A message from the 1970s on state spending

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Mar 8, 2006
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"We used to think you could spend your way out of recession and increase employment by boosting government spending,” boomed the Prime Minister, Jim Callaghan, at the 1976 Labour Party conference.



By Liam Halligan

“I tell you, in all candour,” he went on, “that that option no longer exists. And in so far as it ever did exist, it only worked on each occasion… by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step…”

The above words are among the most important uttered in the history of modern British politics. For a left-wing prime minister to have admitted that too much state spending is dangerous, while being barracked by a rabble of bearded Trotskyists from among his own party ranks, marked a turning-point in Western economic policymaking.


For it was in 1976 that the UK government had been rescued by the International Monetary Fund. After years of industrial subsidies, soft-budget constraints and Keynesian hubris, Britain was insolvent – unable to service its debts. After months of denial, the markets forced Callaghan’s government, “cap in hand”, to seek an IMF bail-out.


On that day, all notions that the UK remained a world-class economy, an industrial powerhouse, were exposed as nonsense. It was this country’s “economic Suez”.

What brought Britain to that disgraceful nadir was a lot of self-serving ideas about the wisdom of near-limitless government largesse. The “Keynesian consensus” had been that the state could borrow and spend practically ad infinitum, that “pump-priming” the economy was “the right thing to do”.
http://www.telegraph.co.uk/finance/...message-from-the-1970s-on-state-spending.html