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Overview of Modern Political history in the UK
To understand the current state of the UK's finances, it's essential to look back at the key decisions and policies that have shaped our economic landscape. From the ashes of World War II to the recent era of austerity, successive governments have left an indelible mark on the country's economic principles. This deep dive will explore the origins of some of the most significant economic policies and their lasting impact.
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The end of World War II ushered in a period of profound change in the UK. The Labour government, led by Clement Attlee, was elected in a landslide victory in 1945 with a mandate to rebuild the nation and create a more just society. This era, often referred to as the "post-war consensus," saw the establishment of the modern welfare state, a concept largely based on the 1942 Beveridge Report. The report identified "five giant evils" in society: squalor, ignorance, want, idleness, and disease.
To combat these, the government introduced a series of landmark reforms:
These reforms were funded by a combination of taxation, National Insurance contributions, and, in the immediate post-war years, significant loans from the United States and aid from the Marshall Plan. This period was characterised by a belief in Keynesian economics, where the government actively managed the economy to maintain full employment and stimulate demand.
The post-war boom began to unravel in the 1970s. The UK faced a perfect storm of economic challenges, including rising inflation, industrial unrest, and the 1973 oil crisis. This period of "stagflation" (a combination of stagnant economic growth and high inflation) put immense pressure on public finances.
A significant fiscal change during this decade was the introduction of Value Added Tax (VAT) in 1973. This was a condition of the UK's entry into the European Economic Community (EEC), the forerunner to the European Union. VAT replaced the existing Purchase Tax and was initially set at a standard rate of 10%. It is a tax on consumption, applied to most goods and services, and has since become a major source of government revenue.
The economic turmoil of the 1970s led to a growing sense that the post-war consensus was no longer working. This paved the way for a radical shift in economic thinking.
The election of Margaret Thatcher's Conservative government in 1979 marked a decisive break with the post-war consensus. "Thatcherism" was characterised by a belief in free markets, privatisation, and a smaller state. The key economic policies of this era included:
These policies were highly controversial and had a profound impact on the UK economy. While proponents argue that they modernised the economy and laid the foundations for future growth, critics point to the social costs, including a sharp rise in unemployment and inequality, particularly in former industrial areas.
What was the 'Big Bang'? The 'Big Bang' on October 27, 1986, refers to the sudden deregulation of the London Stock Exchange. Key changes included abolishing fixed commission charges, ending the separation of stockbrokers (agents) and stockjobbers (market makers), switching from face-to-face to electronic screen-based trading, and allowing foreign firms to own UK stockbrokers. This dramatically increased competition and trading volume, cementing London's place as a global financial hub.
The New Labour government of Tony Blair, which came to power in 1997, sought to find a "third way" between the old-style socialism of the post-war era and the free-market fundamentalism of the Thatcher years. While New Labour accepted many of the economic reforms of the Thatcher era, it also placed a strong emphasis on public services and social justice.
Key economic policies of this period included:
This period was one of sustained economic growth, but it ended with the 2008 global financial crisis, which plunged the UK into a deep recession and led to a new era of economic policy.
In response to the financial crisis, the Conservative-Liberal Democrat coalition government, which came to power in 2010, embarked on a programme of austerity. The aim was to reduce the budget deficit by cutting public spending and raising some taxes. This has had a significant impact on public services, with local government, in particular, seeing a sharp reduction in funding.
A notable policy introduced during this period was the pensioner "triple lock" in 2011. This guaranteed that the state pension would rise each year by the highest of three measures: average earnings growth, the rate of inflation (as measured by the Consumer Prices Index), or 2.5%. While popular with pensioners, the triple lock has become increasingly expensive and has been the subject of much debate in recent years, with some arguing that it is unsustainable and unfair to younger generations. The triple lock has been temporarily suspended in the past and its long-term future remains a key political issue.
The global COVID-19 pandemic represented an unprecedented economic shock, forcing the government to intervene on a scale not seen since the Second World War. With the country entering a series of lockdowns from March 2020, large swathes of the economy ground to a halt. The government's primary aim shifted from deficit reduction to preventing a complete economic collapse and mass unemployment.
To achieve this, a number of vast and expensive support schemes were rapidly introduced. The flagship policy was the Coronavirus Job Retention Scheme, commonly known as the "furlough" scheme, where the state paid up to 80% of the wages of employees who were unable to work. This supported over 11 Million jobs at its peak. Alongside this, various grants, and government-backed loan schemes, such as the Bounce Back Loan Scheme, were launched to keep businesses solvent.
While these measures were successful in preventing the catastrophic levels of unemployment initially feared, they came at a monumental cost. Government borrowing surged, pushing the national debt above 100% of GDP for the first time since the 1960s and adding hundreds of billions of pounds to the debt pile in a very short period.
Just as the UK economy was beginning to recover from the pandemic, Russia's full-scale invasion of Ukraine in February 2022 triggered another major economic crisis. The war caused a sharp spike in global energy prices, as sanctions were placed on Russian oil and gas. This directly fuelled a severe cost of living crisis in the UK, with inflation reaching its highest level in 40 years and household energy bills soaring to unaffordable levels for many.
The government's response was again focused on large-scale financial support to shield the public from the economic fallout. The central policy was the Energy Price Guarantee, which capped the typical household energy bill, with the government paying energy suppliers the difference. This was accompanied by a series of direct "Cost of Living Payments" to pensioners, disabled people, and low-income households. While these interventions were deemed necessary to prevent widespread hardship, they represented another enormous, un-budgeted expenditure. Coming so soon after the pandemic, these schemes added tens of Billions more to the national debt, further complicating the UK's long-term fiscal challenges.
The UK's economic history is a story of constant evolution and adaptation. From the creation of the welfare state to the free-market reforms of the Thatcher era and the recent period of austerity, each government has left its mark on the country's finances. The policies of the past have created a complex legacy of entitlements, obligations, and economic structures that continue to shape our present and future. Understanding this history is the first step towards finding sustainable solutions for the challenges that lie ahead.
