As admirers and critics assess Margaret Thatcher's impact Alan Shipman bemoans the Iron Lady's failure to invest in the benefits of North Sea oil.
Strikes, three-day weeks and phone-box queues were undoubtedly a feature of the decade before ‘Thatcherism’ that had largely vanished by the end of her 11-year rule. But something else which lurked in the background in 1979 had also largely disappeared by 1990 – the UK’s North Sea oil surplus. And the lack of a legacy from it will permanently taint whatever political legacy the Iron Lady is ultimately ascribed.
The UK was, for the decade from 1980, the only democratic industrial country to be self-sufficient in oil and gas. The UK remained a democracy - despite the notorious tendency for oil-rich states to slide into authoritarianism as their leaders (from Indonesia’s Suharto and Libya’s Gaddafi to Russia’s Putin and Venezuela’s Chavez) bribed their public and bought off their opponents with revenue that needn’t come from tax.
But oil enabled Thatcher to govern with the autocratic streak that eventually caused her downfall. And the way her administration used it has left the UK permanently damaged, unable to achieve the economic modernisation or political maturity that would have been possible if she had spent it more wisely.
North Sea production, the product of sustained investment by previous Conservative and Labour governments generated (in today’s terms) £150-160bn in revenue for the Thatcher administrations – enough to pay for all the UK’s industry, employment and agriculture support for ten years at today’s rates (see the Budget 2013 summary).
Uniquely, the UK under Thatcher did not channel any of its eventual North Sea windfall into a sovereign wealth fund. That’s something that even the most egregious Middle Eastern dictators were willing to do. Thatcher’s failure to create anything comparable had devastating consequences. Chief among them:
- Massive de-industrialisation as the sudden inflow of oil revenue pushed the pound to record levels, attracting cheap imports and making it impossible to sell many exports. This crushing blow (which destroyed up to 25% of Britain’s industrial capacity in 1979-82) drove Sir Michael Edwardes – then trying to rebuild what remained of Britain’s car industry – to demand that a government incapable of handling the oil windfall should “leave the bloody stuff in the ground". There were less dramatic ways of avoiding the exchange-rate overvaluation, but Thatcher’s chancellors did not consider them. The gaping hole in the supply side led to an equally destructive burst of inflation when ambitious tax- and interest-rate cuts revived aggregate demand after 1981. In output terms, UK industry has never recovered from the damage wrought.
- Deficient tax capacity: Instead of investing it, Thatcher used the oil surplus to implement a succession of income tax cuts which (along with the 1982 Falklands conflict) ensured her re-election in 1983 and 1987. Her governments repeatedly claimed that these cuts were ‘paid for’ with public spending reductions. But the deep recessions with which the 1980s started and ended meant that public spending did not significantly fall, despite efforts to shrink the Welfare State. Increases in VAT and other indirect taxes offset some of the revenue loss, while poverty and inequality grew substantially worse as regressive taxes replaced a progressive one. The rest of the income tax reduction was funded by North Sea revenues. When these tailed off due to depletion of the main fields, the UK was left with a permanent deficiency in tax revenue, which undermining public investment – leaving its infrastructures permanently weaker than other EU countries’ and ruling-out any replication of their more generous social policies. The Major and Blair administrations that followed tried to mask the tax-capacity gap by inflating the financial sector, but this strategy fell apart in 2008.
- Financial deregulation: North Sea oil ensured an inflow of dollars that enabled the UK to accumulate capital despite a rising trade deficit. That capital could have been invested in new industrial capacity. Instead the Thatcher governments chose to remove UK capital controls and deregulate the City of London, enabling any oil money that wasn’t immediately consumed to drive an asset-price bubble (which burst in 1987) and a housing-market bubble (which burst in 1991). The roots of the crisis that began in 2008 (and is far from over) were planted in the deregulation launched by Thatcher in 1979 and Reagan in 1980 (see this Economist article). To blame it on their successors is to show a shortness of hindsight comparable to the shortness of foresight for which the Thatcher years may in future be bemoaned.
Margaret Thatcher achieved much. But her greatest achievement was to be in office for the decade that the UK’s chronic external and fiscal imbalances were relieved by North Sea oil. To have fuelled a consumption boom with it and leave subsequent generations with no lasting legacy except an irreparable loss of production and tax capacity is an indelible graffito on the monument her worldwide supporters will doubtless seek to erect.
Alan Shipman 9 April 2013
Alan Shipman is a lecturer in Economics at the Open University. He is responsible for the modules You and your money:personal finance in context and Personal investment in an uncertain world, part of the foundation degree in Financial Services.
The views expressed in this post, as in all posts on Society Matters, are the views of the author, not The Open University.
Cartoon by Catherine Pain