As previously argued in my last blog, there were a plethora of factors that culminated to worsen the Economic recession Britain faced in the 1970s. I looked at the structural issues facing Britain in the 1960s, due to falling levels of productivity and a growing preference for short term “vote-winning” demand side policies over sensible supply side policies. However, in fiscal terms, the British economy also suffered in the short run due to the mismanagement of interest rates, especially in the notorious “Barber Boom” of 1972.
The “Barber Boom” of 1972 was the ironic name granted to Edward Heath’s Chancellor of the Exchequer Anthony Barber’s Budget of 1972. Barber stated that his budget would add 10% to the UK’s growth rate within two years, for the cost of £3.4 billion in public sector borrowing. Indeed, this would be achieved by decreasing income taxes by £1 billion, in order to increase consumption (a component of Aggregate Demand) because there would be a higher level of disposable income. The risk of an expansionary fiscal policy, is that unless there are simultaneous investments in supply side policies in order to expand the economy’s productive potential, there will be increased levels of demand pull inflation, as well as a worsening of the budget deficit. Nevertheless, in his Budget speech of 1972, Barber stated “I do not believe that the stimulus to demand I propose will be inimical to the fight against inflation.” Alas, within 18 months, Britain faced unprecedented levels of inflation at CPI 9.18%. This was due to the mass outward shift of demand, fuelled by the increase in consumption and government spending. As Britain reached its capacity in terms of supply, the price level rose exponentially as Aggregate Demand exceeded elastic Aggregate Supply.
This dramatic increase in price levels did not manage to trigger long term growth, as historians argue that the “Barber Boom” actually represented a mere “spike” in economic growth. Indeed, unemployment only decreased by 0.3% that year. Therefore, due to the high levels of government expenditure being unable to trigger a significant drop in unemployment, the British economy entered a period of stagflation.
To combat this, Barber implemented a deflationary budget in 1973, in order to combat the threat of hyperinflation. His March 1973 Budget was notable for its implementation of a 10% VAT rate, in accordance to Britain’s joining of the EEC that year.
Ultimately, the economic result of the implementation of deflationary fiscal policy was minimal. Inflation continued to rise during the 70s, and the withdrawal of government spending from the circular flow of income was detrimental to growth in Real National Output. The Daily Telegraph summarised very simply to its readers, that the 1974 budget had done “very little to reshape the forces working in the economy”.
In my next instalment, I will look at the currency issues that plagued the Sterling in the 1970s.