguments similar to McMahon’s, and Howe concluding that ‘the balance of advantage was decisively against’.¹³ As papers were prepared for a Downing Street meeting on the topic, an approach not so different from that sketched by McMahon began to take flesh among officials. On Monday 22 September Sir Douglas Wass, Second Permanent Secretary Bill Ryrie and the Chief Economic Adviser, Terry Burns, met with ministers on the basis of a submission by Wass designed (as he put it) ‘to pave the way for contingency work if the money and PSBR figures did not come right in the coming weeks and months. We could not now rely on things going right; and if they did not, the credibility of the Government’s policy – which was fundamental to the success of that policy – would be at risk.’¹⁴

Ministers may well have felt officials were trying to bounce them; the record certainly suggests tension between the two. From the ministerial side, Lawson rebutted Wass lengthily and with force:

Officials struck back:

Summing up, Howe withheld explicit authority to plan for a package, although Burns was to prepare a paper on the ‘medium-term fiscal stance’, in connection with which Howe noted: ‘The 1981 Budget was fundamental to the Government’s success.’¹⁷

Meeting without officials a few days beforehand, at Treasury prayers, ministers and advisers had spoken more frankly and in some contrast.¹⁸ In ‘extended discussion’, there was hope that the 1980/81 PSBR might yet come right, but realisation that it might not, and that significant public expenditure reductions would not be achieved within the current financial year. It was concluded that, while there was ‘a reasonable chance that fiscal measures would not be required before the budget’, they might be necessary and contingency planning should take place.¹⁹ Equally, it is obvious that there was great political discomfort about a step so reminiscent of Healey – the kind of makeshift many of those present had damned and double-damned in recent memory. A large political element entered into the thinking, the meeting agreeing in principle that if a package was required it had best take place before the party conference, then barely a fortnight away, although it was pointed out that such a timetable was ‘operationally out of the question’.²⁰ It was noted also: ‘If there were a fiscal package, it would probably be sensible to include some action on consumer credit.’²¹ Contingency plans for such action had been drawn up earlier in the year at the bidding of No. 10, Lawson pushing hard to devise a scheme against Treasury resistance. And, on the subject of inflow controls Lawson broke ranks with the general Treasury view, openly colliding with Howe:

One almost has the sense of entering a looking-glass world, transported by MTFS magic. The monetarists ponder direct controls, the Keynesians hanker for emergency action to cut the PSBR. The Keynesians would have preferred to scrap the MTFS outright, naturally enough, and those monetarists who had placed faith in £M3 as the target aggregate (by no means all, of course) were thinking again.²³ Yet few doubted that the government had at least to pretend to live within the strategy for the time being. In this sense, if not in others, MTFS was working as intended.²⁴

It is surprising at first sight that Lawson should have shown any interest in inflow controls. He had been the Treasury minister most ready to defend the counter-inflationary merits of a high pound. He had been the strongest advocate of the early abolition of exchange control and the most eloquent exponent of Thatcherism as a free market creed. But one should examine the context, which supplied many unpalatable options and not much else. At the end of the month Lawson sent Howe his views of a draft Treasury paper entitled ‘Inflow controls and other options for reducing the exchange rate’.²⁵ The paper had been triggered by pressure on the topic from No. 10; its very existence was significant and probably unwelcome to him. Lawson paid it the closest attention. He detected in the paper, and warned against, a weakening of previous Treasury opposition to intervention in the foreign exchange markets and rejected also various suggested approaches to ‘talking down’ the currency. His objection to talking down was partly that it ‘seems to me to miss the point: it is hardly likely to provide the political cover which is inherent in the notion of inflow controls’.²⁶ He expressed disappointment that ‘officials have been able to come up with so little’ on the latter and suggested they be looked at again, as a revenue measure:

Lawson makes no mention of inflow controls in The view from No. 11 (nor do Thatcher or Howe in their books), but he does concede that sterling offered ‘a clear example of overshooting’ at the end of 1980 and the beginning of 1981.²⁸ And surely he was registering the strength of the political wind blowing from No. 10, which had reached storm force by this point. Options within the existing policy were diminishing to the degree that radical departures were rendered thinkable, however unattractive. By late November the Bank had prepared a scheme on forty-eight-hour readiness, and a wide circle knew of it, with all the risks involved.

October–November 1980: planning the Autumn Statement

Tension and uncertainty as to the next steps in policy only deepened as autumn ran on. There was a long and unhappy Downing Street ‘monetary policy seminar’ on Monday 13 October showing a general movement towards fiscal tightening on all sides – No. 10, Treasury and Bank – albeit with action in the spending round and the next budget in view, rather than an announcement of new taxes in the Autumn Statement.²⁹ There was significantly less agreement on monetary policy – indeed, signs that it was difficult even to discuss. And there was almost a despairing tone to some of Howe’s interventions, for example on inflow controls, when he commented that Treasury analysis had convinced him they would not work, ‘though he would not rule out altogether some inflow control measure if only for presentational reasons’.³⁰ He used a similar formula on interest rates, almost as if inviting people – perhaps one person in particular – to force his hand:

The record suggests that the Prime Minister did not directly respond. In fact, she seems deliberately to have avoided opening up the question of interest rates and sterling at this meeting: having demanded work on inflow controls, she showed no inclination to discuss currency matters in any depth, quite possibly fearing leaks from a group as large, and as miserable, as this one. Instead she closed discussion with the words ‘it would be necessary to think further about the possibility of pushing the exchange rate down’.³² The pound was eleven days short of its peak against the dollar.

A week later, on 20 October, the Chairman of ICI visited the Prime Minister to warn her that the company was about to declare its first ever quarterly loss. Howe was in Luxembourg, and Thatcher summoned Wass for comment. They met for a little over an hour at the end of the working day.³³ Wass later took pains to remind Howe:

It is impossible to know quite what Thatcher asked or expected Wass to do, but he surely made the most of whatever authority she gave him.³⁵ He consulted with Ryrie and others ‘on a strict “need to know” basis’, a group resembling that which had approached ministers in late September, and produced a paper blandly entitled ‘Policy options’, which Howe forwarded to No. 10. The Governor was told about it ‘in general terms’.

This was an unusual initiative, and the document matches it. Wass based his case for a change of policy on the unexpectedly high level of sterling, much as McMahon had pegged that territory as the most hopeful one for the Bank to occupy after its roasting in September. He laid out six options, ‘listed in descending order of compatibility with the Government’s present strategy of gearing down inflation through strict control of the money supply’, namely:

1. (1) inflow controls and some minor measures intended to reduce the exchange rate;

2. (2) a modest cut in interest rates;

3. (3) a large reduction in interest rates;

4. (4) an explicit exchange rate policy;

5. (5) a significant tax switch to the benefit of companies; or

6. (6) a pay freeze.³⁶

That inflow controls were considered the most compatible policy is startling. Wass, like Howe, made a sceptic’s case for them, on presentational grounds, offering perhaps ‘short-term gains’.³⁷ Having initially rejected controls, the Treasury and the Bank seem to have reconciled themselves to the possibility that they might be forced to live with them, and were aiming now to minimise the damage. If the Prime Minister wanted them, she could have them, fully informed of the risks, embarrassments and complications. McMahon had similarly switched to advising the governor to take the line that the Bank was not ‘doctrinaire’ on the question, that such controls might be worth going for ‘on a strictly temporary rough and ready basis’, although ‘very much against the spirit of present policies’.³⁸

By a modest cut in interest rates Wass meant two points off MLR ‘at most’. He went on, in words that echo Ryrie’s remarks, in the 22 September meeting:

Cover again. Thatcher annotated the document: ‘Preliminary view: options (iii), (iv), (v) and (vi) are NOT ON. The long-term damage would be too great.’⁴⁰ Her reaction was immediately relayed to the Treasury.

Thatcher, Howe and Wass met at No. 10 for ninety minutes on 12 November to discuss the paper, Howe arriving fifteen minutes ahead for a preliminary chat. The Bank was not represented at the meeting, and, although a full retinue from No. 10 was there, Thatcher asked them not to speak.⁴¹ Discussion focused entirely on Wass’s options (1) and (2). Howe now sought, and was given, the authority to cut MLR by two percentage points and ‘to demonstrate that the Government was not abandoning the monetary strategy’ by announcing ‘a credible package of measures’, which would require the preannouncement of some of his intentions on tax for 1981/82.⁴² He firmly rejected inflow controls, an option that Thatcher seems to have relinquished only with reluctance, looking to bargain them away: ‘The Prime Minister said that she hoped that, even if option 1 were not adopted, the Treasury would consider switching Bank “customers’” transactions off market again.’⁴³

Howe entered a caveat: it would all involve ‘a considerable element of risk; questions would be raised as to whether the Government was doing enough to get the fiscal balance right, and this might mean that the next budget would have to be even more restrictive; alternatively, it might conceivably be necessary to put MLR up again’.⁴⁴

Significance of these events for the Budget

Thus the Thatcher government decided to introduce something that looked very much like a ‘mini-Budget’ and adopted the stratagem of tightening fiscal policy to give cover for loosening the monetary side. The measures were seen and presented as pointing the way for the 1981 Budget. The initiative largely originated with officials unsympathetic to the fundamentals of policy, who overcome understandable political reluctance because the government was acting faute de mieux, the policy climate having become sufficiently hostile to tempt even the Prime Minister to reverse a totemic reform by reintroducing an element of exchange control. The result was that, only six weeks after Thatcher had declared herself ‘not for turning’, the government was making an MLR cut impossible to fit within the framework of the MTFS – a departure publicly unstated, of course, but privately acknowledged, and all but impossible to disguise from those who understood the policy.⁴⁵ If indeed the November measures pointed the way to the 1981 Budget, from a Thatcherite point of view it had a far from promising origin.

Should one accept, then, that the origin of the Budget strategy lay in the Autumn Statement? Did the idea of tightening fiscal policy in order to ease monetary policy carry through into budget making? Certainly, there was no irresistible progress from one to the other. Perhaps there might have been if the outcome of the Autumn Statement had been triumphant, but it was far from that. One finds instead a variety of strong and weak connections.

Among the most straightforward and significant was that the measures passed muster in the markets. An MLR cut of some kind had already been discounted, the timing and the amount being the main issues. The associated fiscal measures did indeed provide cover, doctrine counting for little. Sterling had peaked against the dollar the month beforehand and continued to fall without trace of a rout.⁴⁶ Howe’s fear that the two percentage point cut might prove too much of a stretch did not come to pass.⁴⁷

Politically, however, the Autumn Statement proved costly – the government was badly battered in the Commons and the press – and it is more likely to have supplied lessons, or warnings, for the Budget. Howe experienced one of the worst periods of his Chancellorship, being sharply attacked by Conservatives as well as political opponents, who successfully maximised the damage by fastening on the failure of the Statement to spell out the fact that employers’ National Insurance contributions were increasing.⁴⁸ As the architect of the MTFS and chief apologist for sterling’s stratospheric rate, Lawson was scarcely less vulnerable. Under such pressure public divisions emerged within the government, even between ministers counted as Thatcherite. The Chief Secretary to the Treasury, John Biffen, publicly expressed sympathy for the critics’ point on NICs, as well as sharply distancing himself from the MTFS in a chat with Conservative backbenchers, while Howe was left for the best part of a week without public support from Thatcher, noticeably and ominously so.⁴⁹ Support, when it came, was of a lukewarm variety: a No. 10 briefing to the Sunday lobby stating that a reshuffle was planned shortly and that Howe would not be moved.⁵⁰ When Sir Keith Joseph spoke publicly at this time of the government having had a ‘lost year’, Mrs Thatcher’s Press Secretary, Bernard Ingham, told Joseph’s anxious press officer that Thatcher was ‘quite relaxed about it’: ‘I believe she agrees with Sir Keith but for the sake of the Government and confidence in it does not say so.’⁵¹

The political climate for the Treasury remained acutely uncomfortable throughout the run-up to the Budget, and improved only as the first signs of recovery appeared – a fact not reflected as much as one might expect in accounts of the Budget.⁵² One consequence was that Howe, who was always inclined to discuss and consult, at length, and – in Thatcher’s view – to a fault, took particular pains to keep important colleagues in touch with his thinking.⁵³ He had one notable success. The Environment Secretary, Michael Heseltine, was won around in advance of the Budget to the view that cutting PSBR was essential to the reduction of MLR, which he favoured over particular reliefs as the measure best designed to aid industry. He even urged the freezing of personal allowances to help achieve it.⁵⁴ As Secretary of State for Industry, Joseph was involved in these discussions, taking a line that gave some comfort to the wets, perhaps by design.⁵⁵ It is revealing that Howe successfully deployed the trade-off argument in this context, and perhaps not altogether surprising that an idea that had commended itself to Wass and Ryrie made appeal to some of his Cabinet critics – as long as they felt constrained to live within the MTFS (which, as events established, finally they did).

Where did the Autumn Statement leave the MTFS? Certainly, the MLR cut on 24 November 1980 decisively established within the government that short-term interest rates were not being set solely, or even primarily, with reference to £M3. The archives are unambiguous on this point. At the very least, then, the November measures opened up the possibility of a further MLR cut at the time of the Budget, regardless of the monetary aggregates. This was a point grasped and reinforced by the markets, forging a relatively strong connection between the two events. But it would be a mistake to suppose that the MTFS was hollowed out by the Autumn Statement and that a reign of ‘pragmatism’ had begun, as some critics suggested.⁵⁶ If anything, the Statement made it more pressing to reassert commitment to the MTFS, so that when Treasury ministers drew up their ‘sighting shots’ for the Budget two weeks before Christmas a general impulse to tighten fiscal policy was evident, well before any decisions were taken about further MLR cuts or the monetary stance in general. This carried solidly through into the phase of budget making proper. Ministers met to consider their stance on 16 January and registered ‘the need for fiscal tightening in the Budget to demonstrate that the PSBR would be reduced and to help re-establish the credibility of the medium-term financial strategy’.⁵⁷

By this time ministerial hints of one kind or another had reinforced expectations that a further downward move in MLR was coming – expectations that were helping the Bank to sell gilts and that, unsurprisingly, it sought to reinforce (‘opportunism’, commented the Treasury Deputy Secretary, Peter Middleton).⁵⁸ The files suggest that the only debates about MLR within the Treasury and the Bank in January and February 1981 were between cutting before the Budget or at the despatch box, and 1 versus 2 per cent. There was more than market sentiment involved: it was common ground in these internal debates that monetary conditions were tight, whatever £M3 was saying – indeed, that it had perverse characteristics as an indicator.⁵⁹

In the light of these discussions it is hard to share the commonly held view that the ‘Niehans report’ of January 1981 played an important part in shifting policy by alerting ministers and officials to the tightness of monetary policy and the waywardness of £M3, the Budget adjusting course accordingly. At most, Niehans provided helpful theoretical underpinning for the Treasury and the Bank’s existing judgement of market conditions from a source monetarists could not ignore – a kind of imprimatur. The report’s influence at No. 10 is also overstated. Walters needed no teaching, while Thatcher herself remained unwilling to relinquish £M3 (of which more below). She also disliked the very idea of such a report – ultimately, a private initiative of Alfred Sherman (one of Thatcher’s advisers), Brunner and Walters recommending Niehans – fearing it would leak and undermine credibility. And Niehans’ advocacy of intervention to bring sterling down found no takers, the most recent battle on that topic having been fought in the autumn. Ultimately, his report made little or no impact on the Budget, the course for which had already been set.⁶⁰

A fortiori, the November measures could not have mattered if the key decisions in the Budget were taken in the last weeks of February 1981. But we have already noted that the eleventh-hour stress in the ministerial memoirs bears the influence of later quarrels, and the detailed account by John Hoskyns in his memoir Just in time, which, like them, focuses on the final PSBR decisions, also looks suspect, for all its fascination and richness. Based closely on his diary, Hoskyns frames the Budget as a make-or-break crisis requiring a ‘Hayekian’ response; Charles Moore’s biography of Thatcher was evidently influenced by it.⁶¹ The picture is of No. 10 advisers manoeuvring the Prime Minister into bullying the Treasury to draw up a tough budget. There is something inherently improbable about this version of events, both as to character and the realities of life in Whitehall, and Sir Tim Lankester’s chapter in this volume convincingly shows that the process of budget making in January and February 1981 does not bear out the Hoskyns interpretation. Examination of where the Treasury actually stood in the last part of 1980 reinforces this impression. In truth, Hoskyns was a figure on the margin of macroeconomic policy making, despite his location at the centre of power.

Potentially, Walters was in a stronger position to influence the Budget, but at the very beginning of his tenure (he arrived at No. 10 on 6 January 1981) he was not the figure he later became. The Treasury was constrained to be more open with him than Hoskyns, but candour certainly had its limits. And, initially, trust was lacking between Walters and Thatcher herself. She excluded him from some crucial final meetings in the budget-making process; and, at the time, he chose to distance himself from the result, writing to Wass the day after the Budget deadline closed to record his view that not enough had been done to justify a cut in MLR, but that, if one had to happen, in view of strong market expectations, one percentage point was the maximum. He anticipated ‘crisis measures after a few months’.⁶²

One is brought then, finally, to the monetary side of the Budget. The November 1980 measures were powerfully influenced by a desire to reduce the value of sterling. How far did this motivation still operate by the time of the Budget? The currency had weakened significantly and steadily against the dollar after its late October peak, falling to $2.2150 on Budget day, only a cent and a half about the level Thatcher had wished for at her meeting of 18 September 1980. On 17 February 1981, when it stood at $2.2635, Howe and Richardson had discussed the rate and felt that ‘substantial depreciation would have serious adverse implications for inflation’.⁶³ The underlying condition was a strengthening dollar, as the tightening introduced by the Federal Reserve Chairman, Paul Volcker, took hold, while the pound was rising markedly against European currencies, so that sterling might now have been constraining a cut in MLR as well as motivating one. And in fact there is no sign that a desire to influence sterling played any part in Treasury thinking on interest rates at the time of the Budget.⁶⁴ The case for a reduction in MLR was made in relation to its impact on the finances of the company sector, action on the National Insurance surcharge having been ruled out.

It has been argued that the Treasury did not seek an MLR cut at all. Lawson’s memoirs handle this question bluntly, drawing a sharp distinction in the paternity tradition. For the Treasury, he asserts that ‘[t]he 1981 Budget was essentially a response to the fiscal difficulties which had emerged in the financial year 1980–81’, a salutary demonstration of resolve, whereas, for Thatcher and ‘in particular Walters’, the cutting of MLR was ‘its raison d’être’.⁶⁵ The MLR cut on Budget day he presents as a misguided and ultimately unsuccessful initiative from No. 10, needing to be reversed in the autumn in two successive two percentage point increases.⁶⁶

In fact, the records do not support as sharp a line on the narrow question of MLR. Walters did not consistently press for a cut; as already noted, by the end of the budget-making process his position was quite the reverse. The Treasury and the Bank did, on the other hand, despite their concerns for sterling. The size of the cut, and to a lesser degree its timing, were at issue for them, but not its desirability. By this stage monetary conditions were seen as too tight, although there was no agreement as to how to present this insight.

Even as to the size of the MLR cut there was only limited debate within the Treasury. Middleton took the lead in urging two percentage points rather than one, arguing that such a cut would be seen as consistent with the Budget’s target for £M3, so that ‘the deciding factor might be the general reaction to the Budget and particularly the reaction of industry’, for which a one percentage point cut ‘just does not seem enough’. (The Budget announced a new target of 6 to 10 per cent annual growth in £M3 over the period from February 1981 to April 1982, helpfully removing the post-‘corset’ bulge from the figures, the manoeuvre being dubbed a ‘roll-forward’ or ‘rollover’ of the previous target in preference to blunter descriptions.)⁶⁷ Wass told Howe that he would have plumped for a one percentage point cut ‘[i]f the Budget were not as tough as it now is and if we were doing a little more for industry’, describing the case for a two percentage point cut now as ‘in my view largely political’. For good measure, he even circulated Walters’ letter warning against a larger cut – a little provocatively, perhaps. Finally, though, Wass concluded: ‘On balance, despite the lack of convincing intellectual reasoning, I am inclined to be on the side of those who want a 2 per cent [sic] reduction.’⁶⁸ Ryrie trod a similar path. Among ministers, Biffen was adamant on two percentage points, with Lawson also in fact supportive, briefly minuting his agreement with Middleton.

As to the timing, the Bank urged a one percentage point cut before Budget day, and tried to nudge Thatcher and Howe towards openly acknowledging that it was taking place outside the framework of the MTFS, to reflect the behaviour of monetary aggregates other than £M3 and ‘to reduce the upward pressure on the exchange rate’.⁶⁹ But the Bank was asking for too much, too soon, contributing to the decision to announce the MLR cut from the despatch box in the Budget itself; this was a further politicising of interest rates, disliked by Howe and many other Conservatives, but one that would permit an extensive restatement of the framework, if desired – and give longer to think about it. In the run-up to the Budget Howe was deeply uncertain where monetary policy should go. He wanted the exchange rate to be taken into account, although he rejected an explicit target (and, for the moment, the European Monetary System); he was attracted to monetary base control and saw a valuable role for monetary targets, but ‘thought £M3 would have to remain a central feature’.⁷⁰

Lawson’s position, as ever, was more crisp. In the last weeks of budget making he twice gave Howe his thinking on this topic, the first via his Private Secretary on 2 February 1981:

Then, on 13 February, came a firm prescription:

But one person remained who was far from ready to relinquish £M3. Although Thatcher was attracted to MBC and was more than willing to achieve greater discretion by paying attention to other variables, she saw a high political cost in changing the target, so many painful things having been done in its name. She had a strong suspicion that £M3 meant something; after all, hadn’t Walters predicted where the ‘Barber boom’ would end by reference to the broad money supply? And she had no desire either, then or later, to abandon the idea of trading off tighter fiscal policy for looser monetary policy, particularly if tightening could be achieved by public expenditure control rather than tax increases. As Chancellor, Lawson later had many fights with the Prime Minister to refute the notion that she had hit upon a timeless formula to this effect. Unsurprisingly, then, the Budget did not offer a full-scale reformulation of monetary policy; as in November 1980, it was politically impossible to construct a wholly adequate doctrinal basis for the MLR cut.