Margaret Thatcher and Ronald Reagan didn’t tame the state

By Peter Hoskin
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This is the third part of a week-long series looking at ‘The Wrong Right’; the barriers to the Conservatives winning a majority at the next election. Yesterday, Tim Montgomerie wrote about how the Tories might properly reach out to working class voters. Tomorrow, Tim will also investigate attitudes towards the State.

The 1980s loom like shoulder pads over the conservative movement today. Ask folk on the Right who their favourite Prime Minister is, and there’s a decent chance that they’ll respond Margaret Thatcher. Inquire about their favourite US President, and it’s just as likely that they’ll say Ronald Reagan. And who can blame them? Both Lady Thatcher and President Reagan were leaders who seemed big even against the colossal events that were going on around them. They made quite a mark.

But there has also been a tendency on the Right to misremember the Thatcher and Reagan years, or to only remember certain aspects of them. I recently wrote an article about this, concentrating on Margaret Thatcher. The truth about her premiership is that it’s a good deal more nuanced, rounded and surprising than popular history would have you believe. There were her “boys” in the Falklands, yes, but there were also defence cuts. There was her struggle against the unions, but she had also been a union member herself. And so on and so on.

In this spirit, it’s worth dwelling on what can be one of the most surprising elements of the Thatcher and Reagan era: their efforts to cut back the State. If you thought that both leaders were merciless and relentless in their use of the axe, then there might be cause for you to reassess that belief. Let’s start with Baroness Thatcher…   

Margaret Thatcher and the State

As it happens, I also wrote about this recently. There’s my chart-heavy post comparing the public finances under Thatcher and under the Coalition, and there’s another on civil service numbers. In which case, I hope you don’t mind if I just pull out some of the most striking numbers from those posts, and leave you to click on the links if you’d like more:

• Public spending in real terms (i.e. accounting for inflation) rose in every year of the Thatcher Governments, except for just two. In today’s money, spending stood at £320 billion when Baroness Thatcher took office, and £376 billion when she left, rising by an average of 1.4 per cent each year. This compares with spending reductions in every year of the Coalition, which is expected to cut by an average of 1.5 per cent each year.
• Spending on the health service rose by around 30 per cent across the Thatcher years.
• According to a recent report from Oxford University, the administrative costs of central government actually rose by 20 per cent under the Thatcher governments. New Labour managed a 5 per cent increase. The Coalition is aiming for a 34 per cent cut.
• Margaret Thatcher ran a structural deficit, measured as a percentage of GDP, in all but three years of her premiership — and one of those three years involved a “surplus” of 0 per cent. These years of surplus came towards the beginning of the Thatcher era, thanks to the 1981 Budget’s remarkable programme to reduce the 4 per cent deficit inherited from James Callaghan. But the deficit generally rose from 1983 onwards, such that it stood at 2.6 per cent of GDP by the end of the decade.

I haven’t, however, written about Ronald Reagan on ConservativeHome before now, so the next section will contain a couple of charts…

Ronald Reagan and the State

In his first inaugural address, Ronald Reagan took time to attack the fiscal trends that preceded him. “But great as our tax burden is, it has not kept pace with public spending,” he said. “For decades, we have piled deficit upon deficit, mortgaging our future and our children's future for the temporary convenience of the present.”

President Reagan’s proposed solution was, more or less, to “starve the beast” — to use tax cuts to limit government spending. As he put it in another address in 1981, “we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance by simply reducing their allowance.”

So how did he do? Judging by this graph, not very well. It shows — in real terms — the outlays, tax receipts and deficits of federal government (i.e. that part of government that the President technically has control over; spending is also controlled at state and local levels) during the Reagan years. Turns out that all three increased:

Indeed, as Steven F. Hayward argued in a though-provoking article last year — entitled “Modernizing conservatism” — President Reagan’s early eagerness to “starve the beast” by cutting tax rates may have been self-defeating in a wider context:

“The de facto starve-the-beast strategy was the great cop out of the Reagan years. By assuming that restricting revenues would eventually compel reductions in the size of government, the Reagan administration was able to justify avoiding any serious attempt to reform entitlement programs. Beyond a few very minor trims, every trial balloon of deeper entitlement reform was swiftly routed and withdrawn. It is uncomfortable but necessary for conservatives to acknowledge that Reagan's disinclination to attack entitlements was one reason for his popularity — after an initial flurry, he did not seriously attack the welfare state.”

The upshot, of course, of spending continuing to outpace tax revenues was “deficit upon deficit,” to use Reagan’s own words. I used the method outlined by Forbes’s James K. Glassman here to produce the table below. It shows that the average annual deficit, as a percentage of GDP, was higher under Reagan than it was under Jimmy Carter, George H.W. Bush, Bill Clinton and George W. Bush. Of the past six Presidents, only Barack Obama tops it:

Which should suffice to make the point, but here’s another graph for the pile; this one showing the number of federal employees over the Reagan years:

Why does this matter?

The above isn’t intended to be a complete picture of the Thatcher and Reagan governments, nor is it meant to disparage what was achieved by both. As Andrew Lilico points out in an excellent Policy Exchange pamphlet, the Thatcher years can be seen as ones of extraordinary fiscal restraint when placed in a historical context. And as for Reagan’s fiscal policy, it remains true that his tax cuts helped clear the way for the economic growth that was seen subsequently.

But how often does the Right admit that Lady Thatcher only cut overall spending in two years of her premiership? Or that Ronald Reagan fought, as he did, for increases in the US foreign aid budget, above those recommend by Congress? Or that, on many measures, George Osborne fiscal plans are more radical than what was achieved in the Eighties (although, admittedly, they are yet to be achieved themseves)?

And the problem is, this skews the current debate. False memories and and forceful rhetoric don't help to cut the deficit. It takes much more than that, as my colleague Paul Goodman will make clear on Friday.