The 1970s Fiscal Squeeze. Stagflation, Recession, Currency Crisis, and Political Crisis
Background: The Period in Perspective
Like the 1920s, the 1970s was for the UK a decade of intractable economic problems combined with high electoral turbulence. One of the economic problems faced by governments in the 1950s and 1960s (as noted in Chapter Six), namely the management of the currency in a fixed-exchange rate system, changed its character with the abandonment of the 'Bretton Woods' system in the early 1970s in favour of a system of floating currencies. But that certainly did not mean that exchange rates ceased to be a political problem for governments, as this episode shows.
Moreover, as can be seen from the tables in the Appendix to this book, two other economic conditions dramatically worsened. In contrast to the low unemployment of the previous three decades, mass unemployment returned, with unemployment going over a million for the first time since the 1930s. Further, whereas unemployment had been associated with falling prices in the 1920s and 1930s, inflation spiked up dramatically from the low single-figure annual price rises of much of the 1950s and 1960s into double digits, peaking at over 20 per cent in the mid-1970s.
Associated with that inflation were high levels of trade union militancy, another marked feature of this decade. And a key factor behind the inflation spike was a huge rise in global oil prices, which increased six-fold between the early and mid-1970s, and by the late 1970s were some seventeen times early 1970s prices. The result was a combination of recession and inflation ('recesso- petroflation', as some termed it) in the UK and other oil-importing countries. Oil and gas were discovered in British (mainly Scottish) waters under the
North Sea in the 1960s, but it was not brought ashore in large quantities until the later 1970s. Production was still extremely limited in the eventful year of 1976, though it was to rise sharply by the end of the 1970s.
In politics, the 1970s was a decade marked by four general elections (as in the 1920s). Almost fouryears of majority Conservative Government (1970-74) were followed by three years of minority or bare-majority Labour Government (1974-77), which were in turn followed by a Labour-Liberal pact from 1977 to 1978,1 then a minority Labour Government again until it lost office to the Conservatives in 1979. As in the 1960s, the 'blame game' over fiscal squeeze in much of the 1970s consisted of the Labour Government aiming to blame their Conservative predecessors (and then the global situation) for fiscal squeeze, while the Conservatives blamed the Labour Government for mismanaging the economy and allowing pay settlements to blow out.
We saw in Chapter Two that historical financial statistics point to three episodes of fiscal squeeze in the 1970s. The first, a hard revenue squeeze between 1973/74 and 1975/76 began in the last year of the Heath Conservative Government and was extended in the first year of the subsequent Labour Government, in the latter case involving tax increases to finance increased government spending and in that sense resembling the mid-1960s Labour revenue squeeze discussed in Chapter Six. That tax squeeze was followed by a year of hard spending squeeze accompanied by soft revenue squeeze, and then by a hard spending-only squeeze, in both cases associated with a deep currency crisis and financial bailouts from the US Government and the IMF. An element of non-fiscal austerity also figured in this case, in the form of efforts to cap wages by both Conservative and Labour Governments and very high interest rates (the highest in the twentieth century) in the late 1970s.