THE LABOUR GOVERNMENT, 1974-79 By the same author POLITICAL PRESSURE AND ECONOMIC POLICY: BRITISH GOVERNMENT, 1970-4 THE LABOUR GOVERNMENT, 1974-79 Political Aims and Economic Reality Martin Holmes Lecturer in Politics Lady Margaret Hall, Oiford ~ MACMILlAN © Dr. Martin Holmes 19B5 All rights reserved. No reproduction, copy or transmission oflhis publication may be made without written permission. No paragraph ofthis publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions ofthe Copyright Act 19.'i6 (as amended). Any person who does any unauthorised act in relation to this puhlication may he liahlc to criminal prosecution and civil claims for damages. First edition 1911.'i Reprinted 19B7 Puhlished hy THE MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world British Lihrary Cataloguing in Puhlication Data Holmes Martin, 1954- The Labour government, 1974-79. I. Great Britain -Economic policy-194.'i- 1. Title 330.941 'OB57 HC256.6 ISBN 978-0-333-36735-3 ISBN 978-0-333-42820-7 ISBN 978-1-349-09102-7 (eBook) DOI 10.1007/978-1-349-09102-7 CONTENTS ACKNOWLEDGEMENTS Vll I THE SHORT PARLIAMENT Wilson's dual inheritance 1 The Social Con tract 7 The October 1974 Election 15 11 THE FALL OF THE SOCIAL CONTRACT The inflationary problem 19 The f6 pay policy 26 The philosophy of wage control 31 111 LABOUR'S INDUSTRIAL STRATEGY The ideological background 35 The scope of intervention 38 British Leyland and Chrysler 44 The ineffectiveness of the industrial strategy 54 IV WILSON'S LAST MONTHS TUC support for the f6 policy 65 The question ofpublic expenditure 67 Harold Wilson: an assessment 73 V THE IMF CRISIS Callaghan takes over 79 The J uly package 88 The IMF medicine 91 VI CALLAGHAN'S NEW DAWN? Labour's parliamentary arithmetic 103 The Lilr-Lab pact 104 Economic recovery? 110 VII THE MISSED OPPORTUNITY Resumed expansion 117 v VI Contents The battle for 5 per cent 124 The election dilemma 129 VIII THE WINTER OF DISCONTENT The initial challenge 135 The dam bursts 136 The conseq uences 146 IX THE 1979 GENERAL ELECTION Labour's last weeks 154 The campaign and economic issues 158 The verdict 164 X CONCLUDING THOUGHTS The Left's criticisms 166 The sources of economic policy formation 175 The overall economic record 181 NOTES AND REFERENCES 188 SELECT BIBLIOGRAPHY 199 INDEX 201 ACKNOWLEDGEMENTS The author and publishers wish to thank the following who have kindly given permission for the use of copyright material: Andre Deutsch Limited for an extract from Inside the Treasury by J oeI Barnett. David Higham Associates Limited on behalf of Barbara Castle, and Holmes & Meier Publishers Inc. for an extract from The Castle Diaries, 1974-6. David Higham Associates Limited on behalf of Lord Wilson of Rievaulx for an extract from Final Term. William Keegan and Rupert Pennant-Rae for extracts from Who Runs the Economy? Times Newspapers Limited for an extract from the article 'The Day the .f Nearly Died' by Stephen Fay and Hugo Young, in The Sunday Times (1978). My thanks are also due to the many Labour cabinet ministers, junior ministers, MPs, trade-union leaders and civil servants, who gave their time to be interviewed in the course ofwriting this book. Special thanks are also due to Gillian Peele for her constant encouragement and wise advice, and to Sam Brittan who shared with me his economic knowledge and expertise. My secretarial assistants, ably orchestrated by Alison Clarke, also deserve praise and thanks. I am also grateful to Mr T. M. Farmiloe ofMacmillan for the speed, efficiency and courtesy with which he handled the typescript. Needless to say, any faults or errors in the following pages are my responsibility alone. Martin Holmes Lady Margaret Hall Oiford VB CHAPTER I The Short Parliament WILSON'S DUAL INHERITANCE It is not an exaggeration to claim that no post-war Prime Minister took office in more difficult circumstances than Harold Wilson on 4 March 1974. Apart from heading the first minority Labour Government since 1931 - with the consequent necessity of another general election in a short period of time - Wilson's inheritance was a dual one. Firstly, he inherited an appalling economic situation partly created by the policies of the 1970-41 Heath Government and partly inflicted externally by the world oil crisis. Secondly he inherited a Labour Party which in opposition had moved further leftwards than Wilson had hoped, and which, now in office, expected immediate radical socialist solutions. Put bluntly Wilson had to keep his party together as party leader as weIl as attending to prime ministerial policy determination in relation to the economic situation. Wilson's Cabinet reflected his task ofbalancing left and right in the party. Michael Foot, whose career had seemed destined to end as a backbench voice of conscience on the left, was made Employment Minister. Tony Benn was appointed Industry Secretary, a crucial portfolio for the left, though in Mr Benn's case his move leftwards in the party had been comparatively recent and at a late stage in his ministerial career. Barbara Castle, who had retained her left-wing credentials after the In Place of Strife debacle ofthe late 1960s, was the Social Services Secretary. The left was therefore weil represented in comparison to previous Labour Cabinets and had the added advantage of greatly increased support in the party and trade union movement as a whole. Thus Wilson later recalled that 'Foot was good Cabinet material, and he did a greatjob with the unions. When I told the union leaders Michael Foot was Secretary of State for Employ ment, JackJones had a broad grin on his face.'2 2 The Labour Government, 1974-79 However many of the figures of stature and considerable ministerial experience in the Cabinet were on the right. Roy Jenkins returned to the Horne Office, Tony Crosland was made Environment Secretary, Denis Healey became Chancellor, despite being an unimpressive Shadow Chancellor, and Reg Prentice was appointed Education Secretary. The rest of the Cabinet, including Foreign Secretary J ames Callaghan, were considered to be in the centre, though with hindsight, centre-right would be more accurate. Wilson's task in moulding a collective will-in accordance with the traditional doctrine of collective Cabinet responsibility - was therefore made more difficult simply because he had to include a left-right balance. Whilst this arrangement was a strength in terms ofinternal Labour Party politics it was arguably a weakness in policy formation. One cabinet minister recalled that: Wilson's main purpose was to keep the Labour Party together. The Cabinet reflected the divisions in the party and Wilson would give us lectures on the need to speak with one voice. 74-6 was astrang Cabinet ofindividual talents hut it didn't puH together. It reflected the contradictions within the party. You could divide the Cabinet into three. The right - Jenkins, Lever, myself, sometimes Mason and Shepherd; the left-Benn, Foot, Barbara [Castiel, Shore on some issues, and later Booth and Silkin. The soggy centre did what the PM decided, waiting to see which way the wind was blowing.3 Both aspects ofWilson's dual inheritance fed upon each other. For whilst the economic inheritance demanded tough measures, as was the case in all Western economies, the party's move leftwards reflected in the February 1974 election manifesto commitments, was essentially geared to economic circumstances intrinsically more favourable in terms of economic growth. The Cabinet battles and party disputes described by Harold Wilson4 and Barbara Castle5 could not es cape from this central dichotomy. In March 1974 the most immediate aspects of Wilson's dual legacy were domina ted by the economic situation. The country was still on the three-day week imposed by Mr Heath; inflation was accelerating with wage rate rises up to 20 per cent;