Electoral and Other Consequences

The fiscal squeezes described in this chapter seem to have produced uneven electoral punishment from voters. The Heath Conservative Government lost the snap election following its emergency mini-budget of December 1973 that marked the end of its period of direct tax cuts funded by borrowing, but voters were arguably at least as concerned to punish that government for its handling of industrial relations as for its fiscal record. The subsequent Labour Government did not suffer electoral punishment for its early revenue squeeze designed to fund higher public spending.

It was the fiscal squeeze episode of 1976-78 (accompanied as it was by the biggest rise in both unemployment and inflation since World War II) that produced the most dramatic electoral punishment, in the form of a 5.2 per cent vote swing from Labour to the Conservatives, after which Labour was out of power at central government level for eighteen years. The Liberal Party, which had propped up the Callaghan Labour Government in 1977-78, also experienced electoral punishment in the form ofa4.5 per cent loss of vote share and the loss of two out of its then eleven parliamentary seats. The October 1974 and May 1979 election outcomes are both compatible with the 'asymmetrical punishment' idea explored in Chapter One, that left-of-centre governments may be more liable to electoral punishment for spending cuts than for tax increases.

Indeed, as argued earlier, on top of that electoral defeat, the 1976 battle over spending cuts and the IMF bailout exacerbated an existing division in the Labour Party, resulting in a short-term victory for the right over fiscal policy but also helping to sow the seeds for the victory of the left in the Party in the 1980s, when it was powerful in local government and controlled many of the big cities but was out of office at central government level. The schism that arose within the Labour Party over that final episode was arguably more serious than the decade-long split between Bevanites and Gaitskellites following the imposition of charges for NHS dentures and spectacles in Labour's 1951 budget, because the conflict was not contained within the Party (as happened after 1951). Instead, it led to the formation of a breakaway centrist party as a result of the defection of four leading Labour frontbench 'moderates' to form a new Social Democratic Party in 1981 (which later merged with the Liberal Party in 1988 to form the Liberal Democrats of the present day). In that sense the political consequences involved in that final episode seem to be more like those of 1931 than 1951.

In terms of other consequences too, it is the final squeeze episode discussed in this chapter that seems to have left more of a legacy than the earlier ones, even though the spending cuts were partly cosmetic, proved relatively shortlived, and aggregate spending soon went back up again, in contrast to the cuts of the 1920s. But as we have seen, the 1976-78 episode saw a major Rubicon crossed in the institutional control of public expenditure, in the form of a big extension of cash limits as a means of controlling a wide swathe of public spending, linked to regular in-year reporting of departmental expenditure in cash. The 'Plowden' system, of medium-term multi-year volume-terms planning of public expenditure allied with economic forecasting, lingered on alongside the cash limits regime until 1982 when the Thatcher Government formally killed it off,[1] and multi-year expenditure planning was destined to reappear in a different form some decades later. But it can be argued that it was this squeeze episode that reinstated cash limits as the basis of managing public spending for the next thirty years.

Finally, this episode also involved policy developments of long-term consequence. The outcome of the long left-right battles within the Labour Party in 1976 put paid for at least a generation to the idea of dealing with fiscal and monetary problems by imposing exchange and import controls command economy-style, put forward by politicians who remembered the application of such measures during and after World War II. It represents the last time up to the present day that such an approach was seriously considered. And the major privatization that was central to Denis Healey's 1976 fiscal adjustment package—the massive sale of stock in the former state-owned oil company BP in 1977—probably unintentionally blazed a trail for the spate of privatizations of former state-owned enterprises under the Conservatives that were to ensue in the following decade. Of course there had been some denationalizations (for example, of steel and road transport) under the Conservatives in the 1950s, but the major public share flotation involved in the BP sale was the first significant Labour privatization and arguably represented a new way to sell state assets, proving in every sense to be the start of something big.

  • [1] The Government's Expenditure Plans 1982-83 to 1984-85, Cmnd 8484 1982 (London: HMSO).
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