Monetarism and Fiscal Policy
Thatcher inherited a nightmare economy with 15% inflation and over 2 million unemployed - a toxic combination called stagflation. Her solution was monetarism: controlling the money supply to crush inflation, even if it meant accepting higher unemployment.
The 1981 budget shocked everyone by going further with monetarist policies rather than reversing course. Government borrowing was slashed, council grants were cut, and benefits were frozen in what Chancellor Geoffrey Howe called the "most unpopular budget in history."
Tax policy shifted dramatically from direct to indirect taxation. The top rate of income tax fell from 83% to 40%, whilst VAT jumped from 8% to 15%. This was meant to reward wealth creators, but critics argued it hit poorer families hardest.
Key Point: Thatcher waged war against Labour-controlled councils like Ken Livingstone's Greater London Council, using rate capping to limit their spending and eventually abolishing metropolitan authorities altogether.
