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BRITISH ECONOMIC HISTORY
BRITAIN AFTER 1945 Did government intervention do more good or harm after 1945? If you wish, you may choose to focus your attention on one aspect of government intervention, such as fiscal policy or the welfare state. Introduction - define 'harm' and 'good' Welfare pre1945/post1945 Nationalisation Economic controls Fiscal Policy Monetary Policy Conclusion The Cambridge Economic History of Modern Britain, 18601939: Floud & Johnson
British fiscal policy since 1939:
After both world wars government spending fell back, but to levels considerably higher than those seen prewar; this is characterised as a 'ratchet' effect.
The government used the Second World War to massively increase the number of Britons liable for income tax, from c4million in 1939 to c12million in 19451.
Despite peaking at c250% of GDP in 1945, the UK national debt fell every year for the subsequent 30 years, stabilising at around 50% of GDP.
Post1945, the government prioritised fullemployment over fiscal and monetary discipline, and adopted Keynesian demand management along with the recommendations of the Beveridge report.
Attlee's government removed many of the wartime economic controls.
Exchange controls were lifted in 1947, but encouraged a run on the pound, and they had to be re
imposed until the late 1950s. Sterling was devalued in 1949 and again in 1967.
There was a marked improvement in the British balance of payments post1945, aided by a weakened pound and an export campaign.
Regional development and policy:
There was a continued growth in regional inequality in the postwar years, and unemployment levels are one way to measure this.
Britain continues to have low geographic labour mobility, the result of regional wage differentials, high variations in living costs, and the nontransferability of skills sets.
The Attlee government passed the 1945 Distribution of Industry Act, which included provisions for regional expenditure on transport and infrastructure improvements. However, cuts to its budget meant it was limited in its effectiveness and it was gradually curtailed after 1947 2. Near full
employment in Britain had made regional development less of a priority. Nearly a quarter of a million regional jobs were created in the six years to 1951, but the majority of these were the result of buoyant economic growth rather than government intervention.
Money and monetary policy since 1945: 1 The Cambridge Economic History of Modern Britain, 18601939: Floud & Johnson 2 The Cambridge Economic History of Modern Britain, 18601939: Floud & Johnson
The pound was devalued from $4.08 to $2.80 in 1949; it was devalued again to $2.40 in 1967, before floating in 1972. The remnants of exchange controls were abolished in 19793.
Postwar, the UK economy was financially closed, with low international capital mobility. This allowed the government to maintain low interest rates and keep inflation in check, despite a doubling of the monetary base over the course of the war.
Impact of Europe:
The postwar policy of restricting sterling balances and domestic rationing helped Britain to rapidly reduce its balance of payments deficit.
The welfare state, income and living standards:
Public expenditure on welfare doubled as a percentage of GDP between 1920 and 1948; this trend continued thereafter.
Because of the financial impracticality of building a National Insurance Fund, the Attlee government instead decided to pay the State pension from current contributions; this made the solvency of the scheme dependent on future economic growth4.
Employment taxes and generous welfare provision raises labour costs and reduces the economy's competiveness. However, the welfare state should be judged by its social contribution as well as its economic cost.
Government and the economy, 18601939:
The British government post1945 was determined to avoid the mass unemployment that followed the First World War.
War had a 'displacement' effect on public expenditure, which failed to fall back to its prewar levels.
A failed experiment the state ownership of industry:
Labour's 194551 nationalisation programme increased the size of the public sector by c2million. The principle purpose of nationalisation, it was argued, was to bring about significant improvements in labour productivity within the industries affected. Growth Effects of Government Expenditure and Taxation in Rich Countries: Folster & Henrekson
There is a strong link between government size and economic growth, but conventional theory suggests that the impact on growth will only be negative when government grows beyond a certain threshold.
For developed nations, an increase in the expenditure ratio of 10% decreases the growth rate by
0.7%0.8%5. The Welfare State and Competitiveness: Alesina & Perotti
Redistributionary expenditure financed by distortionary taxation can lead to a loss of competitiveness, inflationary pressures, and a decrease in domestic employment6.
Competitiveness is defined as relative unit labour costs in this case.
In 1960, UK government spending was 27.3% of GDP; 10.9% of GDP was spent on social services. 3 The Cambridge Economic History of Modern Britain, 18601939: Floud & Johnson 4 The Cambridge Economic History of Modern Britain, 18601939: Floud & Johnson 5 Growth Effects of Government Expenditure and Taxation in Rich Countries: Folster & Henrekson 6 The Welfare State and Competitiveness: Alesina & Perotti
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