Assess the economic record of the 1974-79 Labour Governments

The mid 1970s argues Jim Tomlinson ‘are commonly seen as a watershed in post-war economic policy’. The decade was host to a crises over public spending and borrowing and the exchange rate. It witnessed industrial dispute and the failure of the Social Contract. This was the decade that saw Keynesian economic theory quashed by the arrival of stagflation. The assessment of economic policy of the government in the period, argues Christopher Allsopp, has been critical, ‘regarded as a failure by the left and as a disaster by the right’. Thatcher’s Conservative Government of the 1980s vociferously criticised Labour’s management of the economy, to emphasise their own ‘safe-hands’ approach. Contemporary journalists too, were extremely critical of Labour’s economic record. The Economist magazine suggested in 1975, that Britain’s economic position was so bad that, ‘Britannia’s dream of apocalypse is horribly close to coming true’. After five years in power, the infamous ‘Winter of Discontent’, which was a direct result of Labour’s unpopular pay policy enforced upon Trade Unions was a huge factor in ending Labour’s reign in Government. In the 1979 election, the Conservatives achieved a landslide victory.
Wilson’s Labour Party assumed power from Heath’s Conservatives, on 4 March 1974 on the brink of the most testing economic crisis experienced for over two decades and in circumstances of industrial turmoil and political uncertainty. Tomlinson describes labour’s economic inheritance as a ‘poisoned chalice’. The Heath Government had embarked on an expansionary fiscal and monetary policy, and initiated the Heath-Barber boom, a strategy of creating and sustaining a high level of aggregate demand in the hope of encouraging a great leap in industrial development, with favourable effects on productivity and growth. And although unemployment fell as a result of the boom, inflation increased from under 7 per cent in 1972, to a rate of over 10 per cent in late 1973. The boom also caused a sterling crisis in June 1972, the floating of the Pound and subsequent depreciation in the exchange rate. Heath and his cabinet were forced to raise interest rates to record levels and cut its public spending. Heath’s position deteriorated further, when the National Union of Miners called a strike on 12 November 1973, just as the oil crisis, which saw oil prices quadruple, hit Britain. Allsopp insists, ‘the legacy of the Heath government’s dash for growth combined with the first oil crisis meant that the starting point’ for Labour ‘was one of extraordinary difficulty’. The industrial relations crisis with the miners effectively brought Heath’s period in office to an end. The miner’s dispute, combined with a reduction in oil supply, led to a three-day working week being imposed on industry to save energy. At the same time wage inflation was rocketing, and Heath’s attempts to control it with the policy of threshold agreements failed. With the manufacturing industry in Britain in turmoil, Heath decided to call an election on the theme of ‘Who Rules?’ Heath was defeated, in an election in which neither the Conservatives nor Labour did well. The Labour Party was handed the task of forming the next government, ‘albeit without the mandate of an overall majority, for the election resulted in a hung Parliament’. Nevertheless, Labour was the largest party, and arrived in Government with inflation higher than in 1970 when the Conservatives took office, the balance of payments in the red and the exchange rate sinking quickly. The public sector deficit was at a peacetime high and Tomlinson agrees, ‘when Labour took office almost every economic indicator was moving adversely’.
Wilson’s aim when he first arrived at Downing Street, was to solve the immediate crisis with the National Union of Miners, and he swiftly ended the strike by granting the miner’s demands, thus putting an end to the three-day working week. Action was quickly begun to repeal and replace Heath’s detested Industrial relations Act. When Labour was in opposition, they promised the electorate that they could solve the problems with the unions that had marred Heath’s period in office, and indeed Wilson’s earlier period as Prime Minister between 1966-70. James Cronin, describes Labour’s agreement with the unions, the Social Contract, as a ‘deal in which the party agreed to refrain from statutory incomes policy while in office, to restore and augment Union rights, and most importantly, to use the powers of the state to increase the social wage in the hope that unions would respond by moderating wage claims, and where possible, discouraging the resort to strikes’. Robert Taylor adds, the Social Contract aimed to ‘establish a much closer relationship with the Trade Unions that would prevent any repetition of the kind of trouble that had occurred with previous Labour Governments’. Essentially, the Social Contract was seen by Wilson as a policy that would reduce wage inflation through good relations between the government and unions. It would mean higher public spending however. And the first two of Denis Healey’s budgets before the autumn election of October 1974 were expansionary. Healey, Chancellor of the Exchequer agreed to increase pensions, unemployment and sickness benefits, to add £550 million of subsidies on food and another £70 million for housing subsidies. Healey argued inflation caused by the expansionary budgets would be controlled by statutory price controls and voluntary wage constraint through the Social Contract. The deflation threat, Healey insisted would be averted by a combination of borrowing to finance the balance of payments deficit, and by encouraging other countries to do the same. Michael Artis and David Cobham argue this was a risky strategy, ‘it was uncertain what other countries would do, or to what extent the foreign exchange markets would finance a UK balance of payments deficit’. However, Artis and Cobham insist, although the strategy was a risky one, ‘there was in fact no viable alternative to the government’. The expansionary budgets were designed to promote the Social Contract, and secure further votes in the autumn election, which Labour did win with a majority of three seats.
Wilson was unwilling to open negotiations with the Trade Union Congress if it threatened the existence of the Social Contract, despite economic turmoil and rapidly increasing wage-inflation which reached a peak of 30 per cent in mid-1975. However, soaring wage inflation continued to rise, and forced Wilson to open talks with the unions concerning a new incomes policy. The Government was able to negotiate an agreement with the TUC for the introduction for a twelve month period of a voluntary £6 a week flat-rate pay increase for anybody earning less than £8,500 a year. For the better off, there would be no pay rise at all. The new Incomes Policy was drawn up with the help of two respected Trade Union leaders Jack Jones and Hugh Scanlon. Jones was a staunch Labour supporter, and was concerned that the government would collapse if effective action was not taken to ensure pay restraint. Taylor is adamant that the proposal for a flat-rate pay norm was very much in tune with the needs and aspirations of his lower paid members in the Transport and General Workers Union.Tomlinson argues the flat-rate increase had a significant impact, especially notable on the public sector. Healey, also introduced his first deflationary budget in April, as a means of reducing inflation. He announced increases in income tax and VAT, and made cuts in public spending.
In this period, Wilson also made changes to Labour’s ‘Industrial Policy 1973’, part of their election manifesto, by introducing a White Paper ‘The Regeneration of British Industry’. Wilson aimed to remove features of the original industrial policy which were felt to be most difficult. The original industrial policy was influenced very much by the left of the party, in particular Tony Benn, who was shadow Secretary for Industry in 1973. Benn wanted the government to play a more influential role in the running of large private companies. However, Wilson firmly supported a mixed economy, and although he shared Benn’s concern about the future of British manufacturing, was not prepared to introduce radical proposals such as Benn’s wish to nationalise the top twenty-five private firms, and the imposition of import controls against foreign manufactured goods. Mark Wickham-Jones concludes, ‘Labour’s Programme 1973 and the White Paper The Regeneration of British Industry published in August 1974 contained a very different set of proposals’. Part of Labour’s industrial policy was the creation of the National Enterprise Board which was to be a new source of investment for manufacturing firms. Benn supported the idea of this new committee, but when Wilson reshuffled his cabinet found himself demoted from Secretary of Industry to Energy. The NEB, created in 1975, resulted in total government funding for industrial innovation increasing by 39 per cent between 1974 and 1976. However, the NEB must be regarded as an overall failure. Doug Hoyle describes the NEB as ‘a toothless tabby cat’. It did nationalise the shipbuilding and aerospace industries, Rolls Royce and the engineering firm, Alfred Herbert. But these were all failing industries, Taylor refers to the as ‘lame ducks’. The NEB failed to provide the new jobs or new growth opportunities it promised.
On 5 March, 1976, Britain was hit by a sudden decline in sterling, and within a fortnight Harold Wilson had retired. James Callaghan replaced him as leader of the Labour Party and Prime Minister, and in April, he and Healey introduced a budget which made a number of changes in tax allowances and expenditures, which were conditional upon stage Two in the Pay Policy agreed with Trade Unions. The second stage of the Incomes Policy limited wage increases to 3%, and was supported by Jones and Scanlon. Healey proceeded to announce that public expenditure would be further reduced, and publicly announced monetary targets. However, the decline in sterling continued, falling from $2.04 in late 1975 to $1.65 in 1976, and the Chancellor announced Britain had applied to the International Monetary Fund for a loan. Part of the agreement with the IMF included a ‘Letter of Intent’, in which Healey promised further cuts in public spending. Allsopp declares that the sterling crisis caused a ‘major change in policy’. Prior to the sterling crisis, policy appeared to be to seek a competitive pound as an aid to the longer term health of industry and as a method of managing demand. This would lead to export-led expansion, reducing the need for deficit finance, and cutting expenditure, and, in 1976, this policy was working. The world economy was expanding, wages and prices were coming under control and industry was extremely cost competitive. The balance of payments deficit had fallen to 0.8 per cent of GDP. Tomlinson agrees, ‘down to the autumn of 1976 the fall in the exchange rate was not regarded as a problem, as it aided the balance of payments’. However, the exchange rate continued to fall, and ‘was out of hand in the summer of 1976’, causing Callaghan to seek to politically damaging aid from the IMF. However, the securing of the IMF loan, insists Artis and Cobham calmed the foreign exchanges and the financial markets and was pursued by a period of falling inflation, strengthening the balance of payments and economic recovery. By January 1977, the Chancellor was able to promise tax cuts, albeit they were conditional on a third year of continued agreement with the unions on pay restraint. Stage Three of the pay policy set maximum pay rises at 10 per cent, and unions confirmed the twelve month rule. Relations with the trade unions were good and the government was able to introduce a deflationary budget in October, and by the end of the year, the economy was in a healthy position; inflation was lower in 1977 than it had been in 1976, unemployment was falling and the balance of payments position was strengthening. ‘The favourable economic conditions of 1977’, Artis and Cobham assert, ‘continued into 1978: the annual rate of inflation fell below 10% in February for the first time since October 1973’.
Despite an improving economy, Callaghan saw the key to sustaining the recovery as being a return to a more formal pay policy. He insisted on a 5 per cent overall wage rise norm in 1978/79, which was so low that it even confounded his own supporters in trade unions. Taylor argues ‘they refused to believe he was serious in his insistence on such a low pay rise figure’. In truth, Callaghan miscalculated the situation. Pay restraint had been effectively enforced on trade unions since 1974, and rank and file workers were anxious for a return to free-bargaining wage control. The government had been fortunate that they had allies in influential trade union leaders, Jones and Scanlon, but when these two men retired in the early months of 1978, they were replaced by weak and ineffective leaders. When Ford Motor Company workers demanded a pay rise above the 5 per cent norm, and after a seven-week long dispute, they achieved a 17 per cent pay increase, Wilson’s response was an attempt to apply financial sanctions against errant private companies that defied the pay policy, but he was defeated in the House of Commons. This defeat was a metaphor for the defeat of the Social Contract, and over the following weeks and months, groups of workers from different industries demanded pay rises. The result was the ‘Winter of Discontent’, numerous strikes and industrial disputes. Manual council workers and hospital staff went on strike, and images of piling rubbish on the streets and the unburied dead were to play a major role in the Labour’s defeat at the next election.
G.C Peden is critical of the Labour government, because during its two terms in office, relative poverty increased. The cuts in public expenditure during 1976 may have reduced inflation levels, but saw unemployment rise dramatically to its highest rate since the 1930s. Unemployment increased from 595,000 in 1973, to over 1,383,000 in 1978, increasing the number of people reliant on benefit. In the same period local authority house completions fell 26 per cent from 151,800 in 1976 to 112,300 in 1978, and, education expenditure in 1978/79 was back to the level of 1973/74. According to Peden, NHS expenditure only appeared to rise because of rising costs in the industry. For members of the Labour party on the left, the cuts in public spending were a bitter disappointment, and a betrayal of socialist policy. The government seemed to move away from Keynesian doctrine, towards a monetarist approach, or towards a ‘monetarised keynesianism’. Peden argues the sterling crisis of 1976 marked the end of the Keynesian era in British economic history, emphasised by a speech delivered by James Callaghan at the Labour Party Conference in September 1976, in which he argued government could no longer ‘spend’ its ‘way out of a recession’. Tomlinson disagrees with Peden, instead he insists economic policy was already moving away from Keynesianism well before the sterling crisis and Callaghan’s speech. Tomlinson is less critical of the Labour government and its economic record. He puts its record in context, and makes comparisons with France, West Germany and Italy. He asserts Britain’s inflation record for the period as a whole is markedly better than Italy’s. And, he notes Britain’s public expenditure record fairs better than West Germany’s in 1978/79. This supports Allsopp’s view that national debt fell as a percentage of GDP between 1974-79.
Labour’s economic record can be criticised. Alternatively it can be praised. Wilson and Callaghan did surprisingly well, despite the economic crisis that existed when Labour took power in 1974. Tomlinson argues political opponents have spoken of the period ‘in absurdly exaggerated terms’. Even New Labour have suggested the 1970s were a disastrous period to emphasise the distance travelled between ‘New’ and ‘Old’. But, if we do accept that the economy was in a disastrous state by 1979, as Peden suggests, this was not simply the result of economic doctrine, but of numerous external factors, such as poor management within large private companies. Of course the government made mistakes, Artis concludes ‘all governments do’. The Social Contract, for example, was essentially a failure, Taylor quotes Edmund Dell’s description of Labour’s deal with the unions as a ‘disaster’. However, given the economic background to the Labour Party’s ascendancy to government, and with hindsight reviewing the economic crises of the 1980s, judgement of the economic doctrine of the 1974-79 Labour government as disastrous, as Margaret Thatcher claimed, is probably harsh. When Labour ended office , inflation was lower than in 1974, growth is resumed, unemployment falling and the balance of payments account stronger. Historians on the ‘right’ have generally been more critical than historian’s on the left, such as ‘Artis’ and ‘Cobham’, who genuinely believe the economic record of the 1974-79 Labour Party is good given the worldwide economic setting of the period.

Bibliography

Allsopp, Christopher, ‘Macroeconomic Policy’, in Artis and Cobham (eds), ‘Labour’s economic policies: 1974-1979’ (Manchester, 1991)
Artis, Michael, ‘Social Democracy in hard times: the economic record of the Labour government 1974-79’ in ‘Twentieth Century British History, Volume 3’. (1992)
Artis and Cobham, ‘The Background’ in Artis and Cobham (eds), ‘Labour’s economic policies: 1974-1979’ (Manchester, 1991)
Artis and Robin Bladen-Hovell, ‘A model-based analysis’, in Artis and Cobham (eds), ‘Labour’s economic policies: 1974-1979’ (Manchester, 1991)
Cronin, James E, ‘New Labour’s pasts: the Labour Party and it’s discontents’ (2004).
Peden, G.C, ‘British Economic and Social Policy: Lloyd George to Margaret Thatcher’ (Oxford, 1985)
Taylor, Robert, ‘The Rise and Fall of the Social Contract’, in Seldon and Hickson, ‘New Labour, Old Labour: The Wilson and Callaghan Governments, 1974-79’
Tomlinson, Jim, ‘Economic Policy’, in Seldon and Hickson, ‘New Labour, Old Labour: The Wilson and Callaghan Governments, 1974-79’
Westaway, Tony ‘Stabilisation and Fiscal Reform’, in Maunder, Peter (ed), ‘The British Economy in the 1970s’ (London, 1980)
Wickham-Jones, Mark, ‘Economic Strategy and the Labour Party: Politics and Policy-making, 1970-83’ (New York, 1996)

Joseph Lappin 26/04/07

The United States of Arsenal?

Arsene Wenger looked worried at his weekly press conference yesterday. The usual swagger that normally accompanies Arsenal’s most successful manager since Herbert Chapman deserted the Frenchman as he entered the Arsenal Press office. Just hours earlier, Stan Kroenke, the American businessman who owns three sports teams in the US across three sporting codes, quietly increased his shareholdings in the London club to 12 per cent. Kroenke Sports Enterprises previously held over 10 per cent after buying up ITV’s shares in the club last month.

Kroenke’s arrival at the Emirates Stadium has had a devastating effect upon the Arsenal board. On Thursday David Dein, the Arsenal Vice Chairman since 1988, who was instrumental in bringing Arsene Wenger to the club was effectively sacked after ‘irreconcilable differences’ between him and other board members made his position untenable. Peter Hill wood, the Arsenal Chairman, has refused to explain the specific reasons for Dein’s sudden departure, but there is no doubt that his abrupt dismissal is linked to Kroenke’s rising strength within the boardroom. It is no secret that Dein would like to see Kroenke play a ‘bigger role’ in the club. In other words, he supports an American takeover. But this put him at odds with the Arsenal chairman and the other major shareholders at the club who want to hold onto their shares. Hill-Wood dismayed ‘I would be horrified to see ownership of the club go across the Atlantic’. But this is just what has happened recently in Manchester and Liverpool. Neither Manchester United nor Liverpool fans were happy to see their club fall into the hands of American ownership, but it is rare to hear members from either set of fans complain about the finanical advantages that these wealthy tycoons bring with them. Millions of pounds have been and will be spared for new players The finanical advantages brought to one of Arsenal's rivals, Chelsea, by their Russian owner Roman Abramovich are obvious, and a source of jealousy for Gooners.

Dein, it seems, is worried about Arsenal’s long term competitiveness. Although the new Emirates stadium generates around one million pounds extra per match than the old, much smaller Highbury did, the large sclae constructction of the giant glossy stadium has left Arsenal Football Club in hundreds of millions of debt. There is no doubt that Arsenal will not be able to compete with the rest of the ‘big four’ come this summer in the transfer market. Dein knows an American takeover would result in huge investment in the club, and allow Arsene Wenger to complement his exciting, but young squad, with ‘big’ names to compete for the Premiership title.

Fans are worried too. The two American businessmen who recently acquired the purchase of Liverpool, with whom Arsenal are vying with for third place, have promised to flaunt their wealth by spending extravagantly in the close season on new players. Some fans are questioning the board’s reasoning. If Arsenal are currently fourth in the league, way behind the top two in terms of points, how will they perform next year if the financial gap between them and the top is clubs is going to increase.

Since Dein became Vice chairman in 1988, he has done more than most at Arsenal in transforming the London club into one of world football’s most successful and most supported clubs. Wenger often speaks of Dein’s endeavours in helping create an exciting squad that consists of some of Europe’s most sought after youthful talent. Both Dein and Wenger accept however, that in order to compete with England’s and Europe’s top sides more investment is needed to bolster Arsenal’s young squad. This can only come in the form of Kroenke’s amassed millions and his profitable Sports Enterprises company.

If Arsenal fans want Dein to return to the club, I suspect they will not be disappointed. It is likely the ex-Chairman will launch a joint bid with his ally Kroenke in the near future. If successful, Dein would most probably assume the role of chairman and continue to build on the accomplishments he has already achieved at the club he clearly adores. As an Arsenal fan myself, let’s hope we haven’t heard the last of this saga yet.

Joseph Lappin
21/04/07