Stop-Go Economic Policies Flashcards
Who was RA Butler?
The Chancellor under Churchill (1951-55) who followed the policies of his predecessor, Hugh Gaitskell (Chancellor under Attlee 1950-51).
He perused a mix of mixed and Keynesian economic theory, gaining him the names of “hybrid chancellor” and “Mr Butskell”, from which Butskellism is derived.
Note: Keynesian economic theory argued that state intervention to fund infrastructure, education and benefits, was necessary for preventing unemployment and for increasing consumer demand.
What did Butler do and what problems did he face?
How was the bank rate used to manipulate the economy?
- On assuming office, inherited a defect of £700 million.
- The Korean War cost 10% of GNP & 30% of gov. expenditure.
Butskellism a consensus merger of Labour and Conservative economic policies.
Butler played with the bank rate to manipulate the economy. (Loan interest)
- With a high rate, payments would be higher, leading to less spending, curbing inflation.
- With a low rate, payments are lower leading to more disposable income and more spending. However this can lead to inflation.
How did Butler introduce STOP-GO policies in 1952
STOP: The inherited defect of 1951 created a programme of severe cuts - on imports, credit, travel allowances, food subsidies, and meat rations.
The bank rate was also raised from 2% to 4% in 1952.
GO: Increased bank rate led to a surplus of £259 million.
The balance of payments was reduced due to Korean War’s end and a fall in import prices.
How were GO policies used in the 1955 election?
- Food rationing abolished.
- Most wartime economic controls removed between 1953 and 54.
- £242 million surplus used to give away £134 million in tax cuts in the April 1955 budget. (However led to acute inflation and slump in balance of payments).
Butler was a great Chancellor - near full employment, low inflation, no balance of payments problem, low taxes and rising prosperity.
There was also a rise in living standards with the national income being 40% higher in 1955 than in 1950. This caused a rise in personal savings, home ownership and consumer goods.
Did Butler break the post-war consensus?
The road haulage and iron and steel industries were privatised, however all other industries were left untouched.
What problems did Butler leave?
The early 1950s economic boom gave way for inflation, so Butler increased the bank rate to 4%, however this was undermined by his tax cuts of a sixpence in the pound a few months later.
This led to speculation on the pound and in October 1955, a supplementary budget which clawed back most of the money in April’s tax cuts.
What did Macmillan do to STOP the economy as Chancellor from 1955 to 1957?
In April 1955, Eden had became PM. In his December cabinet reshuffle, Macmillan replaced RAB as Chancellor. Although Macmillan was resentful of his ‘demotion’ in place of Selwyn-Lloyd.
Macmillan was given the job of stopping the spiralling economy from RAB.
He had to curb spending, which could be done by price and income freezes, however this would lead to trade union animosity.
Therefore, he:
- Raised the bank rate to 5.5%
- Cut subsidies on food
- Reduced public investment
- Introduced the premium bond scheme (taking money out of circulation)
- Added VAT to tobacco
However, he did reduce income tax to please the public.
What was the problem in 1957 and what did Thorneycroft do to STOP it?
Macmillan inherited the continuing problem of inflation, yet the economy had been stopped.
Macmillan gave his “You’ve never had it so good!” speech, which later warned that full employment could destroy the economy.
Fortified by his two junior ministers, Nigel Birch and Enoch Powell, Thorneycroft raised the bank rate to 7%, hoping to bring down wage increases.
However was opposed by Macleod as could see unemployment rising above 3% (full employment mark).
His proposed to public sercives spending cut of £150 million also included allowance payments for a 2nd child.
Macleod also opposed this on political grounds since it was introduced to the welfare state by the Conservative government - he wanted them to remain as champions of family allowances.
Macmillan was prepared to cut only £100 million, so Thorneycroft resigned in January 1958, followed by Powell and Birch, whilst Thorneycroft and Powell later returned to government.
How did Heathcoat-Amory use the economy to win the 1959 election?
The public spending cuts and high bank rate under Thorneycroft reined in inflation’s pressure; the cost of living would barely rise by 1% over the next two years.
Trade also turned into Britain’s favour, with a 7% drop in import prices in 1959, easing the balance of payments.
The economy could now be let go.
- To help win the 1959 election, the standard rate of income tax was reduced from 42.5% to 38.75% - a post-war low.
- By November 1958 the bank rate had also been cut to 4%.
- The economy which had been stagnant in 1958 grew in real terms by 4% in 1959 and be nearly 6% in 1960. The Conservatives campaigned on this: “Life’s better with the Conservatives. Don’t let Labour ruin it!”
How did Heathcoat-Amory use the economy to win the 1959 election?
The public spending cuts and high bank rate under Thorneycroft reined in inflation’s pressure; the cost of living would barely rise by 1% over the next two years.
Trade also turned into Britain’s favour, with a 7% drop in import prices in 1959, easing the balance of payments.
The economy could now be let go.
- To help win the 1959 election, the standard rate of income tax was reduced from 42.5% to 38.75% - a post-war low.
- By November 1958 the bank rate had also been cut to 4%.
- The economy which had been stagnant in 1958 grew in real terms by 4% in 1959 and be nearly 6% in 1960. The Conservatives campaigned on this: “Life’s better with the Conservatives. Don’t let Labour ruin it!”
What problems did Heathcoat-Amory leave?
The 1959 boom stimulated by his election budget soon saw the economy overheating as wages increase, high consumer spending and massive imports, all stimulated by his implementations.
What did Selwyn Lloyd do as Chancellor?
Raised the bank rate to 7%.
He was determined to deal with the problem of accelerating wages, which he regarded as an underlying cause of the crisis.
He introduced the National Economic Development Council (Neddy) and the
National Incomes Commission (Nicky), a voluntary method of price and wage restraint
Neddy and Nicky were to include representatives of the state, employers ande trade unions and were intended to propose guidelines for production and wage levels. The treasury was abandoning its hands-off approach.
Nicky and Neddy were not successful as the measures were voluntary, and as the TUC boycotted it.
Selwyn Lloyd also introduced the Pay Pause, freezing wages for pubic sector workers in July 1961. This was the first pay pause since Cripps in 1947.
It failed because:
- It was inequitable, since pay still increased in the private sector
- It was politically inept, as the public were outraged that the respected nurses were denied wage increases.
The pay pause was soon breached by public sector employees, and had collapsed after a few months.
Was Selwyn Lloyd a success?
Although Lloyd’s deflationary measures did reduce pressure on currency reserves, they also increase unemployment, reaching 800,000 by the end of 1962, worsened by a harsh winter.
There were also dock and industry strikes.
His 1962 budget also seemed feeble.
How was the economy under Macmillan and Douglas-Home?
After Selwyn Lloyd, Maudling became Chancellor.
In 1963, the stop-go cycle entered its pre-election phase - in the 1963 budget there were £300 million of tax cuts.
There was also a low bank rate and sufficient consumer spending from the 1963 budget’s tax cuts to lift the economic growth rate from 4% in 1963 to 6% in 1964.
Although the familiar side effect of economic overheating and imbalance of payments was accompanied.
However, Chancellor Maudling was determiend to maintain this “Dash for growth”, hoping the balance of payments dificulties would be solved by induced dynamism (vigerous activity and progress) in exports, which were indeed rising.
However, by 1964, exports were 10% higher than in 1961, but imports were 20% higher, caused by increased consumer spending.
