30 years ago, we were in the same old mess

Deficits, cuts and economic stagnation

"Economic outlook generally: prospects are sombre. Output is rising very slowly. The outlook for productivity, profits, output and employment is equally discouraging. With a large deficit in prospect there is little room for manoeuvre in the short term if we are to keep tight control over the money supply."

These might sound like the private thoughts of Alistair Darling as he contemplates the New Year, but they were the stark views of the Chancellor's predecessor 30 years ago when he was asked by a newly elected Margaret Thatcher to present his assessment of Britain's economic prospects.

In a graphic example of the truth behind the phrase "plus ça change, plus c'est la même chose", Geoffrey Howe's memo to Mrs Thatcher in May 1979 laid out a scenario that bears an uncanny resemblance to that which the present Tory high command insists it would inherit if David Cameron wins next year's general election.

The document, released today by the National Archives in Kew under laws that allow the disclosure of classified files to the public after 30 years, is one of a series that cast new light on the early days of the first Thatcher government as the grocer's daughter from Grantham struggled to impose her programme of swingeing spending cuts and radical economic reform on a reluctant Cabinet.

Within days of her landslide victory over James Callaghan's ragged administration in the wake of the Winter of Discontent, the new Prime Minister ordered each Cabinet minister to write a one-page "personal assessment" of the challenges they faced in their department.

The resulting dossier suggests that political history has a habit of repeating itself. From a Chancellor desperately looking for cuts to reduce a ballooning deficit to concerns over the sustainability of nuclear power stations and an unfolding crisis in Iran, the ministers of 1979 faced a number of familiar difficulties.

Mr Howe, who was entrusted by Mrs Thatcher with reducing "enormous waste" in central government at the same time as cutting income tax, was bullish in his efforts to follow the party leader's wishes. He wrote: "The scale of reductions in direct tax, which are crucial, make all the more important the need to reduce public expenditure."

Other ministers were less keen on embracing the Thatcherite agenda. Francis Pym, the Defence Secretary, asked for an extra £200m, complaining that the budget he had inherited was "simply inadequate to finance the existing defence programme".

William Whitelaw, the Home Secretary, grumbled that there had been a "failure over a long period" to fund the prison system while the Energy Secretary, David Howell, noted that "urgent steps" were needed to raise public confidence in nuclear power, adding: "The nuclear construction industry is in disarray and general uncertainty prevails about reactor choice for the future."

With masterful understatement, the Employment Secretary, James Prior, presaged the decimation of much of Britain's heavy industry, pointing out that rising joblessness would lead to "severe run-downs in a number of industries". But while ministers sought a gentlemanly accommodation with the Treasury to preserve their core budgets, Mrs Thatcher wasted no time in showing the unbending zeal that earned her Iron Lady nickname.

In handwritten notes scrawled in blue ink across documents, the Prime Minister made plain her frustration at what she considered to be the overly cautious approach of her colleagues, furiously writing "this will not do", "too small" (in relation to proposed to spending cuts) and in one case "no", multiply underlined.

Mr Howe was a particular target for Mrs Thatcher's ire, finding his approach described as "not nearly tough enough". The papers show that the Prime Minister eventually accepted her Chancellor's protestations that there were no more "economies of any significance" to be found. There was to be no such tolerance when it came to dealing with foreign affairs, according to the documents. When it emerged that Washington was withholding an export licence for guns for the Royal Ulster Constabulary in August 1979, Mrs Thatcher made clear her displeasure.

In a meeting to discuss the issue, the Prime Minister said she was "not in the habit of discussing the internal problems of the US with the Americans and they should not attempt to do so with us."

Karate ladies? No thank you

To her Japanese hosts, it doubtless seemed the ideal answer to the prickly problem of how to ensure the security at a Tokyo summit of Britain's first female Prime Minister – a personal contingent of 20 "karate ladies".

The only problem was that Margaret Thatcher, later renowned for her martial artistry with the handbag, was less than amused, according to documents from 1979 today.

A memo instructing the Foreign Office to politely reject the offer from Tokyo said: "If other delegation leaders are each being assigned 20 karate gentlemen, the Prime Minister would have no objection to this; but she does not wish to be singled out."

Callaghan's war on Italian baths

Faced by stark images of festering rubbish, unburied bodies and closed factories, it was to James Callaghan a perfect antidote to the Winter of Discontent – an opportunity to blame Britain's economic ills on a flood of illegally subsidised Italian steel baths.

Papers from the National Archives show how the embattled Labour Prime Minister seized on a complaint from a bath manufacturer in his Cardiff constituency to try to shore up his popularity in the run up to the 1979 general election.

Edward Curran Engineering Ltd, a struggling enamelled steel manufacturer in the Welsh capital, wrote to Downing Street complaining that Britain was being overrun by Italian baths which, at £16.50 each, were so cheap they could only have been produced with illegal subsidies.

Michael Collins, the chairman of Curran's, described the "disastrous effect" of imports from the industrial giant Gruppo Merloni and warned that his company faced closure.

Aware of a looming public relations disaster, Mr Callaghan ordered the full machinery of Whitehall to be deployed to head off the threat of the suspiciously well-priced Italian sanitaryware.

Ordering an urgent response to Mr Collins' complaint, Mr Callaghan wrote: "Get the [Department of Trade] to deal with this without delay. Ask the Italians to accept a quota. All this is in my constituency. I can't have Curran's ruined in this way. Get the ambassador to take it up. Make a splash in all directions!!"

The resulting frenzy of government activity saw ministers and civil servants explore a gamut of counter-measures, including a "buy British" campaign to encourage patriotic bath purchasing and direct approaches to Mr Callaghan's counterpart, Giulio Andreotti.

But the documents reveal that, rather like other ailing UK manufacturers, the answer to the problems lay in domestic inefficiency rather than untrustworthy foreigners bending the rules.

Sir Alan Campbell, Britain's ambassador to Rome, visited Merloni's cutting-edge production line, some 150 miles north of Rome. He reported: "[Merloni] were at pains to assure me that their prices were genuine and were achieved by large volume and highly mechanised production. The impression one gets is that this is a highly efficient and cost-effective production unit."

Tony Benn suggested BBC might buy Times

Tony Benn sparked horror among his Labour government colleagues when he went off the political piste and publicly suggested that the BBC should buy The Times newspaper.

The initiative, announced by Mr Benn without warning to fellow Cabinet members, was made as The Times faced a strike by the print unions which took it out of circulation for nearly a year from November 1978, and led to fears that it might not survive.

In a policy paper presented to union leaders in February 1979, Mr Benn, who was Energy Secretary in James Callaghan's ailing administration, argued that the BBC and The Times were "national institutions" and that merging the two would allow the broadcaster to move further into print by launching new publications.

Mr Benn wrote: "This paper argues that there is a case, on grounds of public policy, for the BBC to acquire and operate The Times to resolve the present crisis ... It would be prudent to consider a means by which The Times could be saved on a basis that preserves its essential national character."

Documents released at the National Archives show that the proposal fell on stony ground. A note from Downing Street ordered the staunchly left-wing minister "not to do or say anything further about The Times until further notice".

Secret message for Shah

The thorny issue of how to inform the deposed Shah of Iran that Britain would rather not offer him sanctuary prompted diplomats to indulge in some bizarre subterfuge, according to documents at the National Archives.

While other matters might have been resolved by means of a telegram or phone call, London decided to contact the exiled monarch by sending a man disguised in dark glasses and using a false name to the Shah's refuge in the Bahamas.

In the wake of the 1979 Iranian Revolution, senior officials at the Foreign Office persuaded Margaret Thatcher, who was privately sympathetic to the Shah, that allowing him into Britain would put embassy staff in Tehran at risk of seizure – a concern borne out by the taking of hostages at the American mission a few months later.

The problem for Britain was how to discreetly warn off the Shah without creating a diplomatic incident, when London had no direct method of contacting him at his temporary residence at an exclusive beach club in the Bahamas.

The answer was to send Sir Denis Wright, a retired former ambassador to Iran, under a false identity to the Caribbean with a warning to the British High Commissioner in Nassau that "confidentiality is most important".

Despite misgivings about how to achieve complete secrecy, Sir Denis arrived in the Bahamas wearing a pair of dark glasses and held his meeting. Quite what he said remains unknown – the file detailing the encounter has been retained by the Foreign Office.