The Worst British Government of the 20th Century

Roundup: Talking About History

Daniel Finkelstein, in the London Times (March 5, 2004):

Today is the 30th anniversary of Harold Wilson's return to 10 Downing Street for his final two years as Prime Minister. He may have thought it little more than a footnote to his six-year stretch in the 1960s. But his 1974-76 Government deserves a chapter of its own. For it was the worst British Government of the 20th century.

In order to appreciate just how bad it was, it is not necessary to have good contacts in MI5. Simply spend a couple of hundred pounds buying the memoirs of the people who participated in those two awful years of government. Contained in their pages you will find eye-opening stories of incompetence, feuding, incoherence and incomprehension. When you start reading you may consider my judgment harsh. By the time you finish you will consider it irrefutable.

If you would rather spend a couple of hundred pounds on something else, perhaps you will allow me to summarise.

The outgoing Heath Government had left its successor in a sticky position with high inflation and very poor industrial relations. The incoming administration needed to be clear-sighted, energetic and united. It wasn't.

Denis Healey enjoys a reputation as one of the giants of postwar politics. He certainly didn't earn this by his actions in his first two years as Chancellor. As Joel Barnett, his Chief Secretary to the Treasury, remarked: "If Denis Healey had worked out a plan for a Parliament, I am bound to say that he kept it secret from me...the real worry was the fact that we had worked out no short, medium or long-term economic and financial policies."

This failure to plan was not remedied by discussion in office. Despite the scale of the economic crisis, the head of the Prime Minister's Policy Unit says: "I cannot recall a single sustained discussion in Cabinet or Cabinet Committee of central economic policy until December 1974."

The Chancellor could have done with some advice. His first mistake was to announce a Budget for March 26, giving himself just three weeks to prepare. With inflation soaring and a 29 per cent pay increase for the miners fuelling other settlements, Healey chose to announce a mildly deflationary package. In other words, he intended to reduce borrowing by increasing taxes.

Unfortunately, in the hurry, exceptionally bad forecasting and inadequate control of spending decisions meant that public borrowing was vastly higher than Healey intended. As Healey himself observed in his memoirs: "The magnitude of that one forecasting error was greater than that of any fiscal change made by any Chancellor in British history."

Within a few months the deflationary Chancellor was in expansive mood and in July he announced reflationary measures, increasing borrowing in a mini-Budget. By November the extent of the borrowing and balance of payments hole the country was in was becoming clear even to the Chancellor. According to Healey's No 2, Paymaster-General Edmund Dell, the decision was taken not to publish the full forecasts and show how bad things were. The Treasury team then proceeded to add another £800 million to public borrowing in a November budget.

Having designed one deflationary and two reflationary Budgets in a nine-month period, the Chancellor waited a full four months before changing direction yet again. A deflationary Budget was held in April.

By this time it had begun to dawn on the Government that giving in to every single whim of spending ministers had been a disaster. The proportion of national income spent by the Government rose from around 40 per cent when Labour took office to more than 46 per cent by the end of 1975. Containing the growth of spending and finding the money to borrow in order to pay the bills was then to occupy the rest of Labour's term in office. It led the country to have to borrow from the IMF as if we were a banana republic.

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