The spirit of '45? Austerity then and now.

Author:Tomlinson, Jim

The years of the Attlee government between 1945 and 1951 are commonly regarded as years of austerity, symbolised above all by the policies of Stafford Cripps, Chancellor of the Exchequer from 1947 to 1950. But austerity in the 1940s meant something very different from its use today. If we compare the two periods it is the differences rather than similarities that stand out. But analysing these differences helps us understand important aspects of the contemporary political economy of Britain.

Supply-side socialism in the 1940s

In the 1940s the meaning of austerity was quite clear. It meant holding back the growth of private consumption so that resources could be transferred from the war effort to civilian uses, with most of those resources flowing into exports and investment. In economic terms this policy was very successful; between 1946 and 1952 consumer spending rose by 5.9 per cent, but fixed investment by 57.9 per cent and exports by 77 per cent (Cairncross, 1985, 24). Politically the consequences were problematic for the Labour government. The holding back of consumption, and the rationing and controls which accompanied this restriction, allowed the Conservatives to mount an effective campaign to 'set the people free'. This campaign mobilised the Conservative vote, and seems to have been especially effective amongst women who bore the daily brunt of dealing with austerity and the frustrations of shortages of goods for everyday consumption (Zweiniger-Bargielowska, 2000). Labour's majority was minimal in the general election of 1950, and the government lost office in 1951.

The 1940s austerity strategy was driven by two imperatives: to correct the balance of payments, and to invest in order to expand the economy. Contemporary arguments about the balance of payments focused on the private sector and the current account, the slogan of 'export or die' obscuring the extent to which foreign exchange was flowing into overseas military spending and foreign investment (Tomlinson, 2009). But within this framing of the issue, policy was highly successful, with the payments position corrected, until the onset of the Korean War brought further problems. The improvement in the current account was greatly aided by the inability of the devastated economies of Germany and Japan to fully compete in expanding world markets, and by devaluation of the pound in 1949. But, while conditions were undoubtedly favourable, the political commitment to correcting the payments position, despite the consequent starving of the powerful demands of the home market, is striking.

The commitment to a rise in investment flowed from a strong sense in the Labour leadership that their commitment to full employment and expanded welfare provision as the centre of the post-war settlement was only politically feasible in an expanding economy. Some of the investment was itself part of delivering on that settlement, most notably in housing, where construction was overwhelmingly concentrated in the public sector. While the number of houses built was impressive, reaching a peak of almost 200,000 per annum, the targets of 1945 were not achieved, and after 1947 the programme was cut back in order to release labour and timber for other uses (Cairncross, 1985, 451-2). The biggest increase in investment was in plant and machinery, and the sector that benefited most from the government's priorities was manufacturing and construction (Cairncross, 1985, 456; Chick, 1998, 16-24).

Unlike today's austerity, that of the 1940s was accompanied by expanding welfare provision. The 1940s were of course the years of the inauguration of the NHS, expansion of education, and a major increase in social security provision both through National Insurance and National Assistance. However, three points about this muchemphasised expansion of the welfare state are worth noting. First, because of buoyant demand for labour, expenditure on social security rose much more slowly than had been budgeted for in wartime planning; payments of unemployment pay and sickness benefit (demand for which rises when the labour market is slack) had been based on unemployment levels of 8.5 per cent, while the trend rate in the 1940s was around 2 per cent (Tomlinson, 1997, 254). Second, this expansion was of entitlement to very low standards of support. The newly-expanded National Insurance system, constrained to offer flat rate benefits for flat rate contributions, had to have contribution levels affordable by the low paid, and hence offered benefits which mean we can rightly talk of an 'austerity welfare state' (Tomlinson, 1998). Third, while entitlement to welfare greatly expanded in the 1940s, physical provision in the form of schools and hospitals, especially the latter, was heavily constrained by the priority given to industrial investment. Thus, for example, despite the hopes entertained at the founding of the NHS, no new district general hospitals were built until the 1960s.

What the above discussion should make clear is that in the 1940s austerity was driven by a macroeconomic problem of demand outrunning supply, and therefore the need to restrict private consumption in order to prioritise exports and investment. This excess demand accounts for the low unemployment levels, and also for the government's supply-side initiatives, in areas such as subsidies for research and development, expansion of technical education and a drive to import what were perceived as the superior...

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