By the time Margaret Thatcher became leader of Britain's Conservative Party in the middle of the 1970s, the post-war era of full employment and continuously rising standards of living had ended. That happy era had been replaced by one of "stagflation" – stagnating economic growth coupled with high inflation.
When the economic orthodoxy of the post-war decades proved unable to respond effectively to the crisis, those who had opposed an ever-expanding role for the state in economic affairs became increasingly influential by claiming that stagflation was the inevitable outcome of too much government and not enough free markets.
Thatcher was in the right place at the right time. Just as the grocer’s daughter from Grantham rose to political prominence, her free market instincts were coming back into intellectual fashion.
The crisis in Britain in the 1970s was chronic even by the standards of the industrialised world at the time, explaining, at least in part, why Thatcher had sufficient support for her radical departure upon taking office. An economy once described as the world's workshop had long been in relative decline, coming to be known as the sick man of Europe.
Arguably the nadir came just a year after Thatcher won the Tory leadership. In late 1976 the IMF had arrived in Whitehall, from where only decades earlier the largest empire in history had been run. For many in the political and administrative classes, “managing decline” was the height of their ambition. It was against a backdrop of seemingly inexorable decline, economic mismanagement and industrial strife that Thatcher – scourge of the defeatists – became prime minister in 1979.
Her time in office started badly. As she moved into Downing Street, the second oil crisis struck. It triggered a global recession of even greater severity than the first crisis six years earlier.
Much as today, when the current British government is being called on to change course in its efforts to reduce its budget deficit, Thatcher was urged to do a U-turn on austerity in the early 1980s. The lady was not for turning.
Along with austerity, she opened up many narrower fronts in the battle to change Britain. Privatising industries that had been nationalised and liberalising the closed services sectors made her many enemies. But by 1983 her reforms had begun to pay off. Economic growth averaged more than 4 per cent a year over the remainder of the decade – one of the strongest periods of expansion ever recorded by the economy.
But her reforms were by no means immediately successful. Britain’s jobless rate remained above 10 per cent until 1987. If tackling unemployment was only partially successful, her ambition to roll back the state was even less so. As late as 1986 public spending as a percentage of gross domestic product was at the same level she had inherited in 1979. And despite her ardent belief in low taxes, the British state under Thatcher was dipping its hand deeper into taxpayers’ pockets in the mid 1980s than in the socialist 1970s.
To shrink the state, taxes were then cut. But the stimulus the cuts provided to an already fast-growing economy caused overheating. Inflation, which had been tamed at great cost in the early 1980s, again ran out of control.