What happened when other chancellors tried a ‘dash for growth’?

Can Kwasi Kwarteng succeed where Maudling, Barber and Lawson failed, asks Sean O’Grady

Liz Truss and chancellor Kwasi Kwarteng visit a factory in Kent after the mini-Budget (Reuters)

Simply in terms of tax giveaways, Kwasi Kwarteng’s “fiscal event” was much more a mega-Budget than the “mini-Budget” it was billed as. In fact, this was the largest tax giveaway in modern times, one of the larger increases in public borrowing for non-investment purposes, and it also marked a philosophical departure from the general approach that the Coalition and Conservative governments have followed since 2010.

The Truss government has even been thinking aloud about ending “Treasury orthodoxy”, breaking the department up, and making the Bank of England pay as much attention to growth as it does, in principle, to inflation. Some of this thinking was reflected in the chancellor’s “Plan for Growth”. It was a bold and, in the hands of Kwarteng, a brash set of measures. Will it work?

History has some answers. There have been three previous notable examples of such a “dash for growth” – an attempt to use the public finances and the tax system to “unleash” the British economy, escape the habits of austerity and break the stop-go or boom-and-bust cycle. They enjoyed mixed success.

There were three, all under Tory governments. The first was in 1963. The then Macmillan government was beleaguered, unable to get into the European Community to help boost trade, and the economy seemed stuck in relative decline. So Reginald Maudling set out a series of measures to boost public spending, cut taxes and make credit easier – all designed to boost output to such an extent that economies of scale and an investment boom would soon transform productivity levels and international competitiveness. He also had an eye on a general election that could not be long delayed, and which eventually arrived in 1964.

It failed. The substantial fiscal stimulus overheated the economy, pushed inflation up, sucked in imports (consumer goods as much as raw materials) and there was a sterling crisis.

After the Tories lost the election, Labour had to clear up the mess. Funnily enough, Labour under Harold Wilson set up a new pro-growth Department of Economic Affairs, as a counterweight to the Treasury, and this too failed. On his last day in office, Maudling bumped into his Labour successor, James Callaghan, and remarked: “Sorry, old cock, to leave it in this shape.” Growth peaked at a remarkable 5 per cent or so, before collapsing.

A decade on, and another Tory PM, Ted Heath, also wanted radical change and stronger growth. He had his own suite of “supply side” reforms, though ill-fated. Joining Europe was the centrepiece, and he achieved that – but British industry was poorly prepared for the wave of continental competition that arrived on the domestic market. A loosening of controls on bank lending and a loose money policy led to a rapid expansion in the money supply, and a stock market and property boom. The unions were to be tamed by the Industrial Relations Act, which soon foundered against tough union resistance. Strikes were rife. Later, an Middle East oil crisis and a miners’ strike brought everything to a shuddering halt, and Heath lost an early general election that was supposed to have boosted his authority.

Heath was a dominant figure, and virtually his own chancellor. In 1971 he ordered Tony Barber to cut taxes, spend and borrow in his own dash for growth, which was supposed somehow to complement European Community membership and reverse the socialism of the previous Labour administration. As unemployment mounted in 1972 towards the shocking level of one million, Barber was told to administer another huge fiscal adrenaline shot, one that ranked as the biggest tax cuts package until Kwarteng arrived. Growth in 1973 reached 6.5 per cent in real terms, a post-war record, but soon enough went into reverse.

Third up was Nigel Lawson in 1988 under the Thatcher government. Unusually, Lawson was making radical tax cuts after, rather than before, the 1987 general election, such was his confidence that the UK had achieved an “economic miracle” equivalent to the German example in the 1950s. Again supply side reforms – union laws, privatisations, deregulations – had accompanied a general, if uneven programme of tax cuts, culminating in the symbolic reduction of the top rate of tax in the 1988 budget from 60 per cent to 40 per cent. He also unwisely stoked a housing boom by tweaking tax relief for couples and pre-announcing it. Again, it ended in tears, and a recession duly followed.

At this distance, there is an interesting common factor in all these episodes, in terms of how the British economy managed to extricate itself, if only sometimes temporarily, from these failed dashes for growth, and how boom turned to bust and then recovery. It’s the exchange rate. It gives us hope, of sorts.

In 1963, sterling was fixed in a rigid international system colloquially known as Bretton Woods. It meant that a trade deficit and loss of demand for and confidence in the pound had to be remedied by austerity. Only in 1967 did the then Labour government devalue the pound, boosting exports and depressing imports, via inflating their price. After that, in due course with some additional austerity, there was a decent recovery.

By 1972 the pound was free-floating, though governments tended to try and defend it. The notable depreciation of 1976, with a recovery in trade and more orderly public finances, helped another Labour government repair the economy (before it all went wrong for them).

The Lawson boom led to a sharp recession in 1990 to 1992. Lawson had informally pegged the pound to the deutschmark, which arguably ended up importing inflation; this was followed by sterling entering the European Exchange Rate Mechanism, which had the opposite effect. Only after the pound tumbled out of the ERM in 1992 did the British economy enjoy a sustained recovery and a long period of healthy non-inflationary growth.

Right now, sterling is being hammered on the currency markets, which means more inflationary pain for households and higher interest rates – a severe squeeze. Indeed, the monetary squeeze will need to be correspondingly severe if fiscal policy is loosened, as is now happening. It is going to be a period of huge turbulence and, frankly, misery for the heavily indebted, those who eventually lose their jobs and those at the bottom of the economic pile. The economy will eventually adjust, driven by exchange rate movements – and it will hurt. Unless, of course, the Kwarteng dash for growth succeeds where Maudling, Barber and Lawson failed. Fingers crossed.