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Macroeconomic policy is a particularly difficult area for a party in opposition. Public attention is focused on macroeconomic policy primarily through the publication of economic statistics such as the inflation rate and level of unemployment. It is inevitable therefore that most public comment by opposition parties is led by these variables and is of the rather mundane, ‘interest rates should be lower’, variety. Regardless of the merits of these comments in the particular context they are of limited value in assessing an opposition’s macroeconomic strategy. To gain a more rounded picture of the changes in Labour’s policy it is necessary to concentrate on the party’s overall macroeco-nomic policy stance, the macroeconomic priorities set and principle instruments identified.

Macroeconomic failure, 1974–79?

Despite more recent sympathetic accounts, which have emphasised the appalling world economic situation in the 1970s and the difficult legacy left by the Heath government, it has commonly been held that macro-economic failure was a central part of the 1974–79 government’s record. It was also alleged, particularly by those on the left of the Party, that the 1974–79 Labour government had abandoned Keynesianism for monetar-ism. Allsopp rejects the charge arguing that the setting of monetary targets by the Labour government did not imply an acceptance of monetarist theory.1 In Labour’s policy package, control of inflation was to be through an incomes policy agreed with the trade unions rather than by restricting the money supply. It was the turbulent ending of Labour’s incomes policy during the ‘winter of discontent’ which meant that immediately after 1979 there was a need for macroeconomic policy

5 Macroeconomic Policy

R. Hill, The Labour Party and Economic Strategy, 1979–97© Richard Hill 2001

Macroeconomic Policy 125

to be recast2. Much of Labour’s difficulty on macroeconomic policy after 1979 was attributable to the need to find a credible policy on inflation.

If Labour’s macroeconomic policy was not monetarist in the 1974–79 period, the government’s policy stance did shift during the period to give more priority to inflation, and less weight to its full employ-ment target. This, at least in part, explains why the government’s macroeconomic record was unpopular with its supporters and gives more substance to the claim made by the left that the government had embraced monetarist and Conservative priorities. The oft-quoted speech made by Callaghan at the 1976 Labour Party Conference, with its explicit rejection of Keynesian reflation, did much to reinforce this impressio.3

Regardless of the objective success or otherwise of Labour’s macro-economic policy in this period it is undoubtedly true that Labour’s credibility in terms of economic competence was damaged by the time it left office in 1979. Aside from the ‘Winter of Discontent’, the episode which crystallised this was the government’s recourse, following severe pressure on sterling, to an IMF loan in 1976. It presented a powerful image of macroeconomic incompetence.4

‘Keynesianism in one country’, 1979–83

Following the general election defeat the Labour Party had a number of difficulties to face in terms of macroeconomic policy much of which centred on internal party discontent with the record on the 1974–79 government.5 First, there was a strong feeling within the Party that the Labour government had abandoned the objective of full employment. There was clear pressure within the party to return to a macroeco-nomic strategy within which full employment was the overriding objective. The key question was how this was to be achieved given the inability of the 1974–79 Labour government to follow through on a policy of Keynesian reflation. Second, the breakdown of the govern-ment’s incomes policy in the winter of 1978–79 was the culmination of the trade unions’, and much of the Labour Party’s, discontent with the policy of wage restraint. However, incomes policy had been the core of Labour’s strategy and, if they were to be abandoned, Labour had to develop a new anti-inflationary policy.

Labour’s macroeconomic policy, developed as part of its alternative economic strategy, can be described as neo-Keynesian.6 There was common agreement between most versions of the AES that a reduction in unemployment could only be achieved through the reflation of the

126 The Labour Party and Economic Strategy, 1979–97

economy. It was stressed that the reflation was to be ‘structured’ or ‘planned’ which would seem to indicate that it was somehow different from simple Keynesian reflation though in a way which was often not clear. It was clear, however, that major reflation of a national economy would create difficulties in terms of financing the reflationary package, and have implications for the balance of payments and inflation.

Unemployment

When Labour left office in 1979 the mood of the Party was to reassert the importance of achieving full employment. As unemployment increased through the 1979–83 period, with the Conservative govern-ment prioritising inflation and seemingly indifferent to the rise of unemployment to over three million, it came to be the key economic priority for the Labour Party.7 For Labour this became a moral as well as an economic issue. As Foot wrote in the 1983 manifesto, ‘the most glaring example of this evil [Thatcherism] at work in our midst is the acceptance of mass unemployment’.8

The target that the Party agreed upon was to reduce unemployment to less than a million over the lifetime of a Labour government.9 This was a perverse target in that the credibility of the pledge suffered as unem-ployment increased to reach 3.2 million at the time of the 1983 election. The task anyway was huge as the Labour Party admitted stating that ‘to get back to full employment we will need a million new jobs a year for five years.10 As Whiteley noted, ‘historically a reduction in unemploy-ment of 500,000 in a year has only been achieved twice this century’.11

Financing the reflation

Labour argued that the reflation of the economy should, in the main, be through increased public expenditure – rather than tax cuts – for two main reasons. First, there was proven need for public expenditure increases particularly in the areas of health and education and, second, increased public expenditure was likely to increase employment more rapidly as less spending would leak out on imports. However, Labour’s emphasis on the need for massive reflation through increased public spending, and its desire for increased spending on public services per se, created the impression of a party committed to high levels of public spending, and taxation, regardless of the macroeconomic context.

The estimates of the degree of reflation necessary to reduce unemploy-ment to Labour’s target varied, as was inevitable given that the target changed as unemployment increased. In 1982, Foot’s economic advisor, Henry Neuburger estimated that reducing unemployment to below one


million would mean creating over 500 000 jobs per year. Using the Treasury model he estimated that after two years, £1 billion of public expenditure would create between 25 000 and 70 000 jobs. If, therefore, half of the job creation was financed through increased public expendi-ture the total cost would be between £20 and £30 billion, with the effect on public borrowing less.12 Internal party papers considered the effects of a reflationary package rising from £6 billion in year 1 to £20 billion in year 4 noting that this would necessitate annual GDP growth of more than 4 per cent, ‘well above the performance achieved at any time in the past 30 years’.13

Two issues arise. First, whether increased public expenditure on the scale envisaged would have had the effect of achieving a reduction in unemployment sufficient to meet the manifesto pledge is open to question. Econometric analyses suggested that the employment target would not be achieved though Huhne argues that it would have been possible if it was assumed that the Labour government could agree an incomes policy with the trade unions.14 Part of the difficulty of estimat-ing the effect of the reflation on unemployment were the consequences that the policy would have on the balance of payments and inflation, which required a judgement about the likely effectiveness of Labour’s policy in these areas.

Second, how would it be possible to finance the reflation? Clearly, spending increases would not have been sufficiently reflationary had they been matched by a corresponding increase in taxation. However, this does not make the question meaningless. The argument most often used to explain how the reflationary package was to be financed was that growth would pay for itself in the long run. In the short run the funding of increased public expenditure would be through borrowing or, euphemistically, by ‘tapping … the savings in the economy’.15 This was backed up by the argument that the PSBR was not high by international standards. However, the difficulty of retaining the confidence of the financial markets committed to monetary targets and a low PSBR was an issue given only cursory consideration.16 Further, the party did not consider that the political unpopularity of increased public spending was a significant constraint. Although Labour planned significantly increased public expenditure it did not develop corresponding ideas as to how to improve the efficiency or accountability of such spending.

Import and exchange controls

The second problem of the reflationary option would have been the propensity of the expanding economy to ‘suck in’ imports on a scale


which would severely harm the balance of payments position. To deal with this the party came to favour import controls, a solution which was energetically promoted by the Cambridge Economic Policy Group. By the early 1980s the CEPG had been promoting a strategy of imports controls to deal with ‘the growing lack of competitiveness of UK industry and … the balance of payments problems to which this gives rise’17 for ten years. A number of prominent members of the ‘New Cambridge School’ including Wynne Godley, Francis Cripps and Nicolas Kaldor were active within Labour’s policy-making machinery and import controls became an important part of Labour’s economic strategy.18

However, there were differences within the Labour movement as to the reasons for supporting import controls. The CEPG were clear that the rationale was ‘not primarily to protect particular industries from foreign competition but to enable a sustained expansion of domestic output to be achieved so as ultimately to secure full employment’.19 As such the CEPG sometimes argued for such controls as a second best to devaluation which, they argued, was no longer possible. By contrast, some trade unions favoured import controls to protect ‘their’ industries from foreign competition. Joint Labour Party–TUC documents highlighted the need to link action on imports to strategic policy to modernise ‘core’ industries.20 In April 1980, the HPC followed a similar line in relation to the car industry calling for urgent action to restrict car imports arguing that by 1982 ‘all cars sold here should be assem-bled here’.21

Labour’s proposals for import controls usually centred on manufac-tured products with food and raw materials remaining ‘free’.22 The preference on the left for ‘planned’ or ‘managed trade’ was defended by arguing that it is a false dichotomy to assert that trade is now ‘free’. However, the AES proposals do imply that such controls would be dramatically extended. Within the Party, Neuburger has argued that the issue of import controls became an ‘shibbolethic test of radicalism’23 regardless of the merit of the economic argument.

There were significant arguments against import controls. The tradi-tional economic argument against was that the result would be retaliation and a decrease in the volume of UK exports. Advocates of the AES tried to neutralise this argument by stating that if controls, plus reflation, were to prove successful in expanding the British economy this would lead to more imports. In the long run, controls would reduce the proportion, but not the volume, of imports into the British econ-omy. Conceivably, therefore, import controls would not just benefit Britain but those countries who imported to this country. However, this


is a ‘purely abstract rational argument’,24 which assumed that the economic strategy would prove to be a success, and also, probably wrongly, that foreign governments could be persuaded to see the move to controls in such a rational way. An economy previously as open as the British would be likely to meet with some response if import controls had been introduced.

The second major objection to import controls as proposed in the AES was that what was essentially a technical measure was presented as a panacea. Further, there is an assumption – particularly in trade union versions of the AES – that the protection of British manufacturing from international competition would automatically lead to a regeneration and recovery of British industry. However, the experience of Japan after 1945 was unlikely to repeated in the Britain of the 1970s. In particular, there was little recognition in the AES that import controls did not mean that the prioritisation between industries could be avoided. Finally, it was rarely acknowledged that import controls would lead to a reduction in consumer choice.

Purdy argues that the desire on the left to cut off the external influ-ences which had plunged Labour government into crisis in 1931, 1947, and 1966 meant that the AES aimed at a level of independent control which was unrealistic. It has been described as the ‘classic Left-Labour reflex of attempting to limit links with the world market’.25 The AES was a ‘nationalist protectionist’26 strategy which also called for withdrawal from the EEC. However, as Cutler et al. argue, ‘limiting contact with the EEC cannot easily be reconciled with reducing dependence on world markets, and reducing dependence on world markets cannot easily be combined with a strategy of “industrial regeneration”’.27

There was an alternative way of dealing with the balance of payments constraint on growth based around action to control the exchange rate and, in particular, devaluation. The appreciation in the exchange rate between 1979 and 1981 had caused significant problems for British manufacturers. A number of policy documents from 1980 onwards called for a reduction in the exchange rate to help British exports and it is clear that Callaghan, Healey and Shore, as Shadow Chancellor, were sceptical of the possibility of large-scale import controls. Shore, in particular, was keen to emphasise the damage being caused to the British economy by the over-valued exchange rate. Shore’s ‘competitiveness strategy’ was focused on reducing the value of the pound significantly to boost British exports and reduce foreign imports. Gould et al.’s ‘Monetar-ism or Prosperity’ is perhaps the best example of this line of thinking.28 However, all Labour Party economic policy documents of this period


included a pledge to reintroduce exchange controls to prevent the export of capital. If these controls had worked the effect would have been to raise the exchange rate.

For proponents of import controls a reliance on devaluation alone to restore Britain’s competitive position was flawed for three reasons. First, in a system of floating exchange rate it was difficult to ensure a con-trolled devaluation. The problems of managing the devaluation were significant enough to ‘arguably rule it out as a feasible policy option’29 particularly when the need was for a massive reduction in the exchange rate. Second, devaluation had significant inflationary consequences that had to be dealt with. Devaluation would only be a successful strategy for recovering competitiveness if, and only if, it meant a reduction in real wages which could be maintained over a significant period. However, as Ward argued, British experience was that government would find it difficult to effect such a strategy and would be unable to maintain a strategy of devaluation if it resulted in high levels of inflation. Third, devaluation was ineffective when British exports performed poorly for reasons which were less to do with price than other factors such as quality and after-sales service.

It was, of course, entirely possible to have an economic strategy that included both devaluation and some measures of import controls. Econometric evidence indicated that import controls were likely to create more jobs than devaluation though this was heavily dependent on an assumption of only moderate retaliation.30 However, there was a clear preference on the left of the party for import controls as a means of being able to ‘limit the growth in manufacturing imports directly’31 and in a planned way. As such the commitment to import controls was ideological. Shore’s preference for devaluation, a more market-based solution, found more support on the right.

Inflation

Tackling inflation was undoubtedly the most difficult issue for Labour in this period. The breakdown of the Labour government’s incomes policy at the end of the 1974–79 period meant that there was wide-spread hostility within the party to this method of controlling infla-tion. Most versions of the AES declared their opposition to incomes policies.32 For the Labour left support for free collective bargaining was the ‘lynch-pin’ for an alliance with the trade unions.33

The SDP’s support for an incomes policy reinforced this identification and Labour Conferences overwhelmingly endorsed motions opposing ‘wages restraint’.34 However, while conference resolutions consistently


opposed any form of incomes policy that is not to say that the issue was completely off the agenda. Indeed, within the Party’s decision-making structure there were three significant discussions about inflation and incomes policy; within the HPC, within Labour’s parliamentary leader-ship and particularly the Treasury team, and in joint discussions with the TUC through the Liaison Committee.

Soon after the election the HPC agreed a programme of work which included the observation that at the 1979 election ‘we had almost nothing of value to say, as an NEC, on inflation’.35 It was recognised that ‘we would certainly be ill-advised to develop policy [on inflation] without the widest possible consultation within the Party and the Labour movement’36 and, rather then set up a working group, it was decided that the issue would have to be discussed directly by the HPC. The initiative for this discussion was coming from the Research Department, where opinion favoured a ‘radical socialist incomes policy’.37 Adam Sharples produced a paper which argued that ‘inflation is at heart a process of conflict over distribution’.38 It considered the various approaches to dealing with inflation including deflation, monetary control, price control and incomes policy arguing that price controls represented the best chance of gaining real control over inflation. However, the paper also recognised that there was a ‘need to confront the question of intervention in incomes determination’.39 The paper was poorly received at a special HPC, though it gained some support from academics involved in Labour’s economic policy-making, including that of John Eatwell.40 The original paper went through a number of re-drafts where changes were made to stress the need for effective price controls and put the policy on inflation in the context of Labour’s aims and wider policy.41 However, all of this failed to convince the HPC that the document should be published. Here the refusal to countenance a discussion of incomes policy effectively precluded a serious debate on inflation.

However, if the HPC failed to make significant progress in the discus-sion on inflation it is clear that senior members of Labour’s parliamen-tary leadership did not share the Party Conference’s hostility to an incomes policy. Callaghan is perhaps clearest when he argued that ‘we must secure an agreement and understanding to keep growth in money incomes … and the growth in productivity in line in order to avoid inflation’.42 Other senior party figures contented themselves publicly with commenting approvingly on the Scandinavian and Austrian experience of wage agreement, while being more explicit in the privacy of the Liaison Committee.43 However, as Shadow Chancellor,


it was Shore’s position that was of key importance. The document issued by Shore and the Labour Treasury team in 1982, ‘Programme for Recovery’, has been seen as having the ‘covert function [of bringing] the issue of incomes policy once more into the open in the context of the “hard economic choices” indicated by the “Treasury model”’.44 In the run-up to the 1983 election Shore made clear in a series of inter-views that he thought an incomes policy vital to Labour’s aim of reducing unemployment.45

Labour’s eventual position at the 1983 election was essentially based on a compromise hammered out within the TUC–Labour Party Liaison Committee. The 1981 document ‘Economic Issues facing the Next Labour government’ noted the ‘need for a national economic assessment of the prospects for the growth of the economy, involving such issues as the use of resources between personal consumption, public and private investment, public services and the balance of trade. Such an assessment, to be comprehensive, has to embrace such issues as the share of national income going to profits, to earnings from employment, to rents, to social benefits and to other incomes’.46 The idea for the NEA came from TUC and Labour Party staff and it was essentially an attempt to create a new language for proposals for a dialogue between the TUC and the Labour Party on a number of issues, including pay.47 However, the proposal for a NEA was left open to a variety of interpretations. Foot, for example, went as far as to describe the NEA as a new social contract.48 Benn, on the other hand, recommended the joint TUC–Labour Party document to the 1981 Conference while at the same time asserting that the Labour Party was ‘never ever going back to the old policies of wage restraint as a means of saving capitalism’.49 By 1983 the NEA had grown in impor-tance to the point where it was to be ‘the culmination of a yearly cycle of discussions and collective bargaining and the centrepiece of the planning process’.50 However, when Shore tried to amend the manifesto at the Clause V meeting to include an explicit commitment to an incomes policy he was defeated by opposition from both left and right.51

If Labour had won the 1983 election Kavanagh is probably correct that in office Labour ministers would have acted on their belief that ‘free collective bargaining was incompatible with full employment or the attack on inflation’.52 However, this was not the party’s position going into the 1983 election, following four years in which Labour was not able to have an open debate on the merits of incomes policy.

There are two general points which can be made about Labour’s view of inflation. First, it is clear from all the policy documents that inflation was not the priority issue, and certainly not the over-riding priority, that


it was for the Conservatives. Low inflation was a secondary objective to achieving full employment. Aaronovitch, for example, argued in 1981 that the ‘economy can live and live quite well with some degree of inflation providing it is not allowed to accelerate’.53

Second, there were a number of measures which most variants of the AES, including those promoted by the Labour Party, included as part of an anti-inflation strategy. These included price controls – though it was never clear whether these were to be a short-term expedient or to remain in place on a longer-term basis – withdrawal from the Common Agricultural Policy which would cut food prices, a change in national-ised industry pricing policy,54 and the argument that ‘as the economy expands and capacity is used more fully, costs in industry will fall, making it easier to contain prices’.55 These measures were uncontrover-sial within the Party and given a low priority in most expositions of the AES.

However, a number of the measures in Labour’s strategy, in particu-lar large-scale reflation combined with devaluation, or with import controls, would have created significant inflationary pressures. In the absence of an incomes policy, it is by no means clear that Labour’s strategy would have been sufficient to deal with these.

Shore’s programme for recovery

In macroeconomic policy, perhaps more than in any other area of government, the Cabinet and in particular the Chancellor, have very considerable autonomy from parliament and party. It is worth consider-ing then the extent to which Labour’s leadership shared the macroeco-nomic outlook of party policy. Healey, for example, opened the economic debate at the 1981 Conference by stating that ‘the alternative economic strategy … is one thing on which the whole of our movement is united’56 before giving a speech which emphasised the Keynesian aspect of the policy based around reflation but which was decidedly unenthusiastic about the policies on import controls and inflation.

The key figure in terms of macroeconomic policy had Labour been elected in 1983 would have been Peter Shore who took over from Healey as Shadow Chancellor following Foot’s election as leader. Shore’s approach to macroeconomic policy was different to that developed by the Party’s policy-making procedure in two respects. While Shore was committed to large-scale reflation to deal with the unemployment problem, he was sceptical of the AES position on inflation and favoured the development of an incomes policy. Second, he was unconvinced of the need for import controls to protect the balance of payments


position. Shore was, however, prepared to depart from financial ortho-doxy to advocate large-scale devaluation as part of a strategy of restoring Britain’s competitiveness.

In 1982, Shore’s Treasury team produced two documents – a ‘Pre-Budget Economic Statement’ in March and a more detailed ‘Programme for Recovery’ in November – which indicated his macroeconomic approach. The Statement provided for a reflationary package of £9 billion, resulting in an increase of public borrowing of £5.5. billion. The package was tested on the Treasury model of the economy and produced a fall in unemployment of 500 000 at the cost of 2.5 per cent on the rate of inflation and a £1 billion cost to the balance of payments. There are three significant points to note about this statement. First, considerable emphasis was given to the importance of obtaining a ‘more realistic level of exchange rate’.57 It was clear that for Shore restoring competitiveness could in large part be achieved by reversing the considerable rise in the exchange rate in the first two years of Conservative government. Implicitly, this was clearly seen as preferable to large-scale, long-term import controls. Second, in Shore’s strategy there was a key role for the NEA. It was argued that unemployment can only be reduced ‘if industry, trade unions and the people, as well as government, are prepared to place employment and output as their top priorities and to be ready to accept all the measures that will be required to achieve it’.58 Clearly, Shore was implying that an incomes policy was inevitable if Labour was elected. Third, although referring to a number of AES measures, Shore’s statement implied that he did not consider them to be central to Labour’s economic strategy.

In November, Shore presented a slightly developed outline of these proposals as a ‘Programme of Recovery’. Again the document was concerned with how Labour would get unemployment down and, within the context of the Treasury model, the analysis pointed to the need for an incomes policy. ‘Programme for Recovery’ had been put together by the Treasury team – with those most involved Shore, Jack Straw and Robin Cook – with most of the modelling work done by Henry Neuburger. There were informal consultations with Bish and Sharples in the Party’s research department, and David Lea at the TUC, but the document was clearly produced outside the Party’s policy-making structures. The NEC and its sub-committees had not had any formal involvement in the preparation of the document which was launched to the media directly by Shore. The NEC reacted against the way the document was put together, and its emphasis on incomes policy, and decided not to publish ‘Programme for Recovery’ as an


official Party document or to distribute it to CLPs.59 Roy Green, a member of staff in the Research Department, wrote a scathing attack on the document in Tribune to which Cook and Straw, members of Shore’s Treasury team, were moved to respond.60

As the election approached senior Cabinet figures, with Shore promi-nent, sought to stress reflation, the need for a competitive exchange rate, and an agreement with the trade unions as the main components of Labour’s macroeconomic strategy. Shore attempted to secure amend-ments to ‘Labour’s programme 1982’ to argue that competitiveness could be restored through devaluation and that this obviated the need for general import controls. The manifesto itself was a compromise between Shore’s macroeconomic policy and that of the AES.

Labour’s macroeconomic policy at the 1983 election had a number of flaws that were highlighted during the campaign. First, there was the problem of scale. Labour’s targets for reducing unemployment, requiring the generation of over 500 000 jobs and a growth rate of over 4 per cent per year, were perceived as unrealistic. Indeed, overall Labour’s proposals were seen to lack credibility despite the fact that individual policies, including import controls, were popular. Second, the proposals for import controls or devaluation were likely to provoke hostile responses from international competitors or international financial markets which were not convincingly dealt with. These proposals, designed to enable reflation and ‘Keynesianism in one country’, were problematic. Third, the most obvious gap in Labour’s programme was the absence of a credible policy against inflation.

Cautious reflation, 1983–87

At a Campaign Strategy Committee in late 1984 a paper was discussed which set out the objectives of the ‘Jobs and Industry’ campaign as being to increase Labour’s credibility on economic policy and increase public awareness of the underlying weakness of the economy.61 In order to succeed, it argued, Labour needed to learn the lessons of the previous year’s general election. It had to be frankly admitted that Labour had lost the economic argument to a Conservative government which put their economic principles in common sense language. Further, the Conserva-tives had convinced people that mass unemployment was here to stay; Labour had to yet to convince the electorate that mass unemployment was caused by Conservative policy or that an alternative policy was possible.


When Hattersley became Shadow Chancellor and Deputy Leader after the 1983 general election, he saw his task as repairing Labour’s credibility on economic policy. While policies for the supply-side was developed through the Jobs and Industry JPC, macroeconomic policy tended to fall into Hattersley’s remit as Shadow Chancellor and most policy shifts were announced in speeches. Hattersley, unlike Shore, employed his own economic adviser, Doug Jones, and used an informal group of economists for advice.62 Between 1983 and 1987 macroeconomic policy shifted away from the reflation plus protection stance of the AES to a more cautious emphasis on gradual reflation, ideally coordinated on an European level. The result of these changes, Shaw argues, was to put a ‘cautious and “realistic” gloss’63 on the established revisionist approach. Indeed, it would be difficult to point to major differences between Hattersley’s approach and that adopted in the 1970s. Those areas in which there were distinctions – such as in the new advocacy of a coordinated European reflation – were also those in which policy carried least credibility.

Unemployment

Unemployment remained high during the 1983–87 period and this continued to be Labour’s key economic charge against the Thatcher government. Labour’s position did not waver through this period as it continued to maintain that ‘creating jobs for all is Labour’s central priority’.64 However, while unemployment remained the key economic priority the Labour Party did become less sanguine about the ease with which it could be achieved. The phrase ‘full employment’ was not included in the draft for the 1987 manifesto until this was amended at the Clause V meeting.65

As in the previous period, the way to achieve a reduction in unem-ployment was seen as being, primarily, by reflating the economy. However, it should be clear that the reflation envisaged was of a much more modest nature than that planned in 1983. There would be no ‘dash for growth’ as Hattersley pointed to the lessons of France to highlight the dangers of an over-ambitious expansion.66 Keane and Owens highlight the limit of ambition in contrasting the £9 billion reflation proposed in the Labour’s 1983 alternative budget with the £3.5 billion in that of 1985, and both of these with the TUC’s estimate that a £24 billion reflation over 5 years would create 500 000 jobs.67

Setting a target for the reduction in unemployment was in fact an issue in itself. The target was changed to a reduction of unemploy-ment by one million in the first two years of a Labour government.


This target does appear to be both clearer and more readily achievable. However, Hughes and Wintour’s account of the development of the target casts doubt on its rationality. Kinnock made the new pledge in April 1985 at the launch of the ‘Jobs and Industry’ campaign without any preparatory work having been done.68 Only in May 1986 was it agreed by Hattersley and Prescott (Employment Spokesperson) that the aim would be to reduce registered unemployment by 1 million in 2 years rather than to create 1 million jobs – two very different figures. Working out how the target was to be achieved did not receive attention until close to the election. Prescott, helped by Meghnad Desai, produced a set of proposals based on local employment projects, particularly those developed by Southwark Council, which was rejected.

Following this, Bryan Gould was tasked with coming up with a plan to meet the target at a cost of less than £6 billion.69 Gould’s package proposed to create 1.16 million jobs to cut the dole queues by 1 million. The accuracy of this is open to doubt; the National Institute for Eco-nomic and Social Research (NIESR) suggested 2 million would be closer to the mark. The package did not propose any job increases in private services or tourism which most analysts suggested would be growth areas. Further, Labour’s ‘economic spokesmen had been arguing that manufacturing could not be expected to produce a net gain in jobs – but the campaign policy contradicted that, by claiming that Labour could create 250 000 manufacturing jobs’.70

As much as anything Labour’s difficulties in this area arose from the Conservatives change in economic direction under Nigel Lawson. The 1986 Autumn statement was aggressively Keynesian and included a reflationary package of around £4.7 billion.71 To Neuburger it seemed that Lawson ‘more or less took our policies wholesale’.72 However, in terms of Labour’s policy, even a limited reflation raised familiar problems in terms of public expenditure and tax, the control of inflation and import growth.

The ‘tax and spend’ issue

The funding of the jobs programme was costed at £6 billion. Earlier policy documents highlighted four sources for extra resources; a reduction in the overall cost of unemployment benefit as unemploy-ment fell; increased taxes on the top 5 per cent of society; schemes for attracting and retaining British investment capital; and, in the long-term, economic recovery which would itself generate further tax


revenues.73 The 1987 manifesto stated that the £6 billion would be generated in two major ways; first, reversing the 2p income tax cut which had been promised in the Conservatives pre-election budget and, second, ‘prudently borrowing £3 billion for useful wealth generating national investment’.74 In addition, the manifesto promised to reverse the tax cuts for the richest 5 per cent of the population, a change which was expected to net £3.6 billion.

However, Butler and Kavanagh argue that there was ‘no authoritative guidance about the Party’s tax and benefit plans which were in confusion at the end of the campaign’.75 In the election campaign itself confusion arose as to how the increase in child benefit pledge in the manifesto was to be funded. In initial discussions the proposal had been to abolish the married man’s tax allowance and use this to fund an increase in child benefit. However, due to TUC pressure, and reservations in Hattersley’s office as to the electoral impact, the abolition of the tax allowance did not feature in the 1987 manifesto while the increase in child benefit remained.76 The abolition of the national insurance ceiling, previously trailed as party policy, similarly did not figure in the manifesto. This led to confusion during the election campaign particularly over Labour’s pledge that no-one earning less than £25,000 would pay more in tax.77

On expenditure, Labour’s attitude was more rigorous in 1987 than it had been in 1983. The 1987 manifesto identified three priorities: the jobs programme, the anti-poverty programme, and the anti-crime programme which were to receive public funding for a set of specific measures. Otherwise it was made clear that ‘all other programme that require substantial public finance must take lower priority in terms of timescale and public resources’.78 Hattersley had worked particularly hard to ensure that Labour was seen to be committed to the control of public expenditure. He put forward a number of proposals including zero-based budgeting, efficiency measures for government spending and cash limits. He also advocated replacing the PSBR with a public sector balance sheet and a government debt: national income ratio, and splitting out capital and current expenditure.79 Of more direct political importance was that after 1985 policy documents no longer included references to large increases in spending on health and education and public expenditure commitments were avoided in the run up to the election.80 However, Butler and Kavanagh argue that, in 1987, ‘people feared that a Labour government would put up taxes, boost inflation rapidly and could not afford its programme’.81


The problem of external balance

There was a continued realisation that the balance of payments position would present a problem for a government committed to reflation. However, the solution to this problem was seen in very different terms to the previous period. Hattersley moved the Party away from the controls on trade and imports that were previously advocated strongly. Rather, he argued that ‘action on imports is certainly a second best solution’.82 There was some unease over the policy shift. When the Jobs and Industry Joint Policy Committee discussed industry and trade policy in late 1985, there was disagreement over whether the trade problem was a symptom of industrial weakness to be dealt with through industrial policy, or whether this should run hand-in-hand with some protectionist measures.83

Devaluation was also ruled out as a policy option. Hattersley used three arguments against the measure; that the problem of selling British goods abroad was not primarily a price problem, that devalua-tion would feed through into prices and wages causing inflationary pressure, and that overseas governments could quickly take similar measures.84 Clearly, the political argument that the Labour Party could not go into an election advocating devaluation without creating a run on the pound and a crisis of confidence in the incoming government was also a significant factor.

The solution favoured was rather an expansion of the world economy in an internationally coordinated manner. The argument was that the balance of payments deficit would be reduced ‘if Britain is able to participate in a coordinated approach to expansion both in Europe and more widely’.85 While the AES specifically eschewed economic coordina-tion within the EEC, by 1985 the TUC and the Labour Party saw their role as ‘leading and pressing for coordinated recovery in Europe’.86 Labour’s position had shifted in favour of continued EEC membership and the Party was prepared to advocate using the European dimension as a means of alleviating the jobs crisis in the UK. Having said this the possibility of a coordinated reflation being agreed must be thought of as questionable.

Perhaps as important as the policy shift before 1985 away from de-valuation/import controls and towards the idea of a coordinated European reflation was the fate of this policy subsequently. Clearly, the issue of the balance of payments position had not gone away and newspaper reports continue to highlight the fact that ‘Labour is worried that the UK is heading for a balance of payments crisis’.87 However, the 1987 manifesto did not mention either the problem or the proposed solutions. In terms of presentation it appeared that a decision has been


made to emphasise positive measures as in the pre-election ‘New Industrial Strength for Britain’ which dealt with the problem only in terms of ‘better export promotion’.88 Useful as they may be in the long-term, export promotion measures would have been unlikely to be sufficient to deal satisfactorily with a balance of payments crisis.

The Party appeared to have had more confidence in the policy which it developed to deal with the issues of exchange and capital mobility. The 1983 position was to re-impose the exchange controls which operated until abolished by the Conservatives in 1979. However, the policy of statutory exchange controls was gradually abandoned. Hattersley argued that government no longer had the ability to intro-duce such controls and make them effective; that the threat by a Labour government to impose such controls would lead to an exchange rate crisis; and that, in any event, exchange controls would damage the earnings of the City which were vital to the balance of payments.89

The alternative which the Labour Party proposed was to ‘establish a capital repatriation scheme using the tax system to attract and retain British savings and investment in Britain’.90 The idea was basically a simple one under which managed funds (pension, investment, etc.) would lose valuable tax concessions if more than a specified portion of their investment portfolio was held overseas. The advantages of this proposal, it was argued, would be to boost the exchange rate (though whether this was an advantage is open to question), lower the interest rate, and provide valuable funds for investment in the UK. The policy was linked to the argument that the revenue created would be used by the government to finance the National Investment Bank. The left argued that such a scheme would be full of loopholes and therefore impossible to implement and would, in any case, be illegal under EEC rules.91 However, the policy change was generally accepted and featured in the 1987 manifesto.

A further development on exchange rate policy was in Labour’s position on the EMS. This is discussed later in the section on Europe. However, while Labour was not committed to EMS membership by 1987 it is worth noting that both Kinnock and Hattersley pushed to open discussion on the issue, and Kinnock even went as far as setting out the conditions on which Labour would consider entry.92

Inflation

As Labour moved back to a more centrist political position it might have been expected that Labour would again have adopted an incomes


policy as a principle mechanism for the control of inflation. After his appointment as Shadow Chancellor it seemed clear that Hattersley was prepared to push the issue. He argued that it was ‘quite extraordinary that free collective bargaining, which is a product of free market capitalism and embodies most of the disadvantages of that system, has become a canon of socialist belief’.93 In a 1984 lecture entitled ‘A socialist wages policy’ Hattersley argued that ‘if we are to move at anything like reasonable speed to full employment, some agreement on incomes is necessary’.94

In the context of the shifting power within the Labour Party – and particularly the shift of power back to Labour’s front bench – Hatter-sley’s advocacy of incomes policy is significant. However, there were tensions within the Labour Party leadership over incomes policy and the role of the NEA. The report of the Kaldor Group of economists was clear that ‘some form of planned growth of incomes … is central to the success of Labour’s economic programme and inescapable in prac-tice’.95 The report advocated annual discussions between government, the CBI and the TUC to set the large company settlement rate, a requirement that large companies all settle in one month, and the reintroduction of a Price Commission. Controversially, the report advocated a strengthening of employer organisation, particularly the CBI, to try and ensure that this proposal was feasible. However, there was disagreement within Hattersley’s group of economic advisers over the issue. Hattersley’s permanent adviser, Doug Jones, was firmly in favour wholesale agreement on pay while Gavyn Davies argued for a pay freeze followed by a complex pay policy based on profit sharing. However, Paul Ormerod did not see the need for a pay policy and was particularly critical of ‘ingenious wheezes’ proposed in the City – Davies worked at Goldman Sachs – for linking pay and profits.96

Hattersley did have some success in persuading the trade unions towards accepting the need for an agreed approach to wage increases. In adopting a minimum wage policy it was acknowledged that ‘it is impossible to eradicate low pay without destructive inflationary consequences, unless there is a redistribution of income in which high earners … receive smaller increases than the low paid’.97 In addition, Hattersley proposed a series of priorities for the use of resources at the 1985 TUC Conference – first, the unemployed; second, the low paid and the poor; and, third, everyone else – which became policy.98 The solution to tensions within the party over incomes policies was again to play upon the different understandings of the NEA which were generated by the ambiguous phrasing of the proposal. In the 1987


manifesto the NEA – now broadened to include employers as well as the trade unions and government – featured prominently. It was stated that the NEA would ‘identify the concerted action that will need to be taken by government, employers … and trade unions to increase investment, contain inflation and achieve sustained recovery’.99

This, however, fell someway short of an explicit commitment to an incomes policy which had appeared to be Hattersley’s objective in 1983. There are a number of reasons for this. First, incomes policy remained unpopular in the party as a whole with conference consistently support-ing resolutions along the lines that the ‘next Labour government will not introduce wage control either directly or indirectly nor seek to reach an agreement over incomes which has the effect of reducing living standards’.100 Second, the terms of trade between trade unions and the Labour Party had changed. In the early 1980s the fact that an agreement could be reached between the Labour Party and the trade unions was seen unquestionably as positive. In the aftermath of the miners’ strike this was no longer the case. Shaw argues that ‘Labour’s new strategic advisers warned of the electoral perils of a commitment to erect [the] corporatist structures’101 necessary for an incomes policy.

These factors combined when, in the run-up to the 1987 election, ‘both before and during the private meetings with the Neddy Six union leaders in early 1987, the Party leadership was offered a formula which implied an incomes policy’.102 As Minkin comments ‘ironically, the party leadership turned it down as undeliverable’.103 While the NEA remains a factor in policy Labour does not succeed in developing the incomes policy which had appeared to be Hattersley’s aim on becoming Shadow Chancellor. As a result, at the time of the 1987 election, Labour was ‘still a party in search of a policy on inflation’.104

The Kaldor Group

In terms of macroeconomic policy the development of Labour’s position between 1983 and 1987 was mostly steered by Hattersley as Shadow Chancellor and an informal group of advisers. A more formal group of economists – the Labour Economic Policy Group or Kaldor Group – operated through 1985 and 1986. In considering the relation-ship between Labour and academic advice the fate of the Kaldor Group’s report is instructive.

In late 1984 Kinnock suggested to Lord Kaldor that it would be useful if there was a group of economists thinking about Labour economic policy and providing a critique of Conservative proposals.


While Kinnock may well have envisaged a loose network of economists whose prime purpose was campaigning, Kaldor was more concerned that such a group should be focused rather more on thinking about economic ideas. After informal consultations with Andrew Graham and Wilfred Beckerman, the Labour Economic Policy Group or Kaldor Group was established in February 1985. The Kaldor Group was effectively run by Andrew Graham who chaired the meetings and drafted the group’s report.105 The group consisted of about 20 econo-mists and those particularly active included Allsopp, Beckerman, Desai, Jones (Hattersley’s economic advisor), Lord Kaldor, Metcalf, Neuburger (Kinnock’s advisor), Piachaud, Soskice, Stern and Thirlwall. Eatwell and Ward also attended, though less regularly. Although the group was fairly large it did manage to produce a consensus report in July 1986 and, while some members thought it rather too academic, it did address a number of Labour’s macroeconomic concerns.

The report set itself the same objectives as Hattersley had set for the Party: the maximum possible sustainable reduction in unemployment, the alleviation of poverty, raising economic output, and, in the long-term, increasing the incomes of those in work. The same constraints, on the balance of payments and inflation, were also recognised. However, the recommendations of the groups were somewhat more thoroughgo-ing than those which Hattersley and Kinnock had managed to get the Labour Party to accept. This is particularly true in two areas.

First, the group advocated a policy immediately after the election of a ‘lower exchange rate combined with entry to the EMS’.106 Politically, Hattersley had recognised the difficulty of going into an election advocating the devaluation of the pound. A private report had no such need for caution and the Kaldor report saw depreciation as a key weapon in protecting the balance of payments position. EMS entry was advocated as the prime means by which Labour’s credibility with the financial markets might be established. It was argued that the expecta-tions of the financial markets would have to be managed to avoid a post-election run on the pound. The best way to do this was to enter the EMS – in the wider 6 per cent band – and to enter at a low rate which would appear sustainable. Entry, it was also felt, would provide an opportunity to argue for the coordinated European expansion by which Labour had begun to set much store. It was some time after the 1987 election that the Labour Party itself was convinced of the need for ERM entry. Second, the report clearly recommended that Labour move towards developing an incomes policy. Again, this was further than the Labour Party was willing, or able, to go.


Almost as significant, however, was what the Kaldor Report did not say. The report did not include any recommendations for trade or import controls. The group included a number of economists – including Kaldor, Beckerman and Eatwell – who had been involved in the CEPG in the early 1980s and had pressed the case for import controls. However, by the time of the Kaldor Group’s report only a very small minority, including Kaldor, felt that there was still a case for the planning of trade.107

The Kaldor Report is significant in that it is a rigorous consideration of Labour’s macroeconomic options produced by a group of econo-mists of international standing. The group’s thinking, particularly on EMS membership but also on other issues such as education and training, shows the direction in which Labour’s policy was to develop after 1987. However, most of the group’s members considered that their efforts had been wasted. A meeting with Kinnock to discuss the report was cancelled and never rearranged. There was never any contact with Hattersley. While the involvement of advisers to Labour’s front-bench, including Eatwell, Jones, and Neuburger, ensured that the group’s thinking received some attention it is difficult to argue that the group’s work received a wide circulation, or significant discussion, amongst the Labour leadership. In part the problem was structural; without a central site for the discussion of macroeconomic policy there was no focus for initiatives like the Kaldor Report. However, the main problem was political; when it became clear that Kinnock had other priorities there was nowhere that the Kaldor Group could go and it ceased to meet after its report was completed. The group needed to report to a Shadow Cabinet member to ensure it had an impact. Some members of the group, including Andrew Graham, were consulted by Gould when he was tasked with drawing up a strategy for achieving Labour’s jobs target. However, the influence of the Kaldor Group, as a group, was minimal.108

Reviewing macroeconomic policy, 1987–92

Although there were changes in macroeconomic policy between 1979 and 1987, the main changes in Labour’s macroeconomic strategy were effected after 1987. This was the period when there was most dispute about macroeconomic policy, though it was a dispute which was for the most part conducted behind closed doors inside the PRGs and then in the newly-established Economic Sub-committee of the Shadow Cabinet. Controversy was centred on two questions. First, the role of


macroeconomic policy, and particularly the efficacy of reflation, in bringing down unemployment, and even more fundamentally the commitment to full employment itself. Second, the role of ERM membership in providing a monetary anchor for the economy and the consequences of such a move for the real economy. These questions were central to both the policy review and subsequent policy debate.

Macroeconomic policy and the policy review

The period between 1987 and 1989 is an atypical one for Labour’s macroeconomic policy. The policy review structure meant that questions of macroeconomic policy tended to fall into the remit of the PRG on the Productive and Competitive Economy. This meant that macroeconomic policy was effectively determined by a group co-chaired by Bryan Gould, rather than by the Shadow Chancellor, John Smith. There were clearly macroeconomic issues that needed to be addressed. The first meeting of the Economic Sub-committee of the Shadow Cabinet received a paper on ‘Economic Prospects’ which sought to identify the limitations of Labour’s economic approach at the 1987 election. On unemployment it argued that the ‘Jobs Pro-gramme’ was seen as a social rather than an economic programme, and that it was not obvious why an employment target should be set again. A number of areas were identified as needing attention; the EMS, monetary policy in the face of the credit boom, an approach to public expenditure which emphasised differences in priorities rather than just increases, the problems of external balance and sterling, and an approach to inflation which was more credible.109

The PRG tended to avoid the issues of macroeconomic policy and, indeed, one of the key arguments put forward in the policy review was that the main faults of the British economy were on the supply side. However, the policy review did commit the Party very strongly to the goal of full employment stating that this objective had to be ‘at the heart of a rational economic policy’.110 In fact, this policy was extended slightly in that the quality of jobs was also highlighted. It was argued that ‘merely setting a target for the reduction of unem-ployment is not, however, enough’.111 While full employment remained the objective, it was recognised that a traditional Keynesian reflation of the economy would not only run into a balance of payments constraint but, more seriously, a lack of the industrial capacity that would be needed to cope with any such increase in demand and so generate employment. The document states that steady


macroeconomic expansion, with low inflation is necessary, but the need is for a ‘new focus on the encouragement of structural change, building up from the needs of flexibility and adaptability at the level of the firm and the industry’.112 Achieving full employment is not to be by the traditional remedy of reflation, although demand will be raised at a ‘sustainable and predictable rate’,113 but through ‘supply-side’ measures such as training. Overall, the goal of macroeconomic policy was to aim at ‘restoring balance to the economy’,114 in particular that between consumption and investment, in order to support the industrial strategy.

To provide the basis of its discussion of inflation the PRG commis-sioned papers from a number of academics including Paul Hare, Malcolm Sawyer and Jim Tomlinson.115 The papers differed in a number of respects, including the importance of inflation and the need to fix an exchange rate target. However, while it was accepted that a ‘full-blown corporatist arrangement’116 was no longer feasible all three papers put forward the need to have some form of policy on incomes as part of an anti-inflationary strategy. The policy review, however, stated that Labour ‘reject[ed] a pay policy or any form of pay norm as being unhelpful and unworkable’.117 The idea of a NEA is dropped from policy. There is a line in the policy review – inserted at the initiative of John Edmonds who wanted the review to be clear that Labour, and the trade unions, could take a hard-headed view of pay negotiation – that public sector man-agement would be given a financial framework and have to ‘negotiate wage settlements within that framework’.118

The PRG report emphasised that ‘inflation is of special concern to socialists’ and that ‘the control of inflation must be a major priority’.119 However, ERM membership is rejected on the basis that ‘there is no solution … in an over-valued exchange rate which in the long run damages both the real economy and the inflation rate’.120 The policy review also went on to ‘reject a pay policy or any form of pay norm as being unhelpful and unworkable’.121 It was not clear what Labour would do except that ‘policy will be aimed at specific inflationary pressures as they arise’.122 The result was that ‘the major weakness of this policy, as Labour economic advisers admit, is the lack of any weapon against inflation’123 particularly as the commitments to lower interest rates, hints of devaluation, and a minimum wage might well cause inflation to rise. This lack of an anti-inflation policy was to be a key issue in the reorientation of economic policy after 1989.

Therefore, although macroeconomic policy received little attention in the final report of the PRG, a number of commitments were made;


to balanced growth based on investment not consumption, to ending the reliance on high interest rates and an uncompetitive exchange rate, and to control over public expenditure combined with the assertion that Labour was not a high tax party. It was clear that the expectation was for continually increasing demand to boost employment and growth. As such macroeconomic policy could be said to have had a Keynesian orientation. The common criticism of the Policy Review, that it neglected macreoeconomic policy, was not well-founded.

However, as Graham highlighted in an internal document, it was possible to mount a plausible attack on the macroeconomic policy contained in the review.124 Lower interest rates and a competitive exchange rate implied a ‘looser’ monetary policy the corollary of which was the need for a tighter fiscal policy. This implied that if there were not to be high taxes there was then little scope for increased public expenditure, and that a balance of payments crisis would present the government with unpalatable macroeconomic decisions. This attack could only be defended by avoiding new commitments, particularly for public expenditure, and by focusing on the medium-term supply-side strategy. In part, it was the realisation of these difficulties which led to Labour’s change in macroeconomic policy before 1992.

Emphasising stability

After the policy review was concluded control of macroeconomic policy returned to the Shadow Chancellor and the economic sub-committee of the Shadow Cabinet. Smith appointed Andrew Graham as his economic adviser in mid-1988.125 From 1989, Graham ran an advisory group of economists that worked with Smith through to the 1992 election mainly on issues of macroeconomic policy.126 The macroeconomic policy developed by Smith was fundamentally different to that put forward in the policy review.

Between 1979 and the end of the policy review macroeconomic policy had been based on the traditional Keynesian use of macroeconomic instruments to expand or contract the economy. Labour was generally pledged to expand the economy, by increasing public expenditure and/or reducing interest rates, in order to combat unemployment. The exchange rate was then used to influence the balance of payments position. However, economists such as Graham and Eatwell were arguing by the end of the 1980s that the economy had changed significantly enough for this traditional model to be no longer applicable. Four main changes were identified. First, the British economy was more open which affected the use of all macroeconomic instruments. Second, inflationary expectations


had been generated in the 1970s and 1980s which increased the need to stabilise inflation. The monetarists were right in arguing that the economy needed some kind of nominal anchor. This particular issue had been the cause of some dispute between Eatwell and Gould in the PRG. Third, the credibility of fine-tuning had been reduced, partly by an increased awareness of the complexity of the time lags involved, which argued for a focus on the medium to long term. Fourth, the liberalisation of markets had increased the interaction between economic policy instruments.127

These changes implied a number of major changes in Labour’s approach to macroeconomic policy in the period after the policy review. First, there had to be less fine-tuning and a focus on stabilisa-tion of inflation and inflationary expectations. Smith’s public image lent itself to a policy which stressed the importance of macroeconomic stability. In this respect, Labour’s thinking was also deeply influenced by the effects of the Lawson boom in the late 1980s. During 1988 the boom meant that the balance of payments deficit was growing rapidly and inflation was heading for double figures with house price inflation a particular problem. Anderson and Mann argue that ‘for Smith, Brown and Eatwell and for the overwhelming majority of economists advising Labour, the persistence of mass unemployment even when the economy was over-heating was definitive proof that increased demand would not on its own cut the dole queues substantially except at an unacceptable cost’.128 Gould, and his economic adviser Henry Neuburger, took a different view which was basically that the economy was not ‘over-heating’ as much as it was ‘unbalanced’ and the need was for credit controls to allow continued expansion.129

Second, there was a need for a nominal anchor, a monetary target, to guarantee short- and medium-term stability. Of those available it was argued that the best was the exchange rate, particularly as part of an internationally coordinated system such as the ERM. The debate on whether there was a need for a nominal anchor surfaced both in the PRG and the Economic Sub-Committee. Gould’s position was essen-tially that the economic policies of a future Labour government should not be based on a monetary target and that economic policy objectives should be set in real terms. To support this position he argued that previous Labour governments had had to abandon their long term economic strategies to defend unrealistic exchange rates, for example, between 1964 and 1966. Gould’s position in this respect had remained remarkably consistent throughout his political career and was reflected in his support for Shore’s ‘competitiveness strategy’ in the early 1980s.


In the PRG Eatwell argued that that there was a difference between having unrealistic monetary targets and no monetary targets at all. His key theoretical argument was that in an open economy it was impossi-ble to ignore the impact of nominal variables on real outcomes and, further, that ratios of nominal variables defined competitiveness. It was economically impossible therefore to ignore monetary variables such as inflation even if such a course was politically feasible.

The second stage of the argument concerned the desirability of fixing the exchange rate. It was agreed that for an open economy to remain competitive there must be no long-term significant trend change in the real (i.e. nominal adjusted for inflation) exchange rate. This could be achieved in two ways. Gould argued that this could be achieved by allowing the exchange rate to adjust to take into account national differences in inflation. In the British case this would imply allowing the exchange rate to depreciate against, for example, the Deutschmark to compensate for British inflation being higher than that of Germany. Eatwell employed two main arguments against this position. First, he argued that the rate of inflation was not independent of the exchange rate pointing to empirical evidence showing that the main impact of monetary policy on inflation was transmitted via the exchange rate. The implication was that inflation and devaluation were reinforcing. Second, Eatwell pointed to the instability created by the floating exchange rate system since the 1970s. It should be recognised, however, that Eatwell’s position had uncomfortable consequences if domestic inflation was high enough to establish a trend increase in the real exchange rate. This would cause strains on the domestic economy that could only be alleviated by domestic anti-inflation policy or periodic deflation. Eatwell’s hostility to devaluation can be traced back to his involvement in the CEPG in the late 1970s and early 1980s.

This was the theoretical background to Labour’s change in macroeco-nomic policy. Already by the time of ‘Looking to the Future’ (1990) the objective of macroeconomic policy was ‘a monetary framework which will provide long term exchange rate and interest rate stability’.130 No mention was made of achieving full employment and the only reference to growth was to say that it must be balanced. Smith emphasised the macroeconomic policy aims at the 1990 Conference arguing that ‘it is important to achieve a stable exchange rate, to bring down interest rates and to secure an economic climate which encourages both sustained investment and growth’.131 The move away from full employment as the main macroeconomic objective is a key change in Labour Party policy.132


The changes in macroeconomic objectives and policy are most clearly shown on the issue of membership of the Exchange Rate Mechanism. The particular route to that decision is discussed in the next chapter. Here it is enough to note that the policy review had, in line with Gould’s Eurosceptical view, set a stringent list of conditions for Britain to enter the ERM. By 1990, the tone, if not the conditions themselves, had changed substantially with the new document stating that Britain would enter the ERM at ‘the earliest possible opportunity’133 after the condi-tions were met. The argument was that the ERM ‘would create a new framework for wages and other costs’134 indicating that membership was seen as providing a counter-inflationary discipline. When the Conserva-tives entered the ERM in October 1990 at an exchange rate of £1 : DM2.95 Labour was left in the difficult position of deciding whether to argue that the rate was too high or promise that the rate would be maintained. Wary of being accused of being pro-devaluation the party remained committed itself to maintaining the rate.

ERM membership would not, however, be enough on its own; the ERM would provide the target but not the means to achieve it. It is in this context that the idea of a NEA returns to Labour’s policy armoury in ‘Opportunity Britain’.135 However, in private meetings of the Contact Group in the run-up to the 1992 election it became clear to the TUC that the Labour leadership regarded the NEA as a forecasting activity rather than as a forum for real negotiation.

During this period there was some serious thinking about incomes policies within the trade union movement. The most significant was ‘A New Agenda’, a joint document by John Edmonds (GMB) and Alan Tuffin (UCW). The new agenda included proposals for ‘synchronised’ and coordinated pay bargaining. It looked at a number of models, including the Japanese spring offensive and the German system of coordinated bargaining, where ‘free collective bargaining continues but a consensus view is reached about the overall scope for pay rises which conditions negotiations and influences settlements’.136 Edmonds and Tuffin proposed that major negotiations be ‘concentrated in the first three months of the year following a public discussion between the government, CBI and TUC of Britain’s economic prospects’.137 This would lead to pay negotiations being informed by the overall economic situation, reduce the danger of leapfrogging, allow the Chancellor to frame the budget after the pay round, and to include an adjustment in the national minimum wage without inflationary consequences. ‘A New Agenda’ was a significant attempt by two influential trade union leaders to say something positive about incomes policy and it had some impact


within the trade union movement. A subsequent TUC paper on ‘Collec-tive Bargaining’ reflected some of the ideas in the Edmonds and Tuffin document in its analysis of the impact of the minimum wage and the need for a position on public sector pay.

A number of academics began to put the case for an incomes policy more firmly in the late 1980s and early 1990s. John Grieve Smith, in particular, published papers under the imprimatur of the IPPR.138 Hirst and Zeitlin produced a paper that argued against ERM membership as an inflationary discipline and that there was a case for an incomes policy which recognised the changes in bargaining structure which had taken place.139 The paper was presented to Labour policy-makers at a private seminar at the IPPR. Eatwell argued that Labour’s strategy for ERM entry would drive inflation down. Hewitt was particularly concerned lest the paper leak and predicted a hostile reaction from the Daily Mail. Hirst and Zeitlin were dismayed by the reaction and argued that, though the political concomitants of the strategy would have been hard to sell, policy-making should not be pre-censored by the tabloids.140

One must conclude then that by 1992 it was the Labour leadership, rather than the trade unions, which were unwilling to consider some form of policy on incomes. Indeed, the TUC view was that an incomes policy would be necessary, and would have welcomed it as a way of gaining an input into macroeconomic policy.141 However, the experi-ence of 1974–79, and the perceived political unpopularity of incomes policy pushed the Labour leadership away from the idea. There was interest in the concept of synchronisation of wage bargaining but there was no explicit commitment in Labour’s published policy.142 This was despite the fact that several commentators argued that a policy on incomes could transform the prospect of Labour’s economic policy. Without an incomes policy, Labour would still have to operate a policy for public sector pay which, as Hare has argued, would be likely to be ‘derived directly from views about acceptable inflation’.143 Given that would be likely to mean private sector wages growing considerably faster than those in the public sector, and hence recruitment and industrial relations problems in the public sector, this was, Hare concluded, ‘a situation to be avoided if at all possible’.144

In a piece on Labour’s economic policy in 1992, Hutton asked ‘is Labour’s intention really to leave the institutions of wage bargaining unreformed and continue with the policy of pay decentralisation?’.145 It was, although this would have had serious consequences in terms of the differential between public and private sector pay, and the government’s


ability to deal with inflationary pressure. Labour’s attitude to incomes policy has been conditioned by their perceived failure in the 1970s and, particularly, the political costs of the ‘winter of discontent’. This has made both left and right reluctant to even discuss policies of this kind regardless of their economic merit. However, it is also true that changes in the labour market, caused by both external factors and Conservative policy, combined to make an incomes policy less viable. Labour’s failure to address the incomes policy issue left a hole in its macroeconomic strategy in terms of its ability to deal with inflation.

Between 1989 and 1992, then, there was a re-orientation of macro-economic policy aimed at creating stability in the exchange rate, through ERM entry, low and stable interest rates, and low inflation. A consequence of this was that the objective of achieving full employ-ment was quietly dropped and did not feature in the 1992 election manifesto. Two main criticisms have been made of this policy. First, it has been argued that Labour’s macroeconomic priorities were now no different to those of the Conservatives and were unworthy of a left party. In particular, the jettisoning of the full employment objective was harshly criticised. By the 1992 election Labour’s macroeconomic policy had effectively boxed the party into a position where it had little to offer in the way of an alternative.

A second criticism that was made was that the Party’s macroeconomic position had been established in late 1989/early 1990 when the tail end of the Lawson boom meant that inflation was the key macroeconomic problem. However, by the time that the election was fought in mid-1992 the economy was in deep recession and unemployment was seen as a more pressing priority. However, Labour’s commitment to the ERM, and to sustaining the Conservative’s rate of entry of £1 : $2.95 meant that Labour was severely limited in the macroeconomic remedies it could offer. Certainly it was ironic that Labour’s remained a commit-ted to credit controls in 1992 at a time when they were clearly irrele-vant to the economic situation. Gould was to make this point strongly after the 1992 election.146 It was a criticism which could also be made of Labour’s tax policy.

Labour’s tax bombshell

The second aspect of Labour’s policy at the 1992 election which has subsequently been heavily criticised was the Shadow Budget. Most criticism has focused on the proposals for tax changes though, as should be clear, these proposals were dependent on Labour’s proposals for public expenditure. The story of the Shadow budget essentially


starts with the 1987 election campaign when a lack of precision on the detail of Labour’s tax and spending proposals meant that Labour’s campaign was marred by uncertainty and confusion. This was one part of the argument for a Shadow budget which set out precisely the tax changes which Labour would make.

One of the reasons why Kinnock was initially reluctant to establish the policy review was a concern that the PRG’s would come up with a ‘wish-list’ of policy proposals which would have considerable public expenditure implications. A number of steps were taken to try and prevent this and the meetings of policy review group convenors were constantly reminded of the need to restrain public spending.147 However, this had a limited impact on the groups. When Brown, as Shadow Chief Secretary to the Treasury, asked Dan Corry to cost the Party’s programme on the same basis that the Treasury would he came up with a figure of around £60 billion.148 This was despite the fact that many of the changes in the policy review, including that on social ownership, had been made on the basis of limiting public expenditure.

The policy review was viewed as unsatisfactory in this respect and the documents that followed can be seen as attempts to remove the more obvious commitments to large-scale public expenditure. For example, after his move to the DTI, Brown removed the commitments to ‘cable up Britain’ and to renationalise British Telecom from Labour’s industrial policy. In this process of restricting public expenditure commitments first Brown and then Beckett as Labour’s Shadow Chief Secretary to the Treasury played the key role, with Dan Corry the official responsible for vetting policy documents for their public expenditure implications. Beckett became famously associated with adding the rider ‘as resources allow’ to Labour’s spending pledges. While to a large extent this was successful it was a difficult process with Party members, and Shadow Ministers, inclined to view an increase in resources as the prerequisite for progress in a number of areas. It also meant that at the 1992 election the status of policies included in the final policy review document ‘Meet the Challenge, Make the Change’ was uncertain.

If the line on public expenditure was controversial within the Party before the election, Labour’s position on tax was to be controversial after. Labour’s tax proposals were, however, conceived to fund two specific pledges – to increase pensions by £8 for a couple and £5 for a single person and to increase child benefit to £9.95. The decision to make these pledges was made soon after the 1987 election outside of the review. The pledge on pensions was exactly the same, in money


terms, as had been made in the 1987 election while the child benefit pledge would have had the same effect in real terms as that made in 1987.149 Once these decisions were made, however, the principle issue for the Economic Equality PRG became how to fund these pledges. Further, these discussions were taking place in the context of reaction against Lawson’s 1988 budget which had abolished higher rates of tax. John Smith, in particular, retained a strong commitment to changing the system in a redistributive way.

The desire for clarity in Labour’s tax and spending proposals and the decision that there would be pledges to increase spending on pensions and child benefit meant that there had to be some tax changes to fund these increases. There was a general agreement within the Party that there needed to be a definitive statement of Labour’s plans to deal with these two issues. Out of that, and the need to avoid making proposals too early and allowing the Conservatives to steal Labour’s revenue sources, came the idea for a shadow budget near to the election which played on Smith’s image as a responsible custodian of the nation’s finances. All of this was agreed across the Party leadership. There was, however, a significant disagreement between Smith’s office and Kinnock’s office on when Labour should begin to campaign on tax. Eatwell and Charles Clark argued strongly that the Party campaign early, in late 1991, in an attempt to neutralise the tax issue. Smith disagreed, in part because he felt that he had the government on the run on the issue of the Maastricht Treaty. As a result the issue of tax did not emerge as the major issue until the campaign proper.150

Knowing Labour was to produce a Shadow budget, Lamont framed the Conservative’s 1992 budget to maximise Labour’s difficulties. The Conservative budget introduced a 20p band that significantly bene-fited the poor. Labour was faced with the difficult task of producing a shadow budget which outbid the Conservatives on tax while at the same time paying for the Party’s proposals on pensions and child benefit. A small team including Dan Corry and the LSE academic John Hills managed to hone the details of Labour’s Shadow budget while Eatwell and Graham’s text sought to play up Smith’s image as the next Chancellor. Backbench pressure on Smith and Beckett meant that money was shifted at the last to ensure that Labour was doing more for the poor – even if in some cases it was only by 1p – than the Conserva-tives. As an economic exercise the shadow budget stood up as a set of proposals. However, politically although the initial reception of the Shadow budget was positive – with an IFS analysis showing that nine out of ten voters would be better off under Labour’s plans – the


Conservative’s campaign on ‘Labour’s Tax Bombshell’ was subse-quently felt by most observers to have had a significant effect.

There are a number of reasons why this might have been the case. For example, after the election a number of MPs from the south of England – including Ken Livingstone and Brian Gould – made the point that Labour’s pledge that no-one earning under £22,000 would lose out did not sound like a great deal of money in the south.151 It was also be argued that in the campaign Labour did not actively promote its pledged increases in child benefit and pensions leaving the impres-sion that Labour was increasing taxes for the sake of doing so. Butler and Kavanagh make the point that ‘Labour critics complained that the Smith budget had hurt the Party by putting tax at the centre of the election’.152 However, the over-riding issue was trust; it was clear that the electorate did not trust Labour not to put up taxes.

Macroeconomic policy, 1992–97

In the aftermath of the 1992 election, Labour’s macroeconomic policy was heavily criticised by Brian Gould as part of his campaign for the Party leadership. Essentially, Gould argued that the emphasis on staying in the ERM at the current parity had closed off any possibility to attack the Conservative’s macroeconomic record. Gould also mounted an argument that the Shadow Budget had been extremely costly to the Labour Party.

The return of Euro-Keynesianism

While the pound had been in the ERM Brown had firmly opposed critics within the Labour Party who had called for devaluation, even though Smith, as Party leader, had indicated that he was willing to consider realignment. The defining moment in the 1992–97 parlia-ment was the pound’s exit from the ERM in September of 1992. This was, of course, extremely damaging to the Conservatives’ reputation for economic competence. The pound’s exit from the ERM set a problem for Labour’s macroeconomic policy as much as for the Conservatives. At the same time there was considerable pressure on Brown to respond to concerns within the Party about the recession and the level of unemployment.

Following his resignation from the Labour front bench in the wake of ‘Black Wednesday’, Brian Gould set up the Full Employment Forum with a number of Cambridge academics including Mills, Harrison and Michie to apply pressure for a change in economic direction. The Full


Employment Forum attracted support in particular from John Edmonds at the GMB. Peter Hain and Roger Berry used the Tribune Group to publish two pamphlets which made the argument for a Keynesian macroeconomic policy. Ed Balls, who was later to become Brown’s key economic adviser, published a Fabian pamphlet which was critical of the position Brown had taken during the ERM period. However, the key push on Brown came from John Smith as Party leader. At the 1993 Trade Union Congress, Smith reaffirmed Labour’s commitment to full employment in unequivocal terms. It had been Smith, as Shadow Chancellor in 1990, who had removed this com-mitment from Labour’s policy. Now, as much as anything to secure victory for his OMOV proposals, Smith changed his position.

There were also a number of developments at a European level to consider again the possibility of European cooperation. Proposals from the European Commission emerged as a spin-off from the Maastricht negotiations. Much of the work on the proposals was done by Stuart Holland, a key figure in the emergence of Labour’s AES in the 1970s and early 1980s, who had by this time moved through a spell on Labour’s front bench, to become one of Delors, advisers. Within the Labour Party this work formed the basis of a ‘European Recovery Programme’ which attracted significant support from Labour MEPs, including Ken Coates.

From the end of 1992, through 1993, Brown responded to this tide of opinion in two main ways. First, following Smith’s TUC speech, Brown published a pamphlet called ‘How we can conquer unemployment’ at the 1993 Labour Party conference. The pamphlet insisted that Labour will ‘not renege on the commitment’153 to full employment. Brown proposed a ‘combination of immediate measures to attack unemploy-ment now and medium-term policies to increase investment in capacity and skills’.154 There was a renewed emphasis on a ‘enhanced Keynesian approach, which treats demand management as an integral part of a structural policy’.155 However, Brown was equally keen to stress that repeated exchange rate devaluations are ‘inappropriate and counter-productive’ since devaluation would do nothing to tackle ‘the real problem of productive capacity’ and would therefore be ‘incapable of conquering unemployment’.156

The pamphlet also made considerable play of the scope for a Euro-pean response to the issue of unemployment. Brown argued that ‘a co-ordinated reflation strategy, taking into account the particular circumstances of individual countries, is therefore in the best interests of the entire Community’.157 For Brown, these ‘particular interests’


encompassed the key concern that the structural problems present in the UK were much less severe in other European countries. Labour’s formal submission to the Commission on the Delors proposals endorsed this line and emphasised Labour’s support for a counter-cyclical European Recovery Fund.158

In early 1994, Dan Corry, now working at the IPPR and editing the journal New Economy wrote an article reflecting on Labour’s macroeco-nomic policy. Corry commented that ‘rightly, [macroeconomic] policy has shifted back a little, particularly since the 1993 Party Conference, towards a more Keynesian feel with concepts of full employment and investment for growth now mentioned much more often’.159 As this was the high point of Labour’s return to a Keynesian macroeconomic policy it is useful to note Corry’s comment that Keynesian-style policies ‘were largely ignored’160 at the 1992 election. Corry argued that that might have been a sensible position in 1992, for political rather than economic reasons, but that to focus entirely on the supply-side was problematic for a number of reasons. First, in a recession, where there was no supply constraint and little risk of inflation, using macroeconomic policy to increase demand would be effective. Second, supply-side and demand-side policies interact, so that, for example, if a recession leads to reduced capacity this will have long-term effects on the supply-side. Third, supply-side policies take a long time whereas ‘the Lawson boom of the 1980s showed just how quickly a surge in demand can effect employment and growth’.161 However, from 1994 to 1997 Labour’s macroeconomic policy returned to focus on stability, and Labour’s emphasis returned to the supply-side.

Stability and inflation

Commenting on the report of the Commission for Social Justice in early 1995, Pierson commented that ‘enormous weight seems to fall on the belief that a new form of international macroeconomic coordina-tion can be generated, probably at EU level’.162 However, by this time, Labour’s overall policy had moved away from the idea of coordinated European expansion. Three factors drove this change in macroeco-nomic policy. First, at an European Union level ‘for all the rhetoric about a “European Recovery Programme” at the time of the Edinburgh Summit in 1992, precious little … happened’.163 Second, the British economy began to recover and, as it did so, the issues became inflation and macroeconomic stability rather than the level of unemployment. Third, the election of Blair as leader changed the context in which


macroeconomic policy was made within the Labour Party, giving considerably more autonomy to Brown as Shadow Chancellor.

Brown moved then to emphasise the importance of macroeconomic stability and the control of inflation. This was reinforced by Blair in his 1995 Mais lecture when he argued that low inflation was more important than even the Conservatives had allowed. Blair argued that ‘low inflation … is the essential prerequisite both of ensuring that business can invest and that supply side measures can work to raise the capacity of the economy to grow’.164 This was Blair’s most substantial intervention into macroeconomic policy during Labour’s period of opposition and was designed to promote the Shadow Chancellor’s position.

Most of Brown’s work in the period between 1994 and 1997 was designed to give this policy a degree of credibility; designing a set of rules that would ensure the level of macroeconomic stability which was necessary. In 1995, Brown committed Labour to the so-called golden rule of borrowing. This meant that, over the economic cycle, ‘government will only borrow to finance public investment and not to fund public consumption’ and that the government would ‘keep the ratio of government debt to GDP stable on average over the economic cycle and at a prudent and sensible level’.165 Setting out these rules on government spending was designed to reassure business, the City and voters that Labour would not rock the macroeconomic boat.

A parallel development in policy terms was the joint work by Gordon Brown, Robin Cook and John Prescott on proposals for public private finance (PPF). These proposals were meant to be an important signal of Labour’s willingness to work with the private sector. However, PPF could also have the positive side effect of allowing the government to get round the PSBR constraints it had set itself. However, if PPF took off on any scale the markets would discount for this when considering the government’s fiscal position.

A further move which was considered was to give some greater independence to the Bank of England. Kenneth Clarke, as Chancellor, in trying to repair the Conservative’s reputation for economic compe-tence after ‘Black Wednesday’, had gone some way down this road in publishing the Minutes of his meetings with the Governor of the Bank of England, Eddie George. The 1995 policy document ‘A New Eco-nomic Future for Britain’ indicated that Labour was prepared to go further down this road. However, there was still widespread opposition to such a move. Opponents argued that independence was an institutional quick-fix. Independence, and the insulation of


monetary policy from ‘political pressures’, was only sensible if one believed that low inflation was a pre-condition for growth. However, Blair’s Mais lecture did seem to imply that New Labour did believe that this was the case and not that there might be a trade off between inflation and growth.166 In the 1997 manifesto Labour did not commit itself to any change for the Bank of England. However, four days after the election, allowing the Bank operational independence was the first key economic change made by the new Labour government.

No new taxes

Philip Gould has stated that 1996 was a year in which Labour’s message to the electorate was ‘reassurance, reassurance, reassur-ance’.167 Brown’s macroeconomic policy was designed to emphasise stability and responsibility. However, the key area of policy where reassurance was thought to be necessary was in terms of tax. The lessons that the Labour leadership had drawn from the Shadow Budget was that the Labour Party could not go into an election with a plan to increase taxes without coming under tremendous attack from the Conservatives and the media. Brown and Blair had both privately advised Smith against the Shadow Budget in 1992, and were concerned not to go down the same route in 1997.

However, before Labour made any decisions on its own tax proposals it made two decisive interventions in the wider debate on tax. First, during the 1992–97 parliament, Labour was much more effective in attacking tax increases made by the Conservatives, particularly rises in indirect tax such as that on domestic fuel, which served to damage the Conservatives’ credibility on the tax issue. Second, Brown attacked the excess profits, and the ‘fat cat’ executive pay, of the privatised utilities. This hit a popular nerve and Brown’s proposal for a Windfall Tax on the privatised utilities to fund a new deal programme for the young unemployed found a wider public resonance.

The decisive moment was, however, when Brown announced in early 1997 when Labour pledged not to raise the 40p top rate of tax and the 23p basic rate. This effectively neutralised the putative Conservative’s attack on Labour as a high tax party. In fact, however, Brown went much further to reassure voters. He committed the new government to the Conservative’s spending plans for their first two years in office. Most economic commentators had viewed the figures for public expenditure in the Conservative’s red book with a fair degree of scepticism, and did not expect the Conservatives to stick to those


levels had they won the election. This commitment would severely limit the scope for public expenditure by a new Labour government.

Macroeconomic change

Eatwell, in assessing the overall changes in economic policy between 1979 and 1992, argues that the main change in macroeconomic policy was that Labour had abandoned the idea that short-term macroeco-nomic management was the key to maintaining full employment. Rather, this sort of ‘fine-tuning’ had been replaced by the goal of ensuring macroeconomic stability for long-term investment. This implies that the main goals of macroeconomic policy were a stable exchange rate, stable interest rates no higher than competitor coun-tries, and low inflation.168 This change was confirmed by the 1997 election.

Hutton, in reviewing Eatwell’s article, goes as far as to complain that Labour’s ‘retreat from macroeconomic policy has surely gone too far’.169 Shaw has argued that the abandonment of full employment was a key weakness of Labour’s post-revisionism.170 Hutton, in his book, The State We’re In and through his Guardian columns, and journals such as New Economy was keen to promote ‘New Keynesian’ thinking. For a short period in 1993 and 1994 it looked as though these argu-ments had met with some success. Reviewing Brown’s ‘How can we conquer unemployment’ pamphlet, Hutton had written that ‘Labour is developing a disciplined Keynesianism and a commitment to change radically Britain’s institutional structures’.171 By 1997, however, Labour had moved back to a position which emphasised economic stability.

There were a number of reasons for this re-thinking of macroeco-nomic policy. First, the effects of the Lawson boom made a macroeco-nomic policy which emphasised stability attractive. It confirmed the policy shift within the party away from Keynesian fine-tuning. Second, there was a clear need to address Labour’s key macroeconomic policy weakness on inflation. A commitment to ERM membership addressed, for a while at least, Labour’s key weakness on inflation. Without a plausible incomes policy – which Labour found impossible to develop after the ‘winter of discontent’ – developing a policy on inflation became increasingly important for Labour’s economic credibility. Hedging a Labour Chancellor in with a series of macroeconomic rules was the 1997 solution.

A commitment to ERM membership also boosted Labour’s credibility with the City and the financial markets. It was felt that Labour’s difficulties on the issue of economic competence were to some extent


caused by the fact that the City and business – to the public the groups that understood the economy – were so dismissive of Labour’s propos-als. The so-called ‘prawn cocktail offensive’ of City lunches was a conscious attempt by Labour to limit the extent of negative comment. The commitment to the ‘golden rule’ served a similar purpose in 1997.

While Eatwell argues that Labour’s policy changes have not been influenced by the absorption of Conservative ideas he does acknowl-edge that the ‘presentation of Labour’s policy has been affected by the extreme conservatism (with a small ‘c’) of economic debate in Britain today’.172

The area in which Eatwell cites this as a major influence is public expenditure where the symbolic importance of the PSBR has been out of proportion with its economic significance. It is certainly clear that Hattersley’s aim in the mid-1980s – to make the case for public expenditure – has not been achieved. This had implications for policy in Labour’s key area of weakness, tax. The very structure of the policy review made clear that Labour’s tax policy was semi-detached from its macroeconomic policy. The logical outcome of this was finally reached at the 1997 election when Labour pledged to maintain the Conservative levels of direct tax for the duration of the parliament and their public expenditure plans for the first two years thereby all but eschewing fiscal policy. These were clearly political rather than economic decisions.

Finally, in looking at Labour’s development of macroeconomic policy it is evident that, with the exception of the policy review period, the Shadow Chancellor has controlled policy development. This is particularly true of Hattersley between 1983 and 1987, Smith after 1989, and Brown particularly after 1994. In this context it was the advisers working directly for the economic spokespeople or the leader – such as John Eatwell and Andrew Graham – who were able to directly influence policy change.

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