This document discusses the legacy of Margaret Thatcher's time as Prime Minister of the UK from 1979 to 1990 and lessons that can be learned. It outlines issues with the UK's education, training and industrial relations systems in the 1970s. Under Thatcher, macroeconomic policies caused high inflation and unemployment. Financial deregulation and housing policies exacerbated inequality and a lack of affordable housing. The flexible labor market created more low-wage jobs with few opportunities for skills development. Overall, it argues that the UK needs comprehensive reforms to education, fiscal policy, land use, and financial regulation to address ongoing issues stemming from Thatcher-era approaches.

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3. The Thatcher legacy:
lessons for the future of the UK economy
John Muellbauer and David Soskice
Resolution Foundation 2030 project
17 November 2022

4. The legacy of the 1970s
• UK performs poorly in state education & vocational training (vs. Germany, Japan).
• 1980: only 11% of a cohort graduated from university.
• Primitive apprenticeship system of vocational training run by skilled workers’ unions, largely geared to industry.
• Level of training for management very weak.
• Rising inflation (27% in Aug.1975), driven by the Barber boom and oil shock, worsened fractious industrial
relations.
• Many UK union leaders and managers had little understanding of the economics of a small open economy facing
international competition.
• 1978-79: ignominy of the ‘Winter of Discontent’ opened the door to Mrs. T.
• The UK’s one big advantage: North Sea oil and gas.
• Global trends and shocks:
o Global shifts in employment and output from industry to services.
o Globalisation of trade and finance: increasing trade openness and international capital flows, especially from early 1970s.
o The second oil price shock 1980.
o The rise in US interest rates under Reagan.
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5. Macroeconomic policy under Mrs. T
• Monetarist blunders: delusion that money growth drives inflation, allowing money growth to set interest
rate policy, the (pro-cyclical) MTFS.
• The 1979 hike in VAT from 8% to 15% at a time of high inflation.
• The 1981 Budget tightened fiscal policy in a deep recession: an example of ‘the expansionary effect of
fiscal contraction’ ? No.
• Financial liberalisation: removal of exchange controls in 1979, of the ‘corset’ in 1980, opening the doors
for banks to enter the mortgage market, loosening regulation of building societies.
• From 1983, growth, tax & privatisation receipts and demography improved public finances. Pro-cyclical
fiscal policy: tax cuts from 1986 exacerbated demand-expanding effects of 1986 oil price fall and ongoing
credit and house price boom.
• After ‘flash-crash’ in Oct.1987, interest rates were cut, fuelling demand.
• Switch from Domestic Rates to Poll Tax boosted already booming house prices.
• Base rates were hiked from 7.5% in 1988 to 15% in 1989 in response to soaring domestic inflation and
BOP deficits.
• House prices fell 1991-95; mortgage arrears and foreclosures rose to all-time records in 1991-92.
• Given pressure of high interest rates within the ERM, over-valued real exchange rate and a severe
domestic recession, the UK exited the ERM in Sep.1992.
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6. Consequences for unemployment, worse de-industrialisation
• The unemployment rate rose from 5.4% in 1979 to 11.8% in 1984, only falling below 10% in 1988.
• 1979-93: employment in manufacturing fell by 39%. By 2021, the employment share of manufacturing in the UK
was 7.8%, under half that in Germany.
• Comparative employment shares in industry:
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7. Housing policy: RTB sales, lack of replacement and constrained
land release
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• New builds and right to buy sales of public housing:
• Fall in residential construction and affordable housing explains some of the UK’s record rise in
house prices/income relative to G7; and rise in social exclusion and intergenerational inequality.

8. Son of Poll Tax - Council Tax - is highly regressive: English data
from Fairer Share
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9. Rise in inequality
• Rise in household inequality:
• Also rises in between-region and between-generations inequality.
• Almost no policy to help left-behind locations – no Northern powerhouse.
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10. The labour market, skills and education
• Less job protection and lower replacement rates for unemployment benefits, created a flexible labour market;
balance of power shifted to employers; greater wage inequality.
• Although employment levels are high: the UK has swathe of low wage, skill and progression service sector jobs
with poor labour standards.
• Fundamental failure of the whole period: lack of an effective education and training system to complement the
newly flexible labour market.
• ‘Apprenticeship’ concept has appealed to Conservative governments as a cheap route to training, subsidising
employers to employ low-cost labour.
• Even where apprenticeships are better organised (Germany, Switzerland), employers favour hiring from 2nd level
university systems, for improved ICT and management skills.
• In nearly all advanced economies – apart from the UK – there are increasingly important ‘Tertiary B’ college
systems.
• UK universities teach via highly specialised disciplines: produce students with v. limited (if any) management skills;
software understanding mainly by accident.
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11. Financial regulation, land use and property taxation
• The long shadow of 1980s policies on financial regulation, land and property tax.
• Helps explain the UK’s low saving and investment rates - BOP deficits since 1984.
• Spate of recent international studies: confirm crowding out of more productive investment during credit-fuelled
real estate booms.
• Record rise in UK land prices: the benefits of growth have disproportionately accumulated to land-owners and the
financial sector, diverting entrepreneurship into rent-seeking and overcoming land constraints.
• GFC damage and the government debt burden from bailing out the major banks, are closely connected with prior
lax financial regulation.
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12. Directions for the future – learning the lessons
• Avoid chaotic, pro-cyclical, ideology-driven macro policies.
• A comprehensive reform programme should start with primary fiscal rule that focuses on the net asset position of
the government rather than gross debt.
• Together with the repeal of the 1961 Land Compensation Act, this is essential to empower land value capture to
fund infrastructure and affordable housing and help relax constraints on economic activity.
• Replacement of the unfair Council Tax with fair, current land-value based property taxes and green discounts for
low carbon buildings and gardens.
o This would put right one of the most iniquitous legacies of the 1980s and 1990s, Muellbauer (2018).
• It would help power a green transition, with synergy for the left-behind places.
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13. Directions….
• Taxing land has the least distorting effect on economic activity and reduces social exclusion,
intergenerational injustice, regional inequality and financial instability.
• It would broaden the tax base to help resolve the current fiscal crisis.
• UK needs ‘Tertiary B’ college systems and more multi-disciplinary (including quantitative) university
curricula.
• While the European Single Market and university expansion owe much to Mrs. T, Boris-Brexit has re-erected
the barriers that Mrs T. was so keen to remove.
• UK universities face challenging new handicaps, especially in science.
• Brexit-damage limitation should be a high priority.
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