One of the oft-repeated adages is that this week’s Budget will be a defining moment for the new Labour UK Government. How true is that? We’ve looked at first Budgets by post-war Chancellors to find out, and are publishing an article alongside a podcast looking at the historical record of post-war Chancellor and to what extent that holds true.
Circumstances matter – a lot
We all know what we think Labour Chancellors would prefer to do, which is spend more. And although they have done a bit of that, their loosening of policy has been far from universal, especially in their first Budget Statement in the Commons.
In the immediate post-war period, the Attlee Government pursued a highly restrictive policy. There were some initial tax cuts, largely because war expenditure was no longer necessary, but tax and spend would be the norm of the day – especially from Stafford Cripps tenure onwards. Major spending reforms like unemployment provision, the health service and nationalisation of industries were financed by tax increases. By the time Hugh Gaitskell delivered the final Labour Budget for 13 years, fiscal policy was on a heavy tightening cycle, as inflationary pressures kept building up – supply constraints remained an issue for years after peace.
The 1964-1970 Labour Government had a similar dynamic. James Callaghan presided over a sequence of tightening Budgets, largely on the back of the disastrous Reginald Maudling ‘dash for growth.’ Maudling had attempted an ‘expansion without inflation’, but he increased the structural deficit by the equivalent of £44 billion today and inflation rose even more, putting pressure on the pound – which at the time was on a fixed exchange rate. Maudling left a note for Callaghan that read “Good luck, old cock…. Sorry to leave it in such a mess.” It might have been a private joke, but that made it no less true.
Callaghan would eventually resign after the perceived humiliation of devaluing sterling, with Roy Jenkins taking his place and presiding over one of the most draconian tightenings in the UK’s history. Borrowing was brought down but not inflation, which was then accelerated in another disastrous set of Budgets – this time introduced by Anthony Barber during the Heath Government.
With inflation and public spending out of control, Denis Healey – who couldn’t in good conscious be accused of being dogmatically anti-government spending – was forced to introduce cash controls for departments, which are the direct predecessor of today’s departmental limits, and whose success in restraining spending finally brought the public finances into line. Healey eventually was able to run a looser policy towards the end of his chancellorship, but even then it was much to do with cutting taxes rather than turning on the spending taps.
Even when Gordon Brown came into Number 11, his initial approach was cautious, increasing spending to a small extent but presenting that as being funded by the windfall tax. Larger increases in spending came in the 2000 Budget. And the last Labour Chancellor before Rachel Reeves was Alistair Darling, whose 2009 Budget cuts – though not as large as George Osborne’s – were remarkably strict, and formed the basis for the Coalition’s austerity programme.
Chancellors don’t govern in a vacuum – they must respond to the issues of the day, and circumstances can and do curtail the ambition and the type of policy they need to run. One other example was Rishi Sunak’s 2020 Budget, which was aimed at ushering in a new era of additional government spending, particularly on the capital side. This was the moment after the 2019 General Election, when Boris Johnson’s power was at its peak, and when levelling up and delivering transformation was all the rage. Covid hit UK shores days before the Budget, and two weeks later a lockdown was imposed. Events had overtaken the Budget, and Sunak – as well as Jeremy Hunt – would spend the following years running fiscal policy to get debt down, and slashing government spending and investment to so, undoing nearly all the announcements of that March 2020 statement.
The UK’s tension between ‘Treasury orthodoxy’ and growth is nothing new
One of the benefits of looking at the broad sweep of history is the perspective that it brings to debates over topics that often seem to define current times, and which most often are not new.
Take the UK growth malaise. It has been very real over the past decade or so, but new it is not. In the late 1950s, an OECD report showed that UK growth had lagged its peers’ in the post-war period, and Harold Macmillan (by then Prime Minister) was determined to get growth going. His previous Chancellors – Peter Thorneycroft and Derick Heathcoat-Amory – had mostly followed ‘Treasury orthodoxy,’ meaning that their focus was mainly on controlling inflation. Heathcoat-Amory’s 1959 Budget did loosen fiscal policy, but it increased inflation.
Macmillan and his new Chancellor Selwyn Lloyd pushed back against the Treasury’s position and ended up not tightening anywhere near as much as those in 1 Horse Guards Road advised. Embarrassingly, Lloyd ended up having to take emergency measures just a few months later, as well as secure an IMF loan. He would shift back to a restrictive policy, which staved off devaluation and cooled inflation – but did not stimulate growth, and eventually that cost him his job.
This is a familiar tale these days – not that different from Kwasi Kwarteng’s 2022 ‘mini-budget’ that tried to get growth going, only to find out that (to abuse the joke template) in an open economy, you can’t buck the market; the market bucks you. Jeremy Hunt would then implement the Selwyn Lloyd-like restrictive policy after the shock.
Some Chancellors are defined by their first Budget – but many are not
George Osborne’s defining moment was his first Budget in June 2010, when he announced his spending cuts. Geoffrey Howe mostly restricted fiscal policy, building on his initial 1979 Budget until his famous 1981 statement. Barber and Maudling came to be associated with the build-up of aggregate demand that accelerated inflation throughout their tenures. Philip Hammond proved to be much more comfortable with increasing spending than his predecessor throughout and showed it in his first statement. And James Callaghan and Roy Jenkins’ chancellorships were extensions of their very tight fiscal policy unveiled from the get-go.
But not all Chancellors’ tenures are as linear. Take Nigel Lawson, for example. His first Budget in 1984 was very low-key, and he would become much better for his large fiscal stimulus in 1987 and 1988 which created the ill-fated ‘Lawson boom.’
Or take Norman Lamont, whose final Budget was the complete opposite of his highly loosening 1991 and 1992 statements. Lamont’s experience is fairly typical of the fact that Chancellors govern on the conditions of the day, and misjudgements of the mood of the public, their MPs and financial markets can force them to change course. A final word of caution comes from the 1994 Budget, which Ken Clarke had to quickly reverse after his own MPs defeated the increase in VAT on domestic fuel, leading to several other tax rises and spending cuts instead. A Chancellor is only as powerful as the backing of their parliamentarians, and they put a significant constraint on their options. We shall see how Rachel Reeves’ budget lands with her peers sitting in those famed green benches behind her.
Read and listen
You can find the longer article here, and the podcast here – including a preview of Wednesday’s statement. We’ll have much more coverage in the coming days!
Authors
João is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute. Previously, he was a Senior Fiscal Analyst at the Office for Budget Responsibility, where he led on analysis of long-term sustainability of the UK's public finances and on the effect of economic developments and fiscal policy on the UK's medium-term outlook.