In the run up to the 2024 General Election, the Labour Party claimed the Conservative government had presided over “14 wasted years”, along with accusations that the economy was poorly managed. Similar comments were made by Labour before the 1964 General Election. Historians have broadly agreed that the Conservative government did waste 13 years after 1951, mainly in the areas of competition, education and training, investment and research and development.
Yet despite this, successive Conservative governments in the 20th century were viewed as economically competent, at least up until September 6, 1992 (‘Black Wednesday’). Per contra, it is Labour who were found wanting. Between 1900 and 1992, Labour was implicated in four full-blown financial crises, all of which were connected to an exchange rate crisis: the abandonment of the gold standard in 1931; the sterling devaluations of 1949 and 1967; and the International Monetary Fund loan of 1976.
Labour’s past economic credibility cannot be judged on the value of the currency alone. In terms of the ‘factors of production’ – labour, land and capital – Labour have always been on the side of the first factor and have pursued policies which have favoured this, whilst the Conservatives have traditionally championed the other two factors of production. The fourth factor of production, enterprise, is a combination of all three and allows an entrepreneur to earn a profit. Post-1979 Conservative administrations – and even New Labour between 1997 and 2010 – understood clearly that it was important to create the conditions for enterprise to thrive. Unfortunately, Labour’s experience with labour through its generous approach to trade unions; its largesse in the public sector; and its reliance on borrowing, has traditionally backfired and resulted in deflation and austerity.
The Labour Government of 2024 inherited an economy which was suffering from faltering productivity growth; stagnant living standards; regional inequality; and a fiscal framework that was not conducive to public investment. Although Sir Keir Starmer has said the government will address these issues, he needs to be cognisant not to repeat the mistakes of the Labour Governments of the 1960s and 1970s.
In 1964 Harold Wilson, the Prime Minister, was determined to restructure the UK economy and remove pressure on the balance of payments. Sterling was part of the Bretton Woods ‘adjustable peg’, but Wilson made it quite clear that his government would not adjust the value of the pound. Talk of devaluation was dismissed along with the prospect of deflation.
Wilson’s government would aim to achieve growth via a ‘third way’. This third way was a mixture of income policies and selective intervention to improve the industrial structure of the economy (encapsulated in the National Plan). But before long, the third way fell by the wayside as it was ill-equipped to address the frequent short-term crises of confidence which gripped sterling in the foreign exchange markets.
There was a growing lack of confidence in the ability of the Wilson government to achieve any economic transformation of British industry. A tax on capital gains was introduced in 1965
(which Wilson saw as merely ‘another source of revenue’). The Labour government was unhappy about using market mechanisms and instead aimed to address economic inadequacies through organisation and administration changes. In any case, an initial sterling crisis in November 1964 was followed by another in the summer of 1965 and again in the summer of 1966. While the government then had to talk tough on deflation, public expenditure (in money terms) grew by 50% between 1964 and 1968 – twice as fast as GDP (in money terms). Wilson’s government lost credibility with the markets, its creditors and ultimately the electorate. Three years later the pound was devalued and the 1970 General Election was won by the Conservatives under the leadership of Edward Heath.
Wilson was returned to office in March 1974 with a minority government (another election was called in the autumn, and the Labour government won with a majority of 3). In opposition, the left wing of the Labour Party had formulated a programme which did not command the support of the leadership. At its heart, the Alternative Economic Strategy aimed to bring about a fundamental and irreversible shift in the balance of power and wealth, in favour of working people and their families. This programme was never fully implemented, but it still formed the basis of the Labour Party's plans for economic renewal until the General Election of 1983.
The economic backdrop in 1974 was dire. Oil prices had quadrupled, industrial unrest loomed and stagflation had taken hold. While the economic record of the 1970-74 Heath administration had been dismal, the five years which followed were worse. The Labour Government resorted to a series of incomes polices which broke down and the initial trade union compliance ebbed away. This culminated in the 1978-79 ‘winter of discontent’, when a series of strikes, mainly by low-paid public sector workers, prompted widespread public revulsion against the trade unions. With the highest rates of inflation in peacetime British history; an all-time record of industrial disputes; a bailout from the IMF in 1976; financial markets refusing to buy government debt until the government had ‘put its house in order’; and high income tax rates (the highest rate of income tax on earned income was 83 per cent), it was little wonder that Britain earned the reputation as the ‘sick man of Europe’.
History can provide salutatory lessons for the Labour government in the mid-2020s. Markets are now global compared to the 1960s and 1970s and can exact harsher punishment on a profligate government more rapidly. Although sterling is not in a fixed exchange rate, it can float down quickly. The bond vigilantes are more aggressive than in previous decades and can force a government to impose deflation when they least expect it.
Generosity to trade unions and labour can be quickly forgotten when austerity is imposed. Economic growth through dictates, quangos and national plans is no substitute for genuine private sector wealth creation. Supply side reforms which do raise economic growth take longer to deliver and have to be accompanied by strategic thinking and not short-term crisis management. Finally, the left-wing can de-rail a leadership team and threaten the electability of the Labour Party.
