Heading into the 1980s, the UK economy continued to experience significant macroeconomic distress, as it had done in the 1970s. However, outcomes differed significantly, as Margaret Thatcher’s Conservative government (in office for the whole decade) pursued a radically different approach to managing the economy from its predecessors. This briefing provides an overview of how the economy developed over the course of the decade and considers what the changed approach to economic policy meant for workers and businesses.

1. The end of macroeconomic ‘juggling’

Harold Macmillan, former chancellor (1955–57) and prime minister (1957–63), suggested that economic policymakers, like the circus juggler, had four balls to simultaneously keep in the air during the post-war period: “full employment, an expanding economy, stable prices and a strong pound”.[1] The extent to which these objectives were ever all satisfactorily achieved at the same time is a matter for debate. However, what does appear clear is that their simultaneous attainment became harder as the decades went on, as illustrated by the stagflation crisis of the 1970s and subsequent IMF bailout.[2]

In the 1980s there was a clear break with this approach. An important change which underlaid this was the implementation of a new foreign exchange regime. The pound had started floating in 1972, following the breakdown of the Bretton Woods system of fixed exchange rates. This meant that the pound was able to readily adjust and help correct a significant trade surplus or deficit should either emerge. Additionally, towards the end of the 1970s exchange controls were abolished, liberalising the flow of capital into and out of the UK.[3] From this point on, balance of payments surpluses or deficits could be sustained indefinitely if they were combined with a compensating flow of capital. For example, the pound could remain at a stable exchange rate while maintaining a consistent trade surplus for as long as the UK remained a net investor or lender to the rest of the world. Conversely, and more pertinently in the decades to come, the pound could remain stable with a consistent trade deficit for as long as the UK remained net borrower or recipient of investment from the rest of the world. These changes to the foreign exchange regime meant the strength of the pound and the balance of payments were no longer such immediate concerns for macroeconomic policymakers.

More fundamentally, Thatcher’s government reconceptualised the purpose of macroeconomic policy. Rather than attempting to juggle the three remaining objectives identified by Macmillan (full employment, growth, and inflation), macroeconomic policy was to be primarily concerned with inflation. As explained by then chancellor Nigel Lawson in his 1984 Mais lecture:

It is the conquest of inflation, and not the pursuit of growth and employment, which is or should be the objective of macroeconomic policy. And it is the creation of conditions conducive to growth and employment, and not the suppression of price rises, which is or should be the objective of microeconomic policy.[4]

In practice, this new approach to macroeconomic policy for the Thatcher government meant raising interest rates and constraining public spending as inflation resurged. Inflation had fallen from a post-war high of 24.2% in 1975 to 8.3% in 1978 before rising back up to 18.0% in 1980 (see table 1). Among the proximate causes of this resurgence were a more than doubling of the price of oil, high wage settlements, and an increase in the rate of value added tax.[5] Interest rates were raised to post-war highs to counter this, with the Bank of England’s main interest rate increased to 17% in November 1979.[6]

As well as reducing incentives for domestic households to consume and for domestic businesses to invest, high interest rates also strengthened the pound, by making sterling denominated financial assets (such as government bonds) more attractive to hold relative to assets in other currencies. At this time the pound was also being strengthened by demand for North Sea oil, and this further strengthening created significant challenges for the competitiveness of the manufacturing sector, with the strong pound making UK manufacturing products comparatively more expensive for foreign consumers.[7] The early 1980s therefore saw the manufacturing sector continue to decline as a share of the economy, as it had since the 1960s, with job losses accelerating. From 1970 to 1979, manufacturing employment had fallen by around 1 million, from 7.7 million to 6.7 million; however, 1.5 million manufacturing jobs were lost between 1979 and 1983 alone.[8]

The upshot of all of this was a recession and a sharp rise in the rate of unemployment (see table 1). GDP growth was negative for 1980 and 1981 and between 1979 and 1982 the unemployment rate approximately doubled, from 5.4% to 10.7%, reaching double figures for the first time since the interwar depression.[9] GDP growth did gradually recover, reaching 4.2% by 1983, by which time inflation had fallen to 4.6%, the lowest it had been since 1967. Growth subsequently remained positive for the rest of the decade, averaging 3.8% from 1983 to 1989; however, unemployment continued to remain in double figures up to 1987.

Table 1. Selected macroeconomic indicators, 1980–89

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
GDP growth (%) -2.1 -0.7 2.0 4.2 2.2 4.1 3.1 5.4 5.4 2.4
Inflation (%) 18.0 11.9 8.6 4.6 5.0 6.1 3.4 4.2 4.9 7.8
Unemployment rate (%) 6.8 9.6 10.7 11.5 11.8 11.4 11.3 10.4 8.6 7.2

(GDP data from ONS data series ‘IHYP’, 28 March 2024; inflation data from ONS data series ‘CZBH’, 17 April 2024; unemployment data from ONS data series ‘MGSX’, 16 April 2024)

2. The restoration of profitability

The persistence of high unemployment for a large part of the decade can be understood in the context of efforts to restore the profitability of British industry. As highlighted in previous briefings in this series, profitability was challenged in the 1960s and 1970s as a result of industrial tensions, intensifying global economic competition, and price rises for key commodities and industrial inputs.[10] Up to the mid-1960s the rate of return on capital was typically in the range of 25–30%, at least 20 percentage points higher than the rate of interest—that is, the cost for businesses to borrow or the return that could be made by investing in financial assets (such as government bonds) rather than industry.[11] However, from the late 1960s these two figures started to converge, with the rate of return on capital even falling below the rate of interest in 1975 and 1976.[12] As can be seen in figure 1 below, a similar situation almost emerged in the early 1980s.

Figure 1. Profitability and interest rates, 1980–89

Figure 1. Profitability and interest rates, 1980–89
(Profitability data from ONS dataset ‘Volume index capital services (VICS), annual, UK’, 9 November 2023; and interest rate data from Bank of England, ‘Research datasets: A millennium of macroeconomic data’, 2016)

From the perspective of industry, a key mechanism to protect and restore profit margins was reducing the power of workers to bargain for higher wages. A higher rate of unemployment supported this objective by increasing the relative scarcity of jobs and increasing the dependence of employed workers on their existing employer. Further to this, the Thatcher government legislated for a new system of industrial relations, which set a series of limits on trade union activity and outlawed some existing protected forms of industrial action. Labour law was also loosened more broadly. It became easier to hire and easier to fire, and access to employment tribunals became more restricted.[13]

In the wake of these changes, the strength of organised labour and the prevalence of industrial action declined. Trade union density (members as a proportion of the workforce) was at a post-war high of 52.4% in 1979, but fell to 37.5% by 1989.[14] The number of days lost through labour strikes and disputes averaged 10.5mn per year in the first half of the 1980s, falling to 3.9mn in the second half of the decade, and was later to fall to under 1mn per year in the 1990s.[15]

The consequence of resolving industrial tensions in this way can be seen in table 2 below. The share of national income going to private companies as profit rose, as the share going to employees fell to a post-war low. The former rose from 17.0% in 1980 to 26.4% in 1989, and the latter decreased from 59.8% to 52.4% over the same period. This latter figure was over 10 percentage points lower than the average share of national income received by employees over the three previous decades (63.2%).

Table 2. Shares of national income, 1980–89

Compensation of employees Self-employment income Private companies, gross operating surplus* Public sector, gross operating surplus* Households and non-profit institutions serving households, gross operating surplus*
1980 59.8% 6.4% 17.0% 6.0% 10.8%
1981 58.7% 6.3% 17.0% 6.5% 11.5%
1982 56.7% 6.3% 18.6% 6.5% 11.9%
1983 54.9% 6.3% 20.5% 6.1% 12.2%
1984 54.5% 6.6% 21.6% 5.3% 12.0%
1985 53.6% 6.3% 23.5% 4.7% 11.8%
1986 53.9% 6.8% 22.8% 4.7% 11.8%
1987 52.5% 6.9% 25.0% 4.1% 11.5%
1988 52.2% 6.8% 25.8% 3.9% 11.3%
1989 52.4% 6.6% 26.4% 3.5% 11.0%

*Gross operating surplus is a measure of the income of enterprises on the goods and services they produce after they have paid their workers and paid for the cost of raw materials, services and overheads. It can be considered a basic measure of profit for private companies. Amongst other things, this surplus can be used to fund investment, or pay dividends to shareholders in the case of private companies. Gross operating surplus for households is imputed income of owner-occupied dwellings; in effect it is the rental costs avoided by owning one’s home.

(Bank of England, ‘Research datasets: A millennium of macroeconomic data’, 2016)

The enhanced share of national income going to private companies was also supported by privatisation of major public entities, such as British Telecom, British Gas and Rolls Royce.[16] These privatisations, and many others, meant that a significant amount of income that was previously accounted for as the operating surplus of public enterprises was now flowing towards private companies in the form of profit. As can be seen in table 2, the gross operating surplus of public sector organisations as a share of national income fell from 6.0% in at the start of the decade to 3.5% by the end of it.

3. Fiscal restraint and monetary expansion

The restoration of profitability laid the groundwork for what became known as the ‘Lawson boom’ towards the end of the decade, which saw economic growth rise to over 5% in both 1987 and 1988 and private investment surge. Private investment as a share of GDP had averaged 14.0% in the first half of the 1980s, before rising sharply to 20.9% in 1989, a post-war high.[17]

Although personal tax rates were notably reduced during Lawson’s chancellorship, the boom was not supported by a significant fiscal loosening in net terms, as public spending was restrained to compensate for tax reductions. Indeed, as illustrated in figure 2 below, government spending as a share of GDP fell even more sharply than taxation as a share of GDP over the latter part of the decade, creating a public finance surplus in 1988/89 for the first time in almost 20 years.[18] The government’s debt to GDP ratio had been fairly stable for the first half of the decade, but this reduction in borrowing, combined with the acceleration in growth, saw the ratio fall from 38.7% in 1984/85 to 23.1% in 1989/90.[19]

Figure 2. Taxation and public spending (% GDP), 1980–90

Figure 2. Taxation and public spending (% GDP), 1980–90
(Office for Budget Responsibility, ‘Public finances databank’, 25 April 2024)

There was, however, a significant monetary expansion. Secured lending to households was equivalent to 31.1% of household income in 1980 (roughly the same level it had been in 1970), but this figure rose to 67.7% in 1989.[20] Unsecured lending to individuals as a percentage of household income rose from 6.6% to 12.9% over the same period, the first time this figure had reached double figures in the post-war era.[21] Business debt also increased by a similar proportion, with lending to non-financial corporations increasing from 28.5% in the first quarter of 1980 to 51.3% in the last quarter of 1989.[22]

Unemployment started to fall in the wake of the boom, falling from 11.3% in 1986 to 7.2% in 1989. However, inflation did start to rise again, increasing from 3.4% to 7.8% over the same period (see table 1).

4. Living standards growth and distribution

As per the government’s objective, inflation did decrease in the 1980s, averaging 7.5% per year compared to 12.6% in the 1970s. However, in certain respects the two decades produced remarkably similar economic outcomes. For example, GDP growth averaged 2.6% per year in the 1980s, compared to 2.7% per year across the 1970s.[23] Real disposable household income per head, a key measure for living standards, rose by 28.9% over the decade as a whole, compared to 29.7% in 1970s.[24]

A key difference between the decades is nevertheless clear in terms of the proceeds of this growth. In previous decades, the ratio of income between higher income households and lower income households had remained roughly the same, but in the 1980s the gap widened. For example, the Institute for Fiscal Studies estimated that the net household income for the 90th percentile of the income distribution was typically around three times that of the 10th percentile prior to the 1980s, averaging 3.1 from 1961 to 1980.[25] However, this ratio increased sharply during the 1980s to 4.1 by 1989, the rate at which it was to approximately remain for the following three decades.

Cover image by Roger Wollstadt on Wikimedia Commons. Image shows Piccadilly Circus, London, 1987.


  1. Harold Macmillan, ‘Riding the Storm, 1956–1959’, London, 1971, p 3. Return to text
  2. House of Lords Library, ‘The UK economy in the 1970s’, 4 April 2024. Return to text
  3. James Callaghan’s Labour government began their removal in October 1977, before Thatcher’s government completed their removal in October 1979. For more detail see chapter 5, ‘Abolition of exchange controls’, in Jack Copley, ‘Governing Financialization: The Tangled Politics of Financial Liberalisation in Britain’, 2021. Return to text
  4. Nigel Lawson, ‘The fifth Mais lecture: The British experiment’, 18 June 1984. Return to text
  5. Alec Cairncross, ‘The British Economy Since 1945’, 1992, p 234. Return to text
  6. Bank of England, ‘Research datasets: A millennium of macroeconomic data’, 2016. Return to text
  7. Edmund Dell, ‘The Chancellors: A History of the Chancellors of the Exchequer, 1945–90’, 1997, p 472. Return to text
  8. Bank of England, ‘Research datasets: A millennium of macroeconomic data’, 2016. Return to text
  9. As above. Return to text
  10. House of Lords Library, ‘The UK economy in the 1960s’, 13 February 2024; and ‘The UK economy in the 1970s’, 4 April 2024. Return to text
  11. Profitability data from ONS dataset ‘Volume index capital services (VICS), annual, UK’, 9 November 2023; and interest rate data from Bank of England, ‘Research datasets: A millennium of macroeconomic data’, 2016 Return to text
  12. For more detail on this see House of Lords Library, ‘The UK economy in the 1960s’, 13 February 2024; and ‘The UK economy in the 1970s’, 4 April 2024. Return to text
  13. Simon Deakin, ‘Labour law and industrial relations’, in Jonathan Michie (ed), ‘The Economic Legacy 1979–1992’, 1992, pp 173–190. Return to text
  14. Bank of England, ‘Research datasets: A millennium of macroeconomic data’, 2016. Return to text
  15. As above. Return to text
  16. For a summary of the privatisation programme, see House of Commons Library, ‘Privatisation’, 20 November 2014. Return to text
  17. ONS data series ‘NPQS’, 28 March 2024; and ONS data series ‘ANSQ’, 23 April 2024. Return to text
  18. The last surplus was in 1970/71. See Office for Budget Responsibility, ‘Public finances databank’, 25 April 2024. Return to text
  19. As above. Return to text
  20. Bank of England, ‘Research datasets: A millennium of macroeconomic data’, 2016. Return to text
  21. As above. Return to text
  22. Bank for International Settlements, ‘Credit to the non-financial sector’, accessed 12 May 2024. Return to text
  23. ONS data series ‘IHYP’, 28 March 2024. Return to text
  24. ONS data series ‘CRXX’, 28 March 2024. Return to text
  25. Institute for Fiscal Studies, ‘Income and wealth inequality explained in 5 charts’, 9 November 2022. Return to text