Nigel Lawson, a tribute to a radical, reforming chancellor

Warwick Lightfoot was appointed as Nigel Lawson’s special advisor to the Treasury in 1989 and remembers him with great admiration and affection and mourns his death with great sadness.

Nigel Lawson’s death is a huge sadness to me. I was his Special Adviser in his last months as Chancellor of the Exchequer. I was appointed at the point when his relationship with Mrs Thatcher had reached its nadir. At my interview he asked me how long I would do the job. I was cagey, saying perhaps a year, because I was minded to stand for Parliament. When he said he wanted someone who would do two budgets, I told him that if Paris was worth a mass, as Henry of Navarre put it in 17^th century France, then the Treasury was worth two budgets. Although I did wonder whether he would get to deliver two more budgets. In the end it was barely two months, although ironically, I ended up staying at the Treasury working for three Chancellors of the Exchequers over some three years.

Treasury Orthodoxy under Nigel Lawson

It is difficult to reconstruct the extraordinary hold that Nigel Lawson had on the Treasury in the summer of 1989. When he was first appointed Chancellor in 1983, he was not popular among Treasury officials, acquiring the sobriquet ‘Pol Pot’. Yet by 1989 Nigel Lawson’s hold on the official Treasury mind was palpable. Its most powerful expression was in the highly stylised description of UK economic policy that appeared in the Treasury Weekly Brief ‘TWEB’. This was a hugely authoritative document, distributed to all government departments, each Friday. It set out the Government’s economic and financial policies ex cathedra. In the autumn of 1989, it included several distinctive propositions. Among them that inflation would be brought under control by appropriate monetary conditions supported by an exceptionally tight fiscal stance, and a complex argument about why the balance of payments current account deficit was irrelevant in a modern open market economy.

There was a Treasury policy on which all senior officials and Treasury ministers led by Nigel Lawson were fully agreed. This was the imperative need to join the ERM and to link sterling to a fixed exchange rate against the Deutsche Mark. There was however a consistent Treasury blind spot, the failure to appreciate that domestic monetary conditions had been far too loose between 1985 and 1989. Many convoluted explanations were deployed to explain away loose monetary conditions at the time. One of the most vivid was that set out by Bank of England officials that while the bank balance sheet in terms of lending had been expanded, assets were matched by liabilities leaving the overall liquidity position unchanged. Strong reported growth in broad money M4, rising house prices, a stock market bubble and a huge balance of payments deficit were all ignored in what judges would call a collective misdirection of themselves. This involved the whole of the Whitehall economic establishment, the Bank of England and their outstations in the CBI and think tanks such as the National Economic Institute for Economic and Social Affairs. 

While the Financial Times, the former employer of Nigel Lawson, prosecuted the case for membership of the ERM with a messianic mission, not least in the columns of its chief economic commentator Sir Samuel Brittan. Treasury officials were like rabbits mesmerised by a stoat in their pursuit of Lawsonian Treasury orthodoxy. 

One Cabinet minister at a City Lunch, hosted by the former Labour Attorney-General Lord Shawcross QC was asked why did the UK not join the ERM when the only person standing in the way was the Prime Minister. Norman Fowler observed, in a suitably flat manner, that in his experience Mrs Thatcher was a substantial obstacle to any such change. 

The establishment consensus was that aligning sterling with the Deutsche Mark was the way to guarantee low and stable UK inflation. Nigel Lawson ignored domestic indicators of an overheating economy. This involved cutting domestic interest rates when sterling was rising against a de facto 3 DM target and when broad money and bank lending were growing rapidly at annual rates of more than 16 per cent and 20 per cent respectively.

The result was an overheating economy, a huge balance of payments deficit and a return to inflation of 10 per cent in the summer of 1990. In June 1988 Nigel Lawson began to take decisive steps to control inflation by raising interest rates eventually to 15 per cent in October 1989. And inflation fell between 1990 and 1993 reflecting the tight domestic monetary conditions and a strengthening exchange rate on the sterling trade weighted index that was later entrenched by the constraints of the ERM that sterling entered at the end of September 1990.

The Lawson Boom and how to get out of monetarism?

Harold Lever the veteran financier and Labour MP who had been economic adviser to Harold Wilson and James Callaghan in the cabinets between 1974 and 1979, as Chancellor of the Duchy of Lancaster, told me at the time that Nigel had been “clever enough to get himself into monetarism, and he will be clever enough to get himself out it”. It was not for nothing that Mrs Thatcher described Harold as the civilised face of socialism in the 1970s. Unfortunately for Nigel Lawson, Lord Lever’s confidence in him was misplaced.

The Lawson Boom was the product of Nigel Lawson’s loss of monetary control after the 1985 Mansion House Speech. In that speech he explained the serious difficulties with interpreting the domestic money supply information and embraced a discretionary macro-economic policy that focused on monetary policy instruments. In the speech the Chancellor vividly observed that in the end inflation would be ‘judge and jury’ of policy. In many respects the approach was not so different from what the Bank of England’s Monetary Policy Committee does in practice, now. As it turned out inflation back in double digits was the judgement on the policy. An amusing Treasury official sardonically commented that Nigel Lawson’s ‘the plain fact’,had become ‘the harsh truth’.

Britain’s distinctive experiment with monetary targets in the 1980s

How did Nigel Lawson, the arch-monetarist author of the Medium-Term Financial Strategy -MTFS, end up presiding over a wholly discretionary episode of macro-economic demand management that created double digit inflation? The MTFS incorporated a Chicago Milton Friedman framework of money supply targets that reflect the economy’s long-term trend rate of economic growth that would slowly squeeze inflation. The instrument that would be used would be short-term interest rates set by the central bank. In looking at growth in the money supply there is a big question that has to be established. Does the increased recorded liquidity represent saving balances or transaction balances that will be spent?

In the US the best measure of the money supply that matched growth in nominal GDP and prices was M1; it did not contain saving accounts that received interest payments. In the UK, as a result of research done by Gordon Pepper at the stockbroker Greenwell in the early 1970s, the best fit with prices and nominal GDP was £M3, a broad measure of the money supply that included deposit accounts that were interest bearing. This meant a monetary target for £M3, that was to be achieved by the instrument of higher interest rates, would result in a portfolio adjustment where savers would deposit more funds in savings accounts as interest rates rose. Between 1979 and 1981 real interest rates went from being negative to being positive, the result was a huge increase in the demand for money as a result of higher interest rates. An increase in the demand for money swelled the deposits scored as part of £M3. At the same time the exchange rate rose steeply in response to the squeeze in domestic monetary conditions and was further rising, as part of the adjustment generated by the impact of North Sea Oil output on the UK traded goods sector and the balance of payments. Oil output peaked in 1983 at around 6 per cent of GDP, twice the size of agriculture at the time.

Punk Monetarism at the Treasury

 The MTFS in 1980 showed the money supply neatly falling followed by a neat fall in the rate of inflation. Instead £M3 rose sharply and inflation then fell sharply. This blew a hole in the highly stylised framework of the MTFS which appeared to be more honoured in breach than in observation. There is no doubt that there was a very tight monetary deflation that disinflated the economy, but in its detailed causation and practice, it did not conform to the policy set out in the 1980 Budget Redbook. This left Treasury Ministers with egg all over their faces. Denis Healey enjoyed himself, calling it ‘Punk Monetarism’. Nigel Lawson lost confidence in the information yielded by monetary aggregates and embraced targeting sterling against a currency managed by a central bank that found it easier to manage domestic monetary conditions with a more stable demand for money function. Hence the shadowing of the Deutsche Mark.

De facto and Je Jure sterling exchange rate policy that tested exchange rate policy to destruction

Between 1986 and 1992 the three British Chancellors and the official Treasury tested exchange rate targeting to destruction. First by ignoring domestic conditions, focusing on the exchange rate, cutting interest rates and creating very loose domestic monetary conditions and inflation. Second, by entering the ERM at a necessarily high rate to bear down on the inflation created by shadowing the Deutsche Mark and being forced to maintain a domestic disinflation that was no longer needed in 1992. Both these episodes showed that an exchange rate target involved a clash between the needs of the domestic economy and the external exchange rate target.

So why was Nigel Lawson such a seminal Chancellor and why do I mourn his death so much?

He understood that inflation is a monetary phenomenon and that it would not be brought under control without tight domestic monetary conditions – both in the early 1980s and in the late 1980s, after, he had lost control of it. While the Lawson boom was a huge error and embarrassment the fundamental achievement of low inflation was a significant product of his influence on policy.

Nigel Lawson’s understanding of the supply performance of the economy was profound. He understood that beyond a certain stage the public sector would crowd out the private sector and that private markets and the price mechanism had to be allowed to operate. Between 1945 and 1979 there was a broad consensus on economic policy pursued by both Labour and Conservative governments, Butskellism, as the Economist called it. Macro-economic demand management was to secure full employment and growth, monetary policy had no or only a limited role in containing inflation; wages had to be controlled to protect the balance of payments and inflation; there was a large nationalised sector that meant that Britain had a mixed economy where railways, airlines, coal production, gas and electric utilities, telephones, steel, and much of road transport freight were in the hands of nationalised industries. While incentives were blunted by marginal income tax rates were very high at 83 per cent with a 15 per cent investment income surcharge on top giving a top marginal income tax rate of 97 per cent.

Dismantling the post-war mixed economy and the post-war Keynesian consensus

Nigel Lawson played a seminal role in helping Mrs Thatcher carry out a market orientated counter-reformation that demolished this consensus and its institutions and policy tools Control of monetary policy and public expenditure were placed at the heart of economic policy. Foreign exchange controls were abolished. There was a systematic and comprehensive rolling programme of asset sales that privatised nationalised industries and returned them to the discipline of the market and to proper regulation, unlike the unregulated public sector monopolies that were in place before. There was a highly nuanced yet effective reform of trade union legal immunities from the conventional law of tort that radically changed the legal position of trade unions and contributed to much more realistic and flexible pay bargaining in the private sector. He understood the merit in encouraging entrepreneurs but more than that, that economies had to change and adjust. In the UK a smaller manufacturing sector and a much larger service sector was a natural evolution that should not be artificially promoted or stymied. Nigel Lawson was Mrs Thatcher’s intellectual enforcer who translated her instincts into practical policy.

Privatisation returned nationalised industries to the private sector. In 1979 nationalised industries accounted for 20 per cent of the capital stock and fifteen per cent of employment to generate around ten per cent of GDP. The Nationalised Industries White Papers of success governments had failed to establish effective modus operandi for their management, The result was that the last Nationalised Industries White Paper published by the Labour Government in 1978 read as a catalogue of errors. The rolling programme of asset sales that Nigel Lawson initiated denationalised over 45 major businesses. More than 900,000 employees were transferred from the state to the private sector. Industries that were costing taxpayers £50 million a week in subsidy and external support were by the early 1990s contributing £2 billion a year to the Exchequer in corporation taxes on profits. The customers of nationalised utilities benefited from reductions in the real costs of gas, electricity and phones. BT prices fell 27 per cent and the price of domestic gas fell by more than 12 per cent. There were big improvements in service. In 1979s it was illegal to buy a phone from anyone other than the nationalised monopoly. Customers had to wait for a new phone to be installed and long-distance trunk calls often could not be made because of a shortage of lines. The dismantling of the nationalised industries along with the chronically low rates of return on capital that they exhibited was an important part of ending the mixed economy.

Turning macro and micro-economic policy on its head

The changes that this approach meant to economic policy were best explored in his Mais Lecture in 1984, The British Experiment. Nigel Lawson explained how in the post-war years macro-economic policy had been directed at securing employment and growth while micro-economic policy tools had been used to control big macro-economic issues like inflation with detailed controls on prices, dividends and wages – prices and incomes policies. The policy after 1979 turned this approach on its head and assigned different policy objectives to the tools involved.

Wages and the Labour Market

A good illustration of this, is Nigel Lawson’s approach, to the role of wages in the economy and the functioning of the labour market. Until 1979 wage pressure was seen as inflationary. Nigel Lawson saw unrealistic pay bargaining as a cause of unemployment and in a Treasury research paper set about dismantling the perceived connection between pay and inflation and instead replaced it with one that emphasised flexibility and labour markets that could adjust to shocks. In January 1985, the Treasury published a Yellow Paper research note The Relationship between Employment and Wages: Empirical Evidence for the UK. It identified a relationship where a 1 percent increase in real wages would be associated by a fall in employment of between ½ and 1 per cent employment. As Chancellor he was heavily involved in the review of social security in 1986 and the Social Security act in 1987 that took effect in 1988. An important part of this was building on Family Income Supplement FIS by introducing Family Credit a social security transfer payment for low income families in work that was means tested or ‘tapered’ away as incomes rise. In the detailed inter-ministerial correspondence between Nigel Lawson and Lord Young the Secretary of State for Employment the complex trade offs involved and the challenge between universal benefits and means tested benefits were exposed with great clarity. Any suggestion of an easy cutting of the Gordian Knot between welfare, poverty, unemployment and incentives was exposed in that correspondence, as naïve.

Tax Reform

Nigel Lawson’s tax reforms were about creating a more neutral tax system that collected necessary tax revenue with least dead-weight costs. His budgets were about widening the tax base, lowering marginal income tax rates. This started with the reform of Corporation Tax where its rate was reduced and upfront capital allowances were ended removing a distorting tax expenditure subsidy. He moved the tax system from one where it was biased in favour of capital investment and biased against employment and saving. As well as cutting the standard rate of income tax and the top marginal tax rate to 40 per cent, the investment income surcharge was abolished as was the National Insurance clawback where someone working after pension age had their state pension tapered away. The introduction of Personal Equity Plans PEPS was a first step towards an expenditure tax approach to mitigate the double taxation of saving income. The 1988 Budget that cut the top rate of income tax to 40 percent from 60 percent, simplified the tax system replacing several rates with two. As Chancellor, Nigel Lawson maintained a strict discipline in the face of business lobbies whose budget representations, if acceded to, would result in a complex tax system that becomes a baroque system of fiscal churning. Simplicity in public policy is a public good, in itself, that Nigel Lawson understood.

Nigel Lawson and Europe

Many people thought that Nigel Lawson was committed to EEC, EC and later EU integration because of his enthusiasm for replicating German monetary policy through membership of the European Monetary System EMS and its Exchange Rate Mechanism ERM. In fact he was sceptical of the EC and its policies such the Common Agriculture Policy, the constraint that the EC imposed on attempts to liberalise trade policy and expose markets to competition. He was wholly opposed to the European Social Charter and the Social Action Programme of 19 directives to implement it. Nigel Lawson’s views on the EU were in that sense completely at odds with those of his great friend Sir Geoffrey Howe. Before I worked at for him at the Treasury, I was the Special Adviser to the Secretary of State for Employment and in receipt of a series of messages relayed from the Treasury by the Chancellor telling me to get the Department at its Secretary of State, Norman Fowler to harden the line against both the proposed Social Charter and the Social Action Programme.

When the Delors Report proposing an EC economic monetary union was published in 1989, Nigel Lawson was not only opposed to it, but energetically set about proposing an alternative approach to full monetary union. This proposal was prepared in a Treasury paper An Evolutionary Approach to Economic and Monetary Union in September. It was the first substantial piece of Treasury policy I worked for the Chancellor. It was eventually published after his resignation by John Major in November 1989. It emphasised financial integration in Europe and greater use of the currency basket known as the Ecu, suggesting it could be used more widely for financial and eventually everyday transactions. The proposal assumed sterling membership of what would become an ‘unequivocally hard version of ERM.

Lunch in the Treasury Canteen – gravy, one lump or two?

A few days after I went to work for him, Nigel Lawson invited Judith Chaplin and I to join him for lunch in the Treasury Canteen. This was after he had given us a couple of welcome spritzers at our meeting that ended shortly before lunch. The Chancellor apparently had never been to the Canteen before and his private office was concerned he might not find his way back to his office for the afternoon meetings in the old labyrinthine Treasury building. The Canteen itself was dreadful – gravy one lump or two? During the lunch, after he had gone and got us some coffee, he asked me what I thought was the biggest issue in modern British politics at that time. I foolishly answered truthfully and seriously. The answer reflected my experience at the Department of Employment. The biggest issue was the time bomb at the heart of the British constitution that arose from acceding to the Treaty of Rome in 1973 and the European Communities Act 1972. This constitutional timebomb would one day blow up. This was the last thing I should have said to a cabinet minister trying to make an already awkward relationship with the EC work. Part of Nigel Lawson’s enthusiasm for the ERM was his view that membership would help to make the relationship more manageable.

By the 2010s Nigel Lawson accepted that the relationship between the UK and the EU could not be maintained. A central part of his decision to vote to leave was his disappointment and criticism of the EU’s Single Market that he set out in an opinion piece in the Financial Times. He campaigned for Brexit in 2016. Denis Healey, the former Labour Chancellor of the Exchequer, in an interview in the Easter double edition of the New Statesman in 2013, made it clear that he would be voting to leave the EU when the referendum came. He explained that the key matter was the olive tree line. Above the line, people pay taxes and obey rules and below it they do not. It is interesting that the two most formidably gifted ministers of the post-war years were in agreement on bringing UK membership of the EU to an end.

The two dimensions of Nigel Lawson’s political personality

Alan Watkins, the veteran political columnist of The Observer, regularly reminded his readers that there were two dimensions to Nigel Lawson’s political personality. The first was the hugely clever man who combined the qualities of a Cambridge mathematical Wrangler with those of senior Lord Justice of Appeal. The second was the provocative political bruiser on the floor of the House of Commons. When first elected in 1974 he made his reputation as a parliamentary on floor of the House of Commons irritating and getting underneath the skin of Labour ministers.

Even as Chancellor he could be extraordinarily provocative. At one stage during the miners’ strike the Labour Party found that oil fired power stations were being used at great expense in place of coal fired generators to keep the lights on. The Chancellor was forced to make a Government statement. He set out the costly expense of oil and said it was a worthwhile investment in winning the strike and the future of the country. This resulted in a suitable uproar. In private he used to joke that when he went to the House of Lords he would take the title of Lord Lawson of Orgreave, the site of the most violent picketing where the police eventually prevailed against the pickets organised by Arthur Scargill’s striking miners.

Nigel Lawson’s memoirs the View from Number 11 remain a great primer on these questions.

Nigel Lawson wrote a great set of memoirs. Reading them would profit anyone interested in these matters. Some of the interesting tributes on his death have been by contemporary Conservative politicians such as the Prime Minister and the previous Prime Minister. A conspicuous feature of current economic policy and tax policy in particular is the undoing of the tax reform agenda that Nigel Lawson pursued. Instead of widening the tax base, cutting marginal tax rates, making things simpler, current policy is to narrow the tax base, raise marginal tax rates, create a less neutral tax system in terms of tax subsidies for investment, increase taxation of saving income that has been labelled ‘unearned income by the Chancellor and the aggravation of the double taxation of saving. Nigel Lawson’s memoirs still merit reading. 

A tribute made with great affection and admiration, as well as much sadness.

For an economist Nigel Lawson was a joy to work for. He was supremely self-confident, very kind and courteous. You were always on your mettle but were never afraid of speaking to him candidly. He made it clear to me that I could always go to see him if I thought there was a matter I should draw to his attention. These meetings usually took place in his study at No 11 Downing Street where he normally worked with the help of one Treasury Messenger, Marie.

In this tribute I want to give the last words to Nigel Lawson. He largely wrote and arranged his speeches himself, taking pieces that people had drafted and improving on them, and pulling the final thing together on his own. After he resigned that side of life at the Treasury was not as easy in the years ahead. I would like to finish with a gobbet from his final Mansion House Speech made on 19 October 1989:

“Monetary policy is at the heart of macroeconomic policy in a free economy, and thus plays the central role in the battle against inflation.

The key to operating a sound monetary policy is to take correct and timely decisions on interest rates. The task is not easy, at least not without the benefit of hindsight. But it cannot be ducked.”

So, it is with great affection, admiration and much sadness that I mourn and salute the memory of Nigel Lawson.

Warwick Lightfoot

Warwick Lightfoot is an economist and was Special Adviser to the Chancellor of the Exchequer between 1989 and 1992. He is the author of Margaret Thatcher: the economics of creative destruction.