Economic policy under Wilson and Callaghan

Wilson’s economic plan

He wanted to resolve the government v. NUM confrontation to end the 3-day week and state of emergency.

National Enterprise board, 1974

Set up by Toney Benn to administer the government’s share holdings in private companies.

1975 - Made a significant investment in British Leyland
1976 - Nationalisation of British ship building and aerospace industries

By 1975, its effectiveness was being questioned, and was contributing to the deficit.

Social Contract

Negotiated in 1973 with Labour and the TUC which would involve voluntary pay restraint by the TUs, in return the government would repeal Heath’s Industrial Act and Pay Board.

Increased pension benefits, food and housing subsidies, tax and parallel cut to defence, and government deficit

Economic Reforms 1974-76

Nationalise the failing car manufacturer British Leyland caused renewed controversy about the role of the government in rescuing ‘lame-duck’ industries.

More formal pay restraint policy for TUs in 1975 cause the Social Contract wasn’t limiting wage demands.

Denis Healey’s March Budget 1974

Highly redistributive and tax-heave designed to tackle a severe balance of payments crisis and high inflation:

• Income Tax - Base Rate 30%→33%, Top Rate 75%→83%

• Corporation Tax - 40%→52%

• Wealth & Capital - Groundwork for a new Wealth Tax and Capital Transfer Tax

• Price Controls - Stricter controls on corporate profit margins, increased subsidies for working class staple goods.

Denis Healey’s July Mini-Budget, 1974

Stimulus package aimed strictly at cooling inflation and easing the cost of living for consumers:

• VAT - Reduced from 10%→8%

• Fuel Prices - Price cut on road fuel alongside VAT reduction to lower transportation and manufacturing costs

• Rate Relief - Expanded the regional employment premium and provided rate relief to commercial properties to help industry

Sterling Collapse and IMF Loan, 1975-76

Value of the Pound collapsed between 1975 - Oct 1976

• $2.75 = £1 → $1.50 = £1

November 1976 - Callaghan and Healey appealed to the IMF for a loan:

• Granted him £3 Billion to stabilise the economy

• Required him to reduce inflation

Did stabilise the economy and bring some positive economic conditions by 1978

Winter of Discontent, 1978-79

Causes: Autumn 1978, TUC reject the government’s proposed wage increase limit to 5%. Encouraging TUs to put in higher demands and Strike.

Consequences: TUs began industrial action including disrupting transport (ASLEF), along with dustmen and gravediggers.

Results: ASLEF won a 15% increase to wages in December 1978 after a 9 week strike. Resolved in March 1979 with an average 10% wage increase. Public mood damaged due to psychological effects of the WoD.

Led to people feeling Labour were untrustworthy with the economy and when Thatcher called her VoNC in 1979, people supported the Conservatives more than Labour.

Inflation and Unemployment, 1976-79

Inflation: Peaked at 24.2% in 1975 (just before Callaghan), but fell by 1978 to 8.3% due to the tight fiscal controls and the IMF. Surged again after the WoD.

Unemployment: Rose steadily: from 1.25 million in 1976 → >1.5 million in 1979. The focus on reducing inflation led to job losses and economic stagnation.