British Left reject fiscal strategy – speculation mounts, March 1976

This blog continues the discussion of the British currency crisis in 1976. Today we discuss the rejection of the 1976 Public Expenditure White Paper by the British Parliamentary Left who wanted an expansion of the fiscal deficit given that unemployment was well in excess of 1 million people in early 1976. Soon after Harold Wilson resigned as Prime Minister and James Callaghan, took over. He was by then ‘anti-union’ and was, increasingly, making statements about trade union power that played into the hands of the conservative push for an increased share of national income. After the rejection of the fiscal strategy, the sterling sell-off intensified. It was no coincidence.

It traces the growing anti-government influence on key players within the British Labour government as the pressures on the exchange rate were mounting in the early part of 1976. While the Chancellor was clearly influenced by the growing dominance of Monetarist thought, he also fell under the influence of the so-called Bacon-Eltis thesis, which argued that the growth of the public sector in the 1960s and early 1970s in Britain had starved the private sector of resources, which had led, directly, to the declining growth, high inflation and elevated unemployment. The conservative mainstream used this thesis to call for harsh cut backs in public spending and the British Labour government were increasingly cowed into submission by the vehemence of this mounting opposition. The problem is that the ‘thesis’ didn’t stand up to critical scrutiny, although that fact didn’t seem to bother those who used it to advance their anti-government ideological agenda. This blog is longer than usual because I felt it important to put this part of the story into one continuous narrative rather than break it up into two or three separate, shorter blogs.
On March 16, 1976, Harold Wilson resigned as Prime Minister of Britain and was replaced by James Callaghan (formally taking over on April 5, 1976).

By then unemployment had risen beyond the one million mark ( per cent) and inflation was still high although falling.

Inflation peaked in the September-quarter 1975 at 26.6 per cent, following the oil shock in October 1973. As a result of the unions agreeing to voluntary moderate their wage demand under the Social Contract, inflation had fallen to 22.5 per cent by the time, Wilson resigned and would drop to 16 per cent by mid-1976.

The resignation was sparked by the rejection by the left of the Labour Party of the draft White Paper that was circulated to Cabinet by February 2, 1976.

In his memorandum to the draft Public Expenditure White Paper, the Chancellor Denis Healey acknowledged that the proposed fiscal stance in the coming year would “attract an exceptional amount of attention, both from our supporters and our critics” (p.1).

The White Paper was an annual publication which outlined the fiscal strategy for several years ahead (in this case, the forecast period was to 1979-80).

Healey said:

… we are not cutting expenditure while unemployment is high, but are in fact spending more on some programmes which help employment and industry; but this level of expenditure has entailed a high budget deficit in spite of high taxation all round; and, if taxation is not to go much higher still, we must keep within the White Paper limits for the coming year and then have a period of stability in
total public expenditure. This will free resources for exports, investment and take-home pay as the economy expands.

The ‘crowding out’ assertion (“will free resources) was evidence that the Bacon-Eltis thesis was exerting considerable influence on the Chancellor.

The White Paper itself, noted that Britain had experienced modest growth since the oil crisis but a rapid rise in public expenditure, in part due to the major recession that followed the Heath government’s ‘Dash for Growth’.

The government acknowledged that allowing its fiscal deficit to increase during the recession had “helped to sustain employment” but with the economy now in recovery phase it “must progressively reduce … [the] … public sector deficit”, because “more resources … will be needed for exports and investment”.

The problem with this logic is that unemployment had risen from 3.7 per cent (948 thousand) when they took office in 1974 to 5.4 per cent (over 1.4 million) in 1976. It was hard to claim that there was a shortage of idle labour resources.

But it was true that the strategy to fight the recession meant that the public sector was using more of the available resources than previously and at some point it would have to reduce its share of spending (as a percent of GDP) as the private sector recovered.

Note I emphasise share rather than level.

The fiscal strategy outlined was not to cut public expenditure but rather hold it at a stable level and allow the growth in the economy to reduce the public expenditure share.

The White Paper also noted that the on-going struggle against high inflation lay “mainly outside this White Paper” and depended on arrangements with the unions over wage moderation holding.

This was a significant observation because it rejected the view that the relatively large fiscal deficits were driving the inflation process. Rather, it acknowledged that the root cause of the high inflation was the distributional struggle between labour and capital, which was exacerbated by the raw material shock (oil price hike) and then the recession that followed.

The former had reduced the real income available to compete for and the latter had reduced the overall level of income per se.

By way of context, the British Labour Party was made of several factions, with quite bitter divisions frequently emerging. These divisions often mainfest over policy choices, but underpinning them were deep ideological differences, particularly relating to how strongly British Labour should pursue democratic socialism (Seyd, 1987).

[Reference: Seyd, P. (1987) The Rise and Fall of the Labour Left, London, Palgrave.],%2074-79.pdf

The Manifesto Group (Denis Healey was a member) resisted the rising internal power of the left groups, of which the Tribune Group (Tony Benn was a member) dominated. The latter would later split and emerge under Benn’s leadership as the Socialist Campaign Group.

But the left-wing was also regularly able to defeat proposed legislation by its own Party and the 1976 Public Expenditure White Paper which was put to the British Parliament on March 10, 1976 was a significant example.

Whether this defeat was the reason Wilson stood down as leader is moot. He claimed that there were more personal reasons involved and there is evidence that he told colleagues in February 1976 of his intention to retire as leader.
But it was clear that the rejection of what the right-wing of the Party (Healey) thought was a moderate fiscal strategy and did not involve any major cuts in public expenditure, was a turning point.

The Tribune Group were opposed to their own Government’s increased willingness to justify policy proposals with Monetarist or related mainstream, free market authority and had abandoned democratic socialism as an ideal to work towards.

For them, the British Labour Party was becoming “indistinguishable from a Tory government” (Norton, 2004: 195).

[Reference: Norton, P. (2004) ‘Parliament’, in Hickson, K. and Seldon, A. New Labour, Old Labour: The Wilson and Callaghan Governments, 1974-79 London, Routledge, 190-206.]

Tony Benn, a prominent voice on the Left, noted (Benn, 1990: 529-30:

The defeat last night has transformed the situation; it has ended the phoney peace and people see now that the Government is supported by the right-wing forces in society; that they can’t carry the Labour Party in the way they have …

[Reference: Benn, T. (1989) Against the Tide: Diaries 1973-76, London, Arrow Books.]

The day after the defeat, Wilson sought a vote of confidence on the floor of the House.

The antagonism within the Labour Party also manifest over the different views of the role of trade unions in perpetuating the high inflation.

On January 21, 1974, Tony Benn recorded an interchange with Callaghan who:

… expressed his anxiety about the power of the trade unions.

[Benn replied] Maybe Jim, but look at the Government, run by the City of London, and nobody says the City is too powerful. It’s a question of whose side you are on. It’s a gut issue.’

“They’re much too powerful”, he replied.

“Well, I don’t believe in powerful leaders. I believe in spreading the power among the rank and file. Anyway, you were always pro-union when they supported your view.”

“Yes”, he said, “but they are much too powerful. This is our problem”.

[Reference: Benn, T. and Winstone, R. (1996) The Benn Diaries, London, Random House.]

He typecast Callaghan as “an anti-union man” and added Wilson to that list later in 1974 (Burk and Cairncross, 1992: 14).

[Reference: Burk, K. and Cairncross, A. (1992) Good-bye, Great Britain: The 1976 IMF Crisis, New Haven, Yale University Press.]

The issue of trade union power would become a rally point for the conservative forces around the world, intent on wresting a greater share of national income for capital, which they considered had been squeezed by the social democratic policies pursued by governments.

They also knew that the public could be led to believe that the trade unions had become a threat to the stability of society and were controlling the government.

Bogdanor (2004: 13) wrote:

There was a real fear for the future, a fear that trade union power and accelerating inflation would destroy democracy. This fear was by no means confined to those on the right.

[Reference: Bogdanor, V. (2004) ‘1974: The crisis of Old Labour’, in Hickson, K. and Seldon, A. New Labour, Old Labour: The Wilson and Callaghan Governments, 1974-79 London, Routledge, 5-16.]

It should come as no surprise that the speculation against the pound in the currency markets ramped up soon after the Public Expenditure White Paper was rejected.

The sterling sell-off actually began in early March. On March 3, 1976, the pound stood at $US 2.0239. Next day, as the Bank of England started selling sterling, which complemented other large sterling divestments (the largest being from Nigerian traders), the pound fell to 2.0149. On March 5, the Bank of England cut interest rates and the pound fell further to 1.9849 (Hickson, 2005).

[Reference: Hickson, K. (2005) The IMF Crisis of 1976 and British Politics: Keynesian Social Democracy, Monetarism and Economic Liberalism: the 1970s Struggle in British Politics, London, I.B. Tauris.]

It seemed that the Bank was desirous of a lower sterling value to stimulate international competitiveness.


The next instalment will consider the increasing sterling sell-off and the debates within the Labour Cabinet as to how to handle the sell off.

Callaghan, increasingly, claimed that there was no alternative but to call the IMF in. We will see.

The series so far

This is a further part of a series I am writing as background to my next book on globalisation and the capacities of the nation-state. More instalments will come as the research process unfolds.

The series so far:

1. Friday lay day – The Stability Pact didn’t mean much anyway, did it?

2. European Left face a Dystopia of their own making

3. The Eurozone Groupthink and Denial continues …

4. Mitterrand’s turn to austerity was an ideological choice not an inevitability

5. The origins of the ‘leftist’ failure to oppose austerity

6. The European Project is dead

7. The Italian left should hang their heads in shame

8. On the trail of inflation and the fears of the same ….

9. Globalisation and currency arrangements

10. The co-option of government by transnational organisations

11. The Modigliani controversy – the break with Keynesian thinking

12. The capacity of the state and the open economy – Part 1

13. Is exchange rate depreciation inflationary?

14. Balance of payments constraints

15. Ultimately, real resource availability constrains prosperity

16. The impossibility theorem that beguiles the Left.

17. The British Monetarist infestation.

18. The Monetarism Trap snares the second Wilson Labour Government.

19. The Heath government was not Monetarist – that was left to the Labour Party.

20. Britain and the 1970s oil shocks – the failure of Monetarism.

21. The right-wing counter attack – 1971.

22. British trade unions in the early 1970s.

23. Distributional conflict and inflation – Britain in the early 1970s.

24. Rising urban inequality and segregation and the role of the state.

25. The British Labour Party path to Monetarism.

26. Britain approaches the 1976 currency crisis.

27. The 1976 currency crisis.

28. The Left confuses globalisation with neo-liberalism and gets lost

29. The metamorphosis of the IMF as a neo-liberal attack dog

30. The Wall Street-US Treasury Complex.

31. The Bacon-Eltis intervention – Britain 1976.

32. British Left reject fiscal strategy – speculation mounts, March 1976

The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due later in 2016.

That is enough for today!

(c) Copyright 2016 William Mitchell. All Rights Reserved.

This Post Has 4 Comments

  1. Dear Bill

    This has nothing to do with Britain, but is about Brazil. As you know, Brazil has now a new interim president, who is likely to remain after the interim period of 180 days since the probability that Dilma Rousseff will survive the impeachment vote is very small. Economically. Brazil is an interesting case. In the last few years, it has experienced both rising unemployment and rising inflation. Household indebtedness is sky-high and at the same time the public deficit has grown. The priority of the new government seems to be to reduce the public deficit by cutting expenditures, which in combination with a decline in household spending and falling export revenues due to lower commodity prices will further depress aggregate demand. Interest rates have been very high, although the BNDES (National Development Bank) can provide credit at lower rates to businesses.

    You may want to take an expert look at that country. Regards. James

  2. Dear Bill

    You say that it was no coincidence that the sterling sell-off intensified after Parliament (and the Labour Party) rejected the White Paper fiscal strategy, actively encouraged by the Bank of England. Unemployment was still rising but the rate of inflation had fallen considerably over the previous year. I don’t feel you have explained an economic reason for the market sell-off other than irrational fear and the opportunity to latch on to a political ‘crisis’ to make trouble and money. The B of E’s desire to see a lower sterling value to stimulate international competitiveness, might seem to be reasonable, except that it seems that it could have left it to the market to do this. More troublemaking?

  3. Bob: The article cited appears to indicate that Brazil’s sovereign debt is quite manageable (“a net creditor”in fact), however the private corporations have been issuing debt instruments in US$. This is a problem for those corporations who have chosen to do this and not the Brazilian government.

    It is ironic that the business world see’s it as a soveriegn governments duty to pay for their poor decisions.

    There may be more to it than that though..

Leave a Reply

Your email address will not be published. Required fields are marked *

Back To Top