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Is there anything new about New Labour(TM)s approach to Economic Management?

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Samantha Bentham                                                                                                                       New Politics in Britain.

Is there anything new about New Labour’s approach to Economic Management?

  Before we can decide if there is anything new about New Labour’s economic approach we first need to consider the economic policies of previous governments. Initially we need to look at the way ‘Old’ Labour ran the economy and then look at Thatcher’s key economic themes so that there is a point of comparison as to whether New Labour economics is a contemporary phenomena or just old ideas presented in an innovative way.

  In regards to ‘Old’ Labour the most appropriate place to start is with Clement Atlee’s post-War Labour party. This government was seen to be quite revolutionary at this time. It supervised a major nationalisation program of many of the key industries and utility providers. Under Atlee’s government the railways, coal mining, the steel industry and the Bank of England were brought under the public ownership of a national government along with electricity, gas, water and telephones. It was also Atlee’s government that brought about the ‘cradle to grave’ Welfare State which was created on the basis of William Beveridge’s 1942 ‘Social Insurance and Allied Services Report’ (better known as the Beveridge report.) As part of this model the National Health Service was created in 1948 under Aneurin Bevan, health minister at this time. This is seen as being the Labour Party’s greatest achievement.

  The Labour party at this time followed a Keynesian model of economics. This was the theory that aggregate demand for goods was the driving force behind economic growth and that the government should take charge of the economy by promoting spending either by lowering interest rates or investing in the infrastructure of business.

  In 1951 the Conservatives came back into power under Winston Churchill and in 1955 Hugh Gaitskell took over as leader of the Labour party. Gaitskell along with Anthony Crosland saw the Labour party as moving in a different direction than Attlee. Gaitskell and Crosland wanted the party to embrace a more temperate social democrat position. They believed that a mixed economy and demand management rather than government intervention were the appropriate policies to achieve the goals of a collective welfare state and full employment. This did however cause problems within the party and in particular the idea of amending/removing Clause IV of the Labour constitution, which stated:

‘To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible upon the basis of the common ownership of the means of production, distribution and exchange, and the best obtainable system of popular administration and control of each industry or service.’ www.labourcounts.com

  It is widely accepted that this committed the party to public ownership but Gaitskell believed that it was the public opposition to nationalisation that had led to their poor performance in the previous election. He therefore wanted to amend this impression but it caused uproar with Labour party members and he failed to make this change.

 It was 1964 before Labour came back into power with Harold Wilson at the helm.  Wilson was left with a large balance of trade deficit by the previous Conservative government which was mainly due to its expansive fiscal policy and Wilson tightened Labour’s fiscal policy in response to this. The first few years that Wilson was in office were overshadowed by what was an eventually a hopeless attempt to avoid the devaluation of the pound. By 1967 market pressures forced the pound into devaluation although Wilson emphasised this would not affect the ‘pound in your pocket’ as he stated in a televised speech

From now on, the pound abroad is worth 14 per cent or so less in terms of other currencies. That doesn't mean, of course, that the Pound here in Britain, in your pocket or purse or in your bank, has been devalued.’ Harold Wilson 19/10/67

  The devaluation of the pound led to a slight upturn in Britain’s economic performance.

  Another theme of Wilson’s government was an emphasis on planned economy by which the government controls all the chief components of the economy and devises all the policies regarding the use and distribution of income again this was based on the Keynesian approach to economics.

This directly led to Wilson founding the Department of Economic Affairs whose chief responsibility was to create targets which would generate economic growth and investment. Although this wasn’t by any means a new idea and was built on the groundwork of the previous Conservative government.

  Again nationalisation became a major bone of contention within the Labour party. Rather than deal with the difference of opinion directly, as Gaitskell had done by trying to remove clause IV, Wilson took a more cautious approach and renationalised the steel industry to appease the left wing of the party.

  Wilson intermittently used prices and incomes policy to alleviate the inflation that Britain was experiencing at this time. This led to major industrial disputes and strikes.

  In 1970 Labour lost power and the Conservative party led by Edward Heath took over leadership but this was short-lived and in 1974 Labour returned to power with Wilson still as leader. During this time he managed to end the dispute with the miners. Although this was a time of stagflation, a term which describes a period of out-of-control price inflation linked with a slow/no growth of output and because of this Labour became associated with bad economic management.

  In 1976 James Callaghan took over as leader of the Labour party. Callaghan chose to continue the policy of pay restraint for a further year because for the past four years this strategy had been a moderate success. He chanced that a fifth year would lead to a further improvement within the economy and he attempted to hold pay rises at 5%. This led to a series of strikes because the Trade Unions refused to accept pay restraints. The winter of 1978/1979 became known as the Winter of Discontent and led to further disillusionment with the Labour party. Furthermore this became one of the reasons that this was the last Labour government to hold office until New Labour came into power in 1997. So basically up until this moment in time Labour’s economic policy was based on Keynesian economics and a policy of nationalisation.

  At this point we need to examine the economic policies of the Conservative party. The conservatives have always traditionally been linked with sound management of the economy and are viewed as the ‘pro-business’ party.

  The election of Margaret Thatcher in 1979 brought about a complete change in economic policy. She moved away from Keynesian demand side economics and changed her priorities from full employment and began to concentrate on bringing down inflation using supply side/monetarist economics which views inflation as a result of the supply of money being higher than the demand for it.

The new strategy effectively abandoned Keynesian short run demand management aimed at full or high employment. Instead, emphasis was placed on improving the long run supply side performance of the economy.’ Maynard (1991) pg 137.

  Thatcher used a slightly different view to the classic monetarism. Her reforms began with an increase in interest rates to reduce the growth of money supply. She also rather than raising taxes on income cut the highest rate of tax from 95p in the £ to 40p in the £, although this was only beneficial to the richest in the country. Alongside this she chose to use indirect taxation and raised VAT to 15%. The problem with this was it caused a fall in employment levels with unemployment rapidly passing 2 million.

  Thatcher’s government also had a committed policy to privatisation. This had many advantages. One of those being the short term cash gains made from the sales of companies which:

‘generated colossal government income, almost £90 billion by 1997, to fund tax reductions.’ Kingdom J. (2003) pg 574

  During her time in power Thatcher reduced the government’s holdings in BP, British Aerospace and Cable and Wireless, the National Freight Corporation was completely bought out by its management and £4 million was raised from selling off 50% of British Telecom. These sales were followed by Enterprise Oil, Jaguar cars, British Gas onshore oil wells and Sealink Ferries but the largest sale at the time was of British Gas in 1986. Thatcher also oversaw the selling off of council houses to tenants.

Thatcher also believed in ‘rolling back the state’. She felt that:

State intervention destroys freedom and efficiency through taking power from the consumer.’Jones et al, (2001) pg 107

  Thatcher was also dedicated to reducing the power of the trade unions who as she saw it were obstacles in the way of the supply and demand of services, goods and labour. Of course many unions initiated strikes in reply to the legislation brought in to lessen their power but eventually these protests failed and Thatcher’s reforms diminished the influence of the unions.

  Another strategy used by the Thatcher government was the use of the political business cycle. 1986 Nigel Lawson triggered a boom by changing economic policy to stimulate aggregate demand and lower unemployment in time for the 1987 election.

  When John Major became Prime Minister in 1990he continued with privatisation. The most contentious being the rash disposal of British Rail. Many critics believed this was done at reduced prices just in time for the general election of 1997. By use of a convoluted method Railtrack took charge of the entire rail network and then leased out train services to companies by means of franchise.

  During Major’s premiership one of the worst economic crisis in the history of Britain occurred. On Wednesday 16th September 1992 speculation against the pound destroyed the government’s economic strategy. This meant that Britain had to exit from the European Monetary System (EMS) and incrued losses of £4 billion. This day became known as Black Wednesday. Although this didn’t lose them the election in 1992 it certainly damaged Major’s credibility and led to them losing the General Election of 1997.

  On 2nd May 1997, after 18 years in opposition, the Labour party returned to power with Tony Blair as leader and although the idea of New Labour is attributed to Tony Blair its economic policy really began with Neil Kinnock. When Kinnock was leader he gave the Labour party policies a complete overhaul. He realised that the role of the government was not to direct economic affairs but rather to step in when there were problems with the market.

  The Labour party also dropped all plans to renationalise the already privatised companies and also decided not to give back total power to trade unions.

Again the topic of Clause IV was raised and in 1988 the Labour party created a new statement of its goals and ideals which was meant to complement and/or replace the Clause IV using Gaitskell and Crosland’s way of social democratic thinking with an emphasis on equality rather than public ownership. Although it must be remembered at this point that Clause IV was not actually replaced until 1995 by Tony Blair. The present version states:

The Labour Party is a democratic socialist party. It believes that by the strength of our common endeavour we achieve more than we achieve alone, so as to create for each of us the means to realise our true potential and for all of us a community in which power, wealth and opportunity are in the hands of the many, not the few. Where the rights we enjoy reflect the duties we owe. And where we live together, freely, in a spirit of solidarity, tolerance and respect.www.telfordlabourparty.org.uk

  One of the problems with a change in government is that the incoming party spend time and money undoing what the previous government has set in place. To prevent this from 1997 to 1999 Labour pledged to continue with the Conservatives spending plans. This helped to create the belief that its economic management was reliable rather than the impression of bad economic management it gained in the 1970s.

  The Labour party also gave over to the Bank of England the power to set interest rates thus taking the government out of the equation and therefore the chancellor could no longer manipulate the business cycle to their own advantage at times of elections, as some of Brown’s predecessors had. Furthermore in the first Labour budget Gordon Brown did not raise direct taxation and stated he would not do so for the ‘life of this parliament.’ Both of these sent out a message about Labour’s new agenda.

  The Labour party also seemed to recognise that globalisation was making the world small and more interconnected and that the domestic economy could no longer be managed in isolation from the global economy.

  The party also tried to tackle social exclusion from lack of money by bringing in policies regarding low paid wages and child poverty.

One of the main priorities of the government was to promote a stable economy rather than the boom and bust economy of previous years. To achieve this Brown initiated his ‘golden rule’

‘Over the economic cycle, the government will not borrow to finance current expenditure but only to fund investment;’

secondly, in order to ensure that such borrowing does not run out of control,

the ‘sustainable investment rule’ is that public debt as a proportion of GDP will be maintained at a stable prudent level over the economic cycle.’ Labour party, 1997a, pg 13.

One of the ways to help maintain a balanced economy are the Private Finance Inititatives (PFI). These were initially used by John Major but have been greatly expanded during this Labour government.  A PFI provides a way of providing large investments without immediate costs to the public. Private firms are contracted to be involved with all aspects of the construction of a new building and they then lease that building to the public authority. These contracts usually last 30 years.

  After looking at the economic policies of ‘Old’ Labour, the Conservatives and New Labour we can see common ground and differences between all three of them. New Labour still works to the old style principles of ‘Old’ Labour. It is still committed to its socialist principles of reducing social exclusion, poverty and a quest for equality a legacy started with Attlee and his Welfare State.  It has continued to try and improve public services by increasing public spending.  However in juxtaposition to this, similar to the Conservatives economic background, New Labour has not renationalised any of the industries privatised during Thatcher/Major’s leadership. It supports investment and has been known to have constant consultation with business and the CBI in the hope of increasing the wealth and prosperity of the economy.

‘New Labour’s ideologues accept that financial markets make sound judgements on government policies; in other words that policies that are credible to such markets are the correct policies in their own right.’ Arestis and Sawyer, ‘The Economic Analysis Underlying the “Third Way”’, p. 266.

  What is new about the New Labour economic policy is the realisation of a global economy. It has offered a progression of supply side economics which has equipped Britain with the capability to compete within the global market by generating growth and employment.

  So although New Labour has many ideas which are new to the Labour party much of their economic policy is ‘what works best’ rather than the ideology that its party is based in. What is ‘new’ is the method of combining policies rather than the actual economics behind the policies. Furthermore one aspect of picking and choosing the better elements of other’s economic policies is that New Labour has given Britain a very much needed improvement in its economic standing. Since New Labour came to power the economy of Britain has remained more stable than ever before and Gordon Brown’s legacy as Chancellor of the Exchequer has surely left Alistair Darling, the new chancellor, a sound foundation to work from.

Bibliography.

Atkinson H. & Wilks-Heeg S. ‘Local Government from Thatcher to Blair: the         Politics of Creative Autonomy. (2000) Blackwell Publishers, Oxford.

Atkinson R. & Savage S.P. ‘Public Policy under Blair.’ (2001) Palgrave Press,

                                                                                                        Hampshire.

Booth A. ‘The British Economy in the Twentieth Century.’ (2001), Palgrave        

                                                                                             Press, Hampshire.

Grieve-Smith J. ‘There Is a Better Way: A New Economic Agenda for Labour (Anthem Studies in Political Economy & Globalisation)(2005) Anthem Press,                

                                                                                                         Wimbledon.

Jones B. et al, ‘Politics UK.’ (2001) Pearson Education Ltd., Harlow.

Kingdom J. ‘Government and Politics in Britain: An Introduction.’ (2003) Polity

                                                                                              Press, Cambridge.

Websites.

www.labourcounts.com

www.telfordlabourparty.org.uk

www.iea.org

Journals.

journals.cambridge.org -.Arestis and Sawyer, ‘The Economic Analysis Underlying the “Third Way”’, p. 266.

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