Harry Stonebridge HS689@cam.ac.

uk St Catharine’s College

To what extent did Thatcher’s government and the New Labour government establish a new consensus
based principally on neo-liberalism?

When Thatcher was elected in 1979, she implemented a radical paradigm shift away from Keynesian fiscal-
based demand-management towards neo-liberal ideology in the face of the persistent challenge of stagflation.
Neo-liberalism emerged with the following principles; supply-side policy concerned with privatisation and
deregulation, fiscal prudence to control government debt, monetarism as the primary macroeconomic
instrument, and a shift in culture away from collectivism towards Victorian-inspired individualism. To argue
that the New Labour government continued these Thatcherite principles beyond her government in the form
of a new consensus, I will address the main facets of neo-liberalism. First, how policy concerning the supply-
side of the economy changed over the period. Second, whether the role of fiscal policy changed between the
governments regarding the welfare state and a shift towards individualism. Third, if monetarism remained the
primary macroeconomic instrument, marking an abandonment of Keynesian discretionary fiscal stimulus. This
essay will address purely whether a consensus was established at all between Thatcher and New Labour,
rather than debate whether the potential consensus was in fact ‘new’ or just a reincarnation of the Churchill-
Atlee consensus; I believe that the shift to monetarism and privatization away from nationalised industry
alongside fiscal stimulus markedly proves this consensus was axiomatically a different, thus ‘new’, coherence.
The neo-liberal ideology was distinctively different from the welfare-state inspired consensus of the post-war
period, thus when a pragmatic New Labour appealed to the median voter in 1997, the median voter had
noticeably shifted right compared to the one that the Conservatives had appealed to in 1959.

Thatcher revolutionised the industrial economy with deregulation and privatisation that transformed a
productive capacity driven by free-market principles – a notion that New Labour extended in the form of
further privatisations and the introduction of quasi-markets. Thatcher encouraged a sectoral-shift of the
economy away from trade-union-protected declining industries such as coal to other newly privatised energy
sectors such as British Gas which was privatised in 1986. Away from the shackles of national ownership, and at
the mercy of the invisible hand of the market, Thatcher’s policy was to allow demand and cost to determine
key industry, rather than central planning influenced by trade-union collective power – thus the successful
national industries such as British Gas were privatised first, allowing them to flourish against nationalized
British Coal which was to not be privatised until 1994, thus accelerating the sectoral-shift. Despite
nationalisation being key element of post-war Labour ideology, the pragmatic Blair of New Labour made no
attempt to re-nationalise industry upon election in 1997, noting that a pragmatic consensus on privatisation
was necessitated for election following the embourgeoisement of the electorate throughout the 1990s – as
per the median voter theorem. New Labour de facto employed perfect neo-liberal ideology versus classical
liberalism; the state actively supported the provision of the free market on an ongoing basis such as the
introduction of quasi-markets in the NHS, as oppose to no place for the state. Although the plan in 2000 was
set to increase health spending in absolute terms, there was further marketisation and decentralisation away
from the Department of Health. The sustained continuation of marketisation and preservation of privatisation
under New Labour lead Peter Mandelson to declare ‘we are all Thatcherites now’; the consensus had been
forged under a pragmatic endeavor for power by Blair at the expense of ideological purity – New Labour was
now neo-liberal regarding state-ownership.

However, ideologically Thatcher employed minimal fiscal policy, favoring monetarism as the primary
instrument for macroeconomic management alongside supply-side reform – New Labour appeared to deviate
away from this stance with the introduction of Working-Family Tax Credits, a new minimum wage and record
lows of poverty. New Labour was promising the best bits of Thatcher’s reforms combined with greater social
welfare provision typical of Labour. Contrastingly, Thatcher was defiantly principled against the collective
power of the trade-unions, citing labour market rigidity as the cause of stagflation (a la Milton Freidman), and
wished to residualise the welfare state to a last resort for the unemployed. Although Thatcher’s and New
Labour’s standpoints initially seem rather different, in practical application they were not so dissimilar.
Throughout Thatcher’s first term and the beginning of her second term in office, the size of the welfare state
indeed increased as a result of the mass structural unemployment resulting from the accelerated sectoral-shift
of the economy – rather than the fiscal prudence and austerity promised, Thatcher needed to raise greater tax
revenue to prevent exposure to the opposition. Thatcher successfully financed the increased government
Harry Stonebridge HS689@cam.ac.uk St Catharine’s College

spending by increasing indirect taxes, whilst simultaneously promoting a movement from collectivism toward
individualistic principles through her industrial-relation policy. New Labour also increased government
expenditure in pursuit of their ultimate goal - reducing poverty. Their means of raising a greater fiscal dividend
was remarkably similar to Thatcher’s; unable to increase the higher band tax rate from 40p due to the changed
median voter, Blair introduced a number of ‘Stealth’ indirect taxes, just as Thatcher had. Clearly, a consensus
had also developed with regard to financing the remaining welfare state between Thatcher and New Labour in
that necessitated increased government spending would be financed via increased indirect taxation receipts.
Despite this, the issue surrounding Thatcher’s shift toward individualism with regard to increasing
unemployment was perhaps not met by New Labour as they instead introduce Working Family Tax Credits to
further help the poorest of the country, suggesting not such a push away from collectivism was promoted
under New Labour. However, ONS data has revealed that inequality in fact increased under Blair, and the
introduction of university tuition fees and recline of maintenance grants support the notion that New Labour
was also in consensus with Thatcher concerning a movement from collectivism to individualism. Whether this
element of the consensus was intentional, or merely a consequence of the embourgeoisement following
Thatcher’s sustained economic growth and greater uptake of university is difficult to conclude, but at the least
New Labour was pragmatically forced into a consensus on both fiscal financing and individualism.

Thatcher’s radical neo-liberal economic policy centered around a paradigm shift from Keynesian demand-
management to utilising monetary policy as the primary macroeconomic instrument. Inspired by Friedman’s
work on the augmented phillips curve, indeed he worked for the government as a special advisor, Thatcher
highlighted price stability as the core macroeconomic objective with real national output once again being
determine on the supply-side of the economy – a solution to the stagflation of the 1970s and ineffectiveness of
fiscal stimulus in overcoming it. The Bank of England would be the center-point of economic policy, and price
stability would be the absolute aim – something that continued into New Labour. Although it may seem Blair’s
stance on the central bank altered from Thatcher’s, choosing to create the apolitical and independent MPC
following his 1997 election as a result of the 1992 ERM disaster rather than use monetary policy as the
government main tool as Thatcher had, New Labour’s approach was in fact identical. Despite the Bank of
England now effectively being independent from the government, it was still primarily concerned with
maintaining price stability and the target inflation rate set out in its remit was set by the Labour chancellor,
thus the government still possessed influence over the same function the central bank was carrying out before
independence. Therefore, New Labour carried on the monetarist approach to price stability as the core value
to economic success, allowing the supply-side to fuel growth, further embodying the consensus from Thatcher
to Blair.

New Labour carried on the key principles of neo-liberalism that Thatcher had manifested in her paradigm shift
upon taking office in 1979. Blair continued the supply-side approach to growth through further marketisation
with the introduction of quasi-markets, while embourgeoisement of the electorate prevented any real
extension of the welfare state and a return to collectivism under New Labour due to the increased fiscal
dividends being limited to indirect taxation just as under Thatcher, and the monetarist approach to economic
policy of prioritising price stability was continued despite the ERM disaster and independence of the Bank of
England. New Labour, via a pragmatic pursuit of office, had conformed into a ‘new’ consensus of neo-liberal
principal to avoid raising income taxes or inflation at the expense of their own ideology. The Labour state was
now actively providing ongoing support for marketisation, and anti-Blairest Jeremy Corbyn was banished to the
backbenches in the glum shadows of the dark-age for Labour. Perhaps the juxtaposition of Corbyn now as
leader of a reformed Labour Party in opposition is the perfect illustration of how far the New Labour consensus
stretched beyond classic Labour ideology to pragmatic political expediency.