The Tories’ First Year in Office (May 1979–March 1980)

Abstract

The change in government in May 1979 introduced a new era in the history of economic policy-making in the United Kingdom. While it is true that publicly announced targets for the rate of growth of the money supply predated the Conservatives’ return by some three years, the new administration elevated money stock targets (later to be complemented by ‘projections’ for the PSBR as a percentage of GDP) to the central plank of its economic programme. This was in apparent acceptance of the monetarist view that inflation and money stock growth are causally related, with a lag of anything up to two years, causation running from the money supply to prices and not vice versa. Fiscal policy (in the shape of the PSBR), exchange-rate policy and interest-rate policy were all supposed to support monetary policy, the prime aim of which was to achieve a ‘progressive reduction in the rate of growth in the money supply’ in order ‘to squeeze inflation out of the system’. Incomes policy was eschewed as it was deemed distortive and ineffectual (other than temporarily), although cash limits announced for the public sector for the fiscal years 1981–2 and 1982–3 incorporated, in effect, pay norms of 6 per cent and 4 per cent respectively.