Often thought to have initiated key changes in economic policy, both men maintained and defended the longest-standing economic policy orthodoxy in Britain
A common assertion in studies of the British political economy is that periods of economic, financial and political crisis produce changes in policy. This is particularly evident, for example, in the importance conventionally assigned to the 1976 IMF loan crisis and/or the 1979 General Election. In this standard account, the political and economic crises of the 1970s are presented as leading to the ‘turning points’ of 1976 or 1979 when post-war Keynesian and social democratic economic policy embracing demand management, full employment and the welfare state was replaced with a new set of policies designed to defeat inflation, reduce public expenditure and public sector borrowing and roll forward the frontiers of the market.
This portrayal of 1976 or 1979 as ‘turning points’ was again recently in evidence in the obituaries of ex-Chancellors of the Exchequer Denis Healey and Geoffrey Howe after the sad news of their deaths earlier this month. These obituaries provoked furious responses from the blogger Tim Montgomerie and the historian Andrew Roberts, both of which nevertheless served to confirm the notion that these were critical years in the unfolding story of British economic policy.
However, this whole argument about ‘turning points’ often serves to obfuscate the nature of ‘change’ in economic policy in this decade. For example, it was only during a brief period after its election victory in February 1974 that the Labour government sought to counteract the recessionary impact of the 1973 oil crisis through fiscal policies of Keynesian demand management. By the time of his April 1975 Budget Statement, Denis Healey was in effect preparing the way for Prime Minister James Callaghan’s infamous 1976 Labour party conference speech by stating that ‘the budget judgement is conventionally seen as an estimate of the amount of demand which the government should put into the economy or take out of it in order to achieve the optimum use of resources in the short term. For many reasons I do not propose to adopt that approach today.’
This rejection of demand management led Healey to argue that the 1973 oil crisis had caused two interrelated problems for Britain’s economic performance: too high a rate of inflation and too high a level of public borrowing. He thus announced his intention to ‘achieve a very substantial improvement in our current account deficit in the next two years and to eliminate the deficit entirely as rapidly as possible thereafter’, because, he went on, ‘I do not believe anyone in Britain would thank me for producing an even larger deficit on our balance of payments and injecting a further massive dose of inflation through price and wage increases’. Consequently, as early as his 1975 Budget Statement – a full year prior to the onset of the 1976 IMF loan crisis – Healey set as his target a reduction in the Public Sector Borrowing Requirement (PSBR) of £1billion in 1975-6 and £3billion in 1976-7. In addition, he proclaimed his ‘intention that the growth of money supply should continue to be contained at a level which does not fuel inflation’.
Similarly, the Conservative Government, within which Geoffrey Howe became Chancellor, was elected in 1979 determined to reduce not only the PSBR but public expenditure in general. The table below provides the latest public finances data for the period from Healey’s Budget Statement in 1975 to Howe’s in 1981. Whilst it shows that public sector current expenditure rose significantly from 1979-80 to 1981-2, the other columns demonstrate the extent of the fiscal consolidation that occurred under the Chancellorships of both men. For example, on a cyclically-adjusted basis, fiscal consolidation in public sector net borrowing, the current budget deficit and the primary balance cumulatively amounted to 6.4%, 2% and 7.1% of GDP respectively.
In the narrow confines of fiscal policymaking, therefore, there is little to differentiate the similar responses of Healey (after 1975) and Howe to the crises of the 1970s to that of Chancellors of the Exchequer in other periods both before and after. For instance, successive Chancellors in the 1920s, Neville Chamberlain in the 1930s, Nigel Lawson in the 1980s and George Osborne after 2010 all responded, with varying degrees of success, to crisis with strategies of fiscal consolidation based on public expenditure reductions and increases in tax. Furthermore, these strategies of fiscal consolidation shared the same fundamental objective, which was to achieve a balanced or surplus budget in order to reduce national debt.
Indeed, the relationship between crisis and the implementation of strategies of fiscal consolidation in regard to the public finances of Britain can be traced back much further even than the interwar period. Arguably, this reaction has its origins in the Glorious Revolution of 1688 because it was at this juncture of British economic and political history that the tradition arose in British fiscal policymaking that increased public expenditure during war-induced crises would be financed through government borrowing and public debt. This was followed, when peace succeeded war, by the deployment of a strategy of fiscal consolidation in order to return the public finances to a balance or surplus and amortize the public debt accrued in the prosecution of war. In effect, the relationship highlighted here between crisis and the implementation of strategies of fiscal consolidation is rooted in the last 327 years of British economic history!
As a result, fiscal consolidation is best seen as an historically identifiable economic policy orthodoxy that has come to dominate British politics irrespective of political party. In so doing, it has provided successive British political elites with a cognitive shortcut on how to respond to crises. In terms of fiscal policy, at least, crises are therefore more likely to affirm this continuing orthodoxy in economic policymaking than provoke radical changes of approach. In this respect, the economic legacies of Denis Healey and Geoffrey Howe as Chancellors of the Exchequer lie not in the instigation of critical ‘turning points’ in British economic policymaking, but rather in maintaining continuity of economic policy orthodoxy in the aftermath of economic crisis. Very probably the same will in due course be said about more recent Chancellors too.