A Changing Economic Landscape 1945/79 - A Changing Political and Economic Environment 1918 - 79

The 50s and 60s

Butskellism’ – the dominant economic approach of the 1950s and 1960s

—  The 1951-64 Conservative governments largely accepted Labour’s post war welfare reforms and approach to managing the economy along Keynesian lines.

—  Both parties accepted the commitment to full employment and a mixed economy.

—  Such was the closeness of the economic policies of Labour and Conservative governments of the 1950s, The Economist coined the phrase ‘Butskellism’ to describe this consensual approach.

—  ‘Butskellism’ came from the names of the Conservative Chancellor, R. A. Butler, and the Labour leader, Hugh Gaitskell.

‘You’ve never had it so good’ – the illusion of affluence

·       The 1950s was seen as a period of affluence with increased consumer spending - Consumer spending rose by 45%

—  This increase was based on the ability for people to borrow money to spend. This had significant consequences –

-        Growth in inflation (around 4%)

-        Increase in imports which led to an imbalance in balance of payments.

Stop-go economics

—  The Conservative governments of 1951-64 encouraged this growth in consumer spending by relaxing laws on borrowing and credit (low interest rates and taxes).

—  However, when the problems of inflation and import prices became serious, controls to slow the economy down (raising taxes and interest rates and lowing wages) were put in place.

—  This inconsistent policy towards economic growth was called ‘stop-go economics’ and demonstrated that controlling unemployment and inflation was impossible.

What was corporatism?

—  It was clear in the 1950s that Britain was lagging behind its world competitors in terms of economic growth (2.3% a year compared to 5.6% in Italy and 5.1% in Germany).

—  Macmillan’s 1957-63 government decided to follow a corporatism policy – a managed economy uniting labour, management and government through corporations to plan and achieve economic goals. He set up two department nicknamed NEDDY and NICKY

—  NEDDY – The National Development Council and Office. Aimed to produce reports for future of economy. Recommended pay freezes and tax increases. Not popular

—  NICKY – the National Incomes Commission. NICKY was an advisory body for unions and management. Tried to steer course of wages. Trade unions refused to cooperate with it at all.

—  This first move towards economic planning met considerable opposition from within the Tory Party, the Treasury and the capitalist media. The result was a quick U-turn.

—  However corporationist ideas were continued by Wilson through the DEA (Department of Economic Affairs)

‘Dash for growth’

·      Launched 1963 after conservative abandon corporatism.

·      ‘Dash for growth’ was simply a demand management strategy based on the idea that injecting high levels of demand into the economy for a sustained period would stimulate investment, raise productivity, and thus enable the expansion to become self- sustaining.

·      Inevitably, the policy was a complete failure, higher demand simply led to more imported goods, a massive balance of payments deficit occurred, and capital ran scared from the faltering British economy.

·      The Tories lost to Labour and never had to deal with the consequences of this policy

Stagflation

—  By 1964, the key economic problem was it was in a period of stagflation – where there is both high inflation and low economic growth and unemployment (which was supposed to be impossible under Keysian economics)

—  The key causes of stagflation by 1964 were –

-        Increased consumer spending lead to more imports which led to a balance of payments deficit leading to threat to the value of the pound.

-        Increased borrowing from the IMF.

-        Rising unemployment.

Wilson and devaluation of the pound

·       Wilson attempted to improve economic planning and invest in the ‘white heat’ of technology, but attempts failed due to continuing stagflation

·       The DEA created a National plan to stimulate growth, but was over ambitious and never got off the ground due to lack of departmental resources, defined authority and bad relations with the treasury.

·       Labour instead continued to use failing stop-go policies

·       Wilson had been determined to avoid a devaluation of the pound, not wanting labour to be known as the ‘party of devaluation’

·       Yet in 1967 he was humiliatingly forced to cut the value of the pound from $2.80 to $2.40

·       Wilson tried to reassure British through the ‘pound in your pocket’ speech, but he suffered a huge loss of credibility

The 70s

How did Heath attempt to tackle the economy?

·       Outlined ideas in Selsdon Man

·       Wanted to reduce state intervention - with a more hands off approach to governing

·       The budget of 1971 Cut state spending and tax

·       Tried to control the unions - 1971 Industrial Relations Act

Why did Heaths policy fail?

·       Oil crisis 1973 - the price of suddenly oil rose by 70%, which had a dramatic impact of the UK economy

·       Rising inflation - After the oil price rise inflation rose by 20%

·       Rising Unemployment - Unemployment reached 1 million by 1972

·       Heath took a U-turn in government policy

·       £2.5 billion was pumped into the economy in increased pensions, benefits and tax reductions (known as the Barber boom)

·       This brought down the unemployment level to 550 000 by 1974, however it indicated the Selsdon Man had been completely abandoned

Why did Britain apply for a loan from the International Monetary Fund?

—  The consequences of the 1973 oil crisis led to rapid inflation and the pound falling in value to the extent by 1976, Britain was almost bankrupt.

—  Callaghan’s response in a key speech was –

‘We used to think you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending .... That option no longer exists’

—   Such was Britain’s position in 1976, the government negotiated a £3 billion loan from the International Monetary Fund. Britain could have the loan only if they made major cuts in public spending.

—   The impact of this was the abandonment of Keynesian economics, formal withdrawal from the commitment to full employment and paved the way for Thatcher’s more radical approach from 1979.