A conference season overshadowed by a plunging pound, a run on government debt and frightening talk of the IMF. No, not 2022 but 1976. In the departure lounge at Heathrow, on his way to a meeting of world finance ministers, chancellor Denis Healey heard of the latest market turmoil, plonked down his G&T and darted back to Whitehall—to apply for a huge bailout loan.
The ensuing crisis, political as much as economic, was foreshadowed by many of the same problems we have today: rampant inflation, a government deep in the red, a stubborn national overdraft on the Balance of Payments. There was a sense that things “could not go on” as they were—and they didn’t. The next three years, even before Margaret Thatcher was elected in 1979, witnessed deep spending cuts, the sale of public stakes in energy companies and indeed the very first signs of a tick up in inequality.
The 1976 crisis, then, catalysed a broader shift in the UK’s political economy, setting it off on a journey which has now, 46 years on, reached its grotesque denouement in the trickle-down fantasies of Liz Truss and Kwasi Kwarteng. As the Bank of England is forced to restart the printing presses amid rampant inflation and the mortgage market dries up, this brand new government has sunk to a polling deficit of 20 or even 30 per cent. The prime minister and her chancellor are now, very palpably, in a crisis of their own.
The question is whether its resolution could shift things just as profoundly as 1976—in a very different direction. At certain moments, the terms of trade in economic discussion shift. There are sometimes false dawns—the financial crisis, the pandemic—in which the conventional wisdom wobbles before reasserting itself. But sometimes old assumptions really do crumble, and previously unthinkable things become entrenched common sense. It doesn’t take a general election. And there is, as the story of 1976 shows, nothing like a government that is struggling to make things add up to catalyse the change.
It is important not to be distracted by details here—even the details that triggered the current crisis. The few remaining cheerleaders for the Truss/Kwarteng budget are, as it happens, correct to point out that the last-minute surprises, such as the scrapping of the top tax rate, are pretty irrelevant to the big economic picture. They might even be right that it’s only this last bit of overreach that provoked the crisis this week. But they are wrong to imagine that putting one or two lesser rabbits back in the hat can rescue their position now.
It’s all reminiscent of the argument about whether, with hindsight, Healey’s IMF loan might never have been required if the Treasury had only produced accurate figures. Then as now, the “what ifs” are irrelevant. What matters is not the match that happened to light the spark, but all the tinder that was ready to blaze. When the conditions are ripe, there will be a crisis in the end—whether it’s this week, next month or next year.
The underlying problem today is an administration that kicks against reality and anyone who tries to enforce it. Even before the chancellor stood up last week, that trait was clear in his sacking of the Treasury’s top civil servant, Tom Scholar, and his decision not to publish the usual economic forecasts along with his budget. It was evident, too, in Truss’s heavily trailed decisions to reverse the National Insurance hike for the NHS and social care, while maintaining that this would not necessitate any corresponding health service cuts.
This is government unmoored from actuality. And history suggests that is often the precondition for a real turning of the tide and the arrival of a new economic settlement.
Moves on many fronts
We saw that in 1940 when, after Dunkirk, a new dispensation took hold. The game was up for all those wealthy folk who had hitherto expected to be left alone with their money; the “guilty men” who had, not long before, been resistant to coughing up for rearmament. Their grip on reality had been found wanting. It was understood that, if Britain were to survive, we needed to stand together, even if that required big borrowing and a big state.
Despite a large Conservative majority in parliament, the heretical figure of John Maynard Keynes was soon given a desk in the Treasury; chancellors began managing economic demand as Whitehall embraced responsibility for full employment; and previously unthinkable tax rates were imposed, raising the resources which, after demobilisation, were redirected towards the new welfare state.
When political economy shifts, it shifts on many fronts at once. This was seen again in 1976, when the order that had developed after 1940 unravelled. Healey and prime minister James Callaghan were able to grind down the opponents of economic retrenchment, who showed a Truss-like tendency to wish away problems that ultimately couldn’t be ducked. In 1975, Tony Benn had—shortly before price rises peaked at over 20 per cent—advocated an “alternative economic strategy” which he admitted would entail running a still-higher inflation rate. The cabinet’s more conventional Keynesians, such as Anthony Crosland, also struggled to persuade anyone that they had a plan for anything more than borrowing without end.
But the most interesting point for what happens next in 2022 is this: as soon as the left had lost the 1976 argument about “going for growth” over “steadying the ship”, it more or less gave up on the fight about how the ship was to be steadied. The big squeeze came not through taxation but public spending cuts, even though these were bound to hit the vulnerable hardest. The discrediting of left-wing macroeconomics led, in a way that it didn’t logically have to, to a crumbling of wider social democracy.
I once spent a few months pouring over economic and polling data as well as minutes of political meetings trying to unravel this mystery, and concluded that the late-1970s choice to hack back state services, rather than raise taxes, could not be explained by economic constraints or even public opinion, but only by a turn in the tide of broader ideas.
Mammon unchained
Britain’s IMF creditors in the 1970s certainly had a preference for public spending cuts over tax increases, but they, too, moved with the currents of their time. As indeed does today’s IMF, which is operating at the end rather than the beginning of the long neoliberal age. The extraordinary statement it issued about the UK on Wednesday specifically urged London to step back from tax cuts, “especially those that benefit high income earners.”
Now there is one blindingly obvious difference with 1976: Truss is not receptive to the message in the way that James Callaghan was. She will not take to the stage at party conference in Birmingham and do the equivalent of what Callaghan did in Blackpool that year, and explain “in all candour” that the old order is over and neoliberalism has run out of road.
She is the cartoon neoliberal condemned to rule at a moment when the old doctrine’s prescriptions are political poison. Having ridden to power promising a narrow, partisan and ageing selectorate that she could fix all Britain’s problems through a second Thatcherite revolution, Truss has immediately discovered that neither the markets nor the wider public share her enthusiasm. Uncapping bankers’ bonuses is received as Mammon, not Britannia, unchained.
Whether or not her wild tax cuts might have spurred growth in another time or place, in this time and place they have already demonstrably destroyed the confidence on which investment and growth must always depend. She might cling to office, but even if (now a big if) she can get this budget through the Commons, she will never again exert the unchecked power of her first few weeks.
Taxing question
The first obvious effect of the unfolding seachange in political economy will be on the politics of tax. Tory backbenchers and secretly funded think tanks insisting that cutting rates will swell the tax base to the point where revenues actually go up will not be taken seriously for a very long time. They may still spout the same arguments, with a few added excuses, but will find themselves as marginalised as “real Leninism has never been tried” revolutionaries.
But I suspect the effects will go far wider, too. Why? Because the time for a deeper change is right. Just as the difficulties with industrial relations, international competitiveness and inflation had sapped the resilience of the UK’s post-war political economy for seven or eight years before the 1976 crisis hit, inequality and woeful productivity were registering as serious worries in the early 2010s, even before they translated into political tumult from 2016.
As Phil Tinline has written in an excellent recent book about the death of successive political orders, the popular nightmare now “is not of domineering pickets”, ramping up wages and in turn prices, as they were accused of doing in the 1970s, “but of parents having to choose between heating and eating”. As and when Truss goes down to electoral defeat, she will be succeeded by an opposition which—unlike New Labour, but very much like Thatcher—arrives in power convinced the economy is fundamentally broken and needs rewiring.
All this sounds thrilling for the left, but I want to qualify it with a serious cautionary note. Even if—the biggest of all Ifs in economic history—Labour can find some credible ways to raise the growth rate, the benefits will accrue at glacial speed. There is no shortage of attractive-sounding “post-neoliberal” ideas, ranging from green industrial revolutions to properly valuing the care economy. But almost all require serious outlays by the state. And the ugly truth is that—as in 1976, and even more emphatically 1940—the public finances are shot.
Both of those earlier transformations stuck because those driving the change took the problem of revenue seriously: brave tax rises won the war and, though the likes of Truss are wont to forget it, Thatcher sharply increased the tax burden to secure her grip before she started splashing the serious giveaways.
So far, Keir Starmer’s Labour party has answered the question of tax with opportunism. It raised nit-picking objections to the Johnson/Sunak National Insurance rise, but it has not offered any alternative source of funds. The cold, hard reality is that, merely to answer a building wave of destitution and get services like the NHS back up off the floor, some sort of broadly-based progressive levy will have to be part of the mix. It will not be so very different from Sunak’s planned NI rise.
Beyond that, there is no plausible path to rebuilding the broader public realm that isn’t going to require—at the very least—substantial upfront investment. The principle in finding the resources to do it is obvious: wealth has swelled, so tax it. But the detail and the politics are fraught. There will, to use a 1970s phrase of chancellor Healey, be “howls of anguish” from the rich, which will drown out anything but the most adroit advocacy for the smartest policies.
If 2022 is truly going to be a turning point in the mode of 1976, Labour needs to set its best brains to work at once on this most taxing of questions.
