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Thatcher's crucial winter

By John Allan MayJohn Allan May is a former London bureau chief of the Monitor, and a long-time analyst of British economic affairs. / September 19, 1983



If Margaret Thatcher's government emerges whole and unscathed in the spring of 1984, something very remarkable will have happened. And something of profound significance not only to Europe but also to the US.

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For one thing, free-market economics will have made a crucial breakthrough.

One can imagine what this might mean simply by looking around at the world of planned-economics and the situation in which countries addicted to it find themselves. Socialist France, having embarked with well-meaning enthusiasm on a policy of increased government spending and reliance on money alone to stimulate growth, is pulling its belt in very tight. Denmark is ''cutting back on welfare to save the welfare state.'' So are Belgium, the Netherlands, Italy, and Sweden. Poland, on top of all its other troubles, shudders under the unbearable weight of its international debt. Several South American states are technically bankrupt.

And here in Britain the treasury has computed that if present economic and demographic trends were to continue, by 1994 a tax rate of nearly 70 percent would be needed to finance Great Britain's welfare state and its industrial subsidies.

Some free-market economists believe that a tax rate of 30 percent or below is necessary if growth is to be combined with stability and anything like full-employment. Clearly a revolution in policies is necessary.

But there is a structural weakness in Mrs. Thatcher's own policies. The need, she says, is to cut into welfare, education, the National Health Service, state pensions, public housing, and even jobless benefits if there is to be growth-with-freedom. At the same time there is a need, it seems, to increase government spending on nuclear missiles, ''fortress Falklands,'' law and order, agriculture, and the European Community.

Mrs. Thatcher's majority in the House of Commons is unassailable. But Mrs. Thatcher's leadership is not unassailable any more. Her new young Chancellor of the Exchequer, Nigel Lawson, is being watched with a very wary eye by many Tory MPs. Meanwhile, watching intentively from the back benches are both ex-Prime Minister Edward Heath and former Foreign Secretary Francis Pym. Lord Carrington, once a treasured adviser, who felt forced to resign from the Foreign Office over the Falklands war, has been openly critical of the way cuts in public spending are being made.

In theory most Tories, and now many Liberals, agree that there can be no economic growth, no end to inflation, and no great reduction in unemployment without a cut in taxation.

Many agree that there can be no cut in taxes without a large reduction in government spending. Some would add that the reinvigoration of industry is impossible too without such a cut.

Turning several loss-making nationalized industries into (hopefully) profitable private industries - British Telecom and British Airways for example - will bring a few protests.

But cutting back on educational opportunities, closing National Health hospitals and clinics, running down the railroad, reducing welfare payments and half ''privatising'' pensions will make a very unpopular package. Particularly if there is a great increase in spending on new Trident nuclear missiles and on the fortification of the Falkland Islands. And if the European Community insists on a large and continuous British subsidy. And if wages are reduced.

The challenge then to Margaret Thatcher and her new Cabinet is to convince Parliament and the public that switching from government to private spending will bring better education, better health services, better housing, fairer pensions, more employment and a higher national standard of living. And that it will do so without the need to cut the costs of nuclear defense or the need to reach a peaceful understanding with Argentina.

This will not be an easy challenge to meet. But more than just the future of this Thatcher administration depends on her meeting it. The immediate future of ''supply side economics'' also depends on that. And not only in Great Britain.

The critical period of Mrs. Thatcher and her advisers will be from this November to next March.