Efforts were made in 1961 to effectively slow down the rise in wages. A ‘pause’ was called for in July 1961 by the Chancellor and later through a compact with the unions negotiated by George Brown in 1964. This ‘pause’ did not last long and the compact didn’t help to slow down the rise in wages. Hourly wages rose 10% from October 1964 until the following October. Again this is very similar to the rise in hourly wages during the first few years of the 1970’s: hourly earnings rose by 10% in 1970, followed by a 13% rise over 1971 and 1972. It was hoped that the new planning body that was introduced in 1961 (NEDC) would eliminate the ‘stops’ that occurred in the absence of planning. From the start, there was a lot of critism that surrounded the pay pause situation. When the pay pause ended in March 1962, there had been a mixture of successes and failures but little overall change. (see appendix 2)
The Government established an incomes policy and announced its intention to set up a National Incomes Commission who would deal with wage settlements. However, interest in the incomes policy decreased as unemployment was rising.
There were small surpluses in 1962-1963, but this worsened and the Balance of Payments progressed into heavy deficit by 1964 following a series of sterling crises. The labour government found it extremely difficult to balance its international accounts without changing the parity. Deflationary measures did not make it easier and as a last resort, the pound was devalued from 2.80 to 2.40 dollars to the pound in November 1967. This did not bring immediate relief, as there was a lot of speculative pressure on the pound. But the Balance of Payments seemed to improve slowly and by 1969, the current account on the Balance of Payments was in surplus and was still increasing until 1971. Debts from the 1960’s were gradually repaid during the 70’s. In spite of this, there was a rise in international commodity prices at the end of 1973 and oil prices quadrupled, this brought about a period of crisis and the Balance of Payments were again in deficit starting from 1974 until 1977. All major oil consuming countries experienced increasing inflation caused by the high oil price rise, it was reinforced in the UK by the depreciation of the pound. In the UK, Prices and Incomes policies became the central policy instrument in the fight against inflation. From 1976, these were added by the new instruments of ‘cash limits’ on public spending and targeting of monetary aggregates.
The manufacturing industry had fallen after 1961 to a low in 1963, however, it did improve and by the end of a decade the industry had increased to a peak.
Under the control of the Labour in 1964, the government developed an industrial policy, this was to make the industry more efficient and competitive through government intervention. A National plan was developed to set targets for each industry and help was to be provided towards their achievements. The government created a new department, the Ministry of technology in 1964, and a new agency, the Industrial Reorganisation Corporation (IRC). The Ministry of technology was to bring advanced technology and new processes’ to the UK’s industry. The IRC was directed by an independent group of businesses men and had £150 million of Exchequer finance to lend or to invest in reorganised industrial units.
Another problem facing the 1960’s and the beginning of the 1970’s was unemployment. Unemployment had been falling since 1959 and was down to 1.33% in June 1961. This did not persist and by the first quarter of 1963, unemployment had risen to almost 4%. The 1970’s began with rising unemployment; this had rapidly worsened by 1971, reaching 900,000 at the beginning of 1972. The government had to take reflationary measures, which in the short term, helped to bring unemployment down to 500,000 by the end of 1973. Not long after, unemployment had started to rise again until 1977. It reached a peak of 1,200,000, which was almost double the unemployment figure of the 1960’s.
As an attempt to encourage competition between financial institutions, ceilings on bank credit were removed. There was an increased pressure of demand as the economy approached capacity working. Also, there was a rise in import prices. All these were factors that contributed to a rise in inflation before the boom of 1973. Inflation was at its worse in 1975, but the rise in unemployment helped to lower inflation. From 1975, retail prices were rising at 27% per year but this slowed down to 13%. There was a rapid fall in the first half of 1978 to a low point of 7.5%.
Output grew by 7.3% in the 1970’s; this was faster than any other post-war year. Investment increased in both decades and a large part of the increase was in public investment, especially in the years up to 1967. However, the increase in fixed investment was small during the 1970’s. Consumer spending benefited from growth in National income and therefore it increased except in 1969 when the post-devaluation budgets marked a slow down in spending. Over the decade, consumers absorbed 56% of the increase in gross national income. This did not deteriorate during the 1970’s; in fact, consumer spending in the 1970’s was higher than previous years.
Over the decades of the 1960’s and 1970’s the economy had seemed to be improving even though the 1970’s was a decade of economic ‘shocks’. The 1970’s had many similarities to the 1960’s, one of the main similarities were the amount of policy reversals: in 1964, the Labour Government were planned growth and fixed the IMF parity of $2.80. Each of those commitments was broken. Likewise, in 1970, Mr Heath promised a policy of state ‘disengagement’ in the economy, and to end price and income policies. But not too long after, the government had nationalised ‘Rolls Royce Aero Engines’ and brought about the most comprehensive statutory prices and incomes policy in the UK.
During the 1960’s decade: retail prices increased by 40% and at the same time, production rose by 34%. There was also an overall increase in the economy’s GDP. The GDP at the end of the 1960’s were similar to the GDP figure in the 1970’s even though there were a few small falls in 1974 and 1975 and a large fall in 1980, the unexpected rise in GDP during 1973 made up for the amount that was lost during the decade. There was a rapid growth of exports after the devaluation of 1967, with three fifths of the increase in exports taking place in the last three years of the 1960’s. It also accounted for nearly three quarters of the increase in output over those years. The increase in exports continued throughout the 1970’s and by the end of the decade it had reached an all time high. It had exceeded the increase in imports even though they were larger than any other decade. The 1970’s was also a decade of policy discontinuities. The biggest change was the failure of the Bretton-Woods adjustable peg exchange rate system in 1972 and its replacement by floating exchange rates.
In 1976, the Labour Government required the IMF to meet a large external deficit and to restore confidence in sterling. However, the IMF needed the UK to deflate the economy to squeeze out inflation. But cuts in Public Expenditure ran counter to government commitments to the Trade Unions to expand the Welfare State. This led to an IMF crisis, which in turn led to an intense political debate within the Cabinet. The squeeze on public spending was eased by the gradual expansion of UK’s North Sea oil, which generated considerable tax revenues from 1976.
Controlling the growth of public expenditure was one of the main policy issues in 1960’s but it was not the central concern that it became in the 1970’s when the PE/GDP ratio rose from 51% in 1970 to 1971 to 58% in 1974-1975. Workers were asked to treat the increases in the social wage as the equivalent to the cash earnings. The planning aspirations of 1964 Labour government were scaled down in the 1970’s.