The Final Phase: 1977-78

After the fiscal dramas of 1976, there was a modest economic recovery the following year (albeit with continuing high unemployment and balance of payments deficits), inflation started to fall, and after its low point in October 1976, the currency began to recover on the international markets as North Sea oil and gas came on stream. As noted earlier, in March 1977, the Labour Government, with no overall majority, avoided defeat on a 'no confidence' motion by securing a one-year 'confidence and supply' agreement with the Liberal Party in exchange for accepting some Liberal proposals.

As announced by Healey the previous year, 1977 saw the first big privatization of recent decades, in the form of a sale of 66 million BP shares in 1977 that realized ?564m towards the planned cuts of ?3bn. The 1977 budget (dubbed by Margaret Thatcher as 'an IMF budget',[1] reflecting the government's borrowing cap agreed as part of the IMF bailout) further raised taxes on road fuel and vehicle licences, and though it raised income tax thresholds to the point of taking some 845,000 people who would otherwise have paid tax out of the net, critics pointed out that the government's previous tax changes had brought over a million people into the income tax net and that the much- trumpeted increase in tax thresholds did no more than correct for inflation.[2]

The month after the 1977 budget the Conservatives won by-elections in two out of three previously Labour-held constituencies, and another previously Labour-held seat fell to the Conservatives early the following year. With a general election expected in the autumn of 1978, when the Lib-Lab pact was due to expire, the government began to moderate the spending squeeze in the autumn of 1977. In October the Chancellor announced that some ?1bn was to be added back to expenditure plans for 1978/79, mainly consisting of an extra ?400m for construction and over ?300m for raising the rates of child benefit in 1978. The 1978 budget also raised income tax thresholds further, introduced a new lower tax rate of 25 per cent on the first ?750 of taxable income (though the changes still left the real level of income tax thresholds lower and the standard rate higher than they had been at the start of 1974), and announced a further uprating of retirement pensions to take effect in November, claiming that the real level of such pensions had increased by some 20 per cent over the life of the government.

Despite this relaxation in the fiscal squeeze, unfavourable opinion polls persuaded Callaghan to remain in office as head of a minority government rather than call a general election when the Lib-Lab pact ended in 1977, in the hope that an economic upturn and further tax cuts could boost Labour's chances in a general election the following year. But a winter of industrial disputes sparked by the government's public sector pay caps hampered the Labour campaign, and the government lost control of the election date after a referendum on Scottish devolution in March 1979 (when the numbers approving the devolution proposal fell short of the threshold required for enacting the legislation). At that point, Margaret Thatcher tabled a parliamentary motion of no confidence in the Labour Government, which was supported by the Scottish National Party and carried by a single vote.

As a result, the Labour Government could neither hold an election at the time of its own choosing nor bring out a giveaway pre-election budget, and Denis Healey merely introduced a 'caretaker budget' raising all tax thresholds by the rate of inflation. With the Liberals damaged by allegations that their former leader, Jeremy Thorpe, had conspired to murder a former gay lover, the subsequent general election in May 1979 turned into a straight fight between Labour and the Conservatives, producing a Conservative majority of forty- four and the largest swing between the two parties since 1945.

  • [1] HC Deb 29 March 1977, c.294.
  • [2] (John Stokes), HC Deb 29 March 1977, c.315.
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