Conservative economic policies on the whole were based on the theory of “monetarism”. It had two main aspects to it, the most effective way to control the economy is to ensure that the money supply does not rise faster then the growth in economic activity. This is designed to ensure that high inflation is avoided and that industry can operate within a stable economic environment. It also implies that governments should not interfere with the rest of the economy, it is fairly liberal since it promotes minimum state intervention.
There were 3 main ways in fulfilling the theory of monetarism, the first was control of the money supply. This was done by initially calculating the money supply. This would help in setting annual targets over growth rate which could be published with the budget as part of a medium term financial strategy. Any deficits could be reduced via 3 ways, high interest rates to lower demand, financing the public sector borrowing requirement without printing money and allowing exchange rate to float as well as stop buying and selling foreign currency to effect the money supply. There were problems with this way though since it was not too effective, particularly in the early 80’s when the inflation rate grew twice the government target, starting at a higher rate from 79-85 then any time in the Labour government. Inflation only fell when the money supply began to increase it was ineffective as society was generally cashless so from 86 onwards the idea of money control was abandoned. The second main way of carrying through monetarism was reducing the levels of government spending. If the government was spending more then its income it resulted in a deficit which would certainly not stimulate the economy. Geoffrey Howe’s budget planned to slash spending including in the following ways, put cash limits upon the public sector, Raise minimum lending rate to 14%, Sell public assets and switch to indirect tax. This was moving away form the Keynesian demand management belief since Keynes would keep unemployment down by a deficit but in this budget it was reduced even if it resulted in short term recession and unemployment which as further tightened in 81 with massive rises of indirect taxes on petrol. This was fairly effective since it resulted in a budget surplus in the mid 80’s but public spending continued to rise due to increasing unemployment as the burden on social security increased which also resulted in a tax deficit as the unemployed could pay neither direct nor indirect tax. Finally a free market economy was to be created. This was linked with a reduction in government spending, they stopped employees and employers making wage policies allowing the marker to dictate wage levels instead. Not considering income policies helped it break away with Keynesian policies and privatisation helping the government to reduce its role with the state.
As for Labours approach to state intervention, there have been aspects that have been different to the conservative approach with things being introduced which simply would not have come if the conservatives were in power showing Labour to have a much more pro active role in the economy. Aspects like the minimum wage, child and working tax credits rewarding a family structure, new deal with labour has also come into play which is a state funded job training program, something unlikely to come to the surface if the conservatives were in power with their ideal of minimum state intervention. Also with Labour there is a possibility for the Euro being introduced which would have a major impact upon the economy involving much more state intervention then the conservatives would be willing to comply with. Indeed it is very unlikely the conservatives would ever allow this to happen, particularly since front runner to take over the Tory leadership David Cameron is cynical over the UK’s relationship with the EU, fearing it could alter the shape of the economy. Labour have also reduced state intervention to some degree with the taxing system by allowing fiscal drag to set in keeping the barrier for the highest level of tax the same, this means many more people are now dragged into the top level of taxation.
Despite there being contrast between the two parties approach to state intervention there is an overwhelming consensus between the two main political parties over certain aspects of the economy and state intervention. One of these is Labours policy to allow the Bank of England to set inflation rates and to keep tem fairly low. This is a consensus between both parties and demonstrates fairly low state intervention. Labour has also accepted privatisation and deregulation partly because privatisation has run so deep it is now irreversible, but Labour have also gone on to privatise state controlled industries such as the recent privatisation of air traffic control. Aspects of previously state controlled economy have also now gone to multinationals so Labour would find it arduous to try and regain what it used to own. Also there is a general consensus that the British economy should stay part of the European union with both parties now accepting this inevitability. The EU also helps to minimise state intervention as it now controls huge sections of the economy such as fishing quota policies which are now decided elsewhere from parliament meaning less state intervention in this regard for either party and it is nigh impossible to now disentangle the UK economy from that of the EU without major uproar and widespread opposition.
Overall due to the level of consensus there is relatively little difference between the way the economy has panned out between the conservatives period in charge end the dominance that the Labour party currently are enjoying. On the whole the economy has become relatively depoliticised since the Thatcher years as politicians have less control over this increasingly globalised and privatised aspect of the agenda. Now with Brown’s decision to give the Bank of England the power to set the level of interest rates the economy has become less prone to state intervention then ever especially with a clear end to the grip that Trade Unions once had over the Labour party. Overall state intervention over this period has decreased and barring a crisis it is likely that this will remain the case unless the Liberal Democrats manage to gain power, even through a coalition government.
