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of 1980 the economy had been plunged into full scale recession, but the government still pursued its deflationary policies, unemployment reached the unprecedented level of 3 million. This lead to a major reduction in the consumption expenditure as the people's disposable income was reduced and the cost of goods was also high. Even the share of government expenditure was reduced to reduce the overall total consumption expenditure substantially.

The effect of these policies was:

1. Reduce consumer spending, investment and exports. Therefore there was a decline in Aggregate Demand and hence economic growth.

2. Increase in the exchange rate ( as well as higher interest rates, the production of oil in the north sea caused a rapid appreciation in Pound Sterling) Exporters struggled to cope with the rapid appreciation because it made their exports less competitive. Many industries who relied on exports went bankrupt. Manufacturing output fell by almost a third during the recession.

3. Inflation was brought under control, but unemployment rose to over 3 million and didn't fall below 3 million until 1986.

4. Real GDP fell by 2.2% in 1981

The govt argued that the recession was necessary to shake up the economy and get rid of inefficient firms. It is true that some firms were inefficient but most economists would argue that the recession was deeper than it need to be. With the rapid appreciation of sterling many good firms also went bankrupt.

Targeting the money supply proved to be a futile task because money supply growth proved to be very erratic and there was no direct link between inflation and Money supply. By 1985 the govt had effectively abandoned monetary targets. By this time, unemployment was still over 2.5 million people. However, from 1986 the government made various decisions which helped to inflate the economy causing an inflationary boom.

1985-95: Lawson Boom and The Economic Recession of the 1990's

If we analyse the consumption expenditure and GDP trends for the period 1985-95 we see a sustained period of growth followed by a major decline in both the GDP and consumer expenditure. The British economy had undergone a major recession in the early 1980's and the period of mid-eighties (1985-1990) saw a sustained period of recovery known as the Lawson boom, named after the “Chancellor of the Exchequer”Nigel Lawson. This boom period, however, was short-lived and the excessive fiscal laxity in this period led to an inflationary spiral finally resulting in a big recession in the early 1990's which more or less removed all gains made in the Lawson Boom period. The British economy in this period can be studied under two related but mutually dependent timelines of the Lawson Boom and the corresponding crises of the early 90's.

Lawson Boom (1986-89)

The government took a number of policy decisions which led to an increase in the marginal propensity to consume (MPC). The encouragement to public spending led to an unprecedented growth in the economy at the cost of inflation finally leading to a major inflationary crises causing the 91 recession. The major policy steps taken in this period were

Tax Cuts

Nigel Lawson took reduced income tax rates indirectly creating a fiscal stimulus for the income, the increased money in the hand of the consumers increa