Economic policy consists of choices made or rejected by the government, designed to affect the production of goods and services in the community. Economic policy has been the single most contentious issue in modern British politics. Political parties are often elected because they are thought to be competent at managing the economy. There is a significant link between economic competence and electoral popularity.

Most people would probably say that there is a strong link between economic competence and electoral support of parties and the available evidence seems to support this view. The support of the government in opinion polls is usually higher in periods of economic prosperity than in periods of recession. One exception to this rule was in 1992 when Britain experienced the deepest recession since the 1930s and yet the Conservative government was re-elected with 43 per cent of the vote.

David Sanders, a lecturer at the University of Essex, said that the relationship between the economy and electoral popularity was less to do with the objective state of the economy, and more to do with peoples’ subjective perceptions of how well the economy is performing. Sanders believes that unemployment, inflation and personal income has little effect on voters’ inclinations. Sanders said that what does effect voters behaviour is interest rates. Interest rates are influential because people are adversely effected by increases in interest rates, and the consequent rises in mortgage repayments. Britain is unique in Europe in terms of home ownership. On the continent people are more likely to rent property. In the UK, 70 per cent of households are owner-occupied. Of these 70 per cent, ¾ of properties are mortgaged. Conservative Chancellors were very cunning in the run up to the 1983, 1987 and 1992 general elections, cleverly lowering interest rates about 18 months before the election.

Ivor Crewe’s studies of the 1983 and 1987 general elections indicate that the Conservatives won because enough people felt that the economy was in good shape under their government, even though their policies in respect of key issues such as unemployment, health and education inspired little public confidence.

Sanders believed that voters’ intentions were influenced by their subjective perceptions of economic performance. The ‘feel-good factor’ consists of a number of different aspects. Personal retrospections, General retrospections, Personal expectations and General expectations are concerned with how well an individual has done in the economy in the recent past, how well individuals consider the economy to have performed in the recent past, how well an individual thinks that they will perform in the economy in the future, particularly in terms of employment opportunities, and how well individuals believe the general economy will perform in the future.

Sanders believes that attribute of responsibility by voters affects their political inclination. That is to say, who or what people believe to be responsible for the economy doing well or badly will effect their voting intentions. Even if the economy is doing well, people may not thank the government. This was a major problem for the Conservatives in the 1997 general election. Conversely, when the economy is doing badly, and there is a recession, people may not blame the government. In 1992 people attributed the poor performance of the economy to a world recession, rather than blaming the government.

Opinion polls of economic competence have been around since 1964. With the exception of March 1990, when Margaret Thatcher introduced the poll tax, between 1964 - 1992 the Conservatives were always ahead of Labour in terms of economic competence. This probably stems from the relationship that the Conservative party has with business. Because people believed that the Conservatives represented the interests of business, they believed that they were competent at managing the economy. Black Wednesday shattered the Conservative’s record on economic competence. Between 1992 and 1997, Labour have been ahead of the Conservatives in terms of the electorate’s perception of economic competence. Labour’s lead in terms of economic competence since 1992 is not solely attributed to Black Wednesday. Labour has also seemed more competent by shedding its image of extremism, particularly by rewording the famous Clause Four. Labour have managed to convince the electorate that they are competent at managing the economy.

Sanders believes that the electorate's perception of economic competence is very significant in determining political parties’ support. David Sanders predicted as early as 1995/6 that the Conservatives would lose the 1997 election as he saw that the public’s perception of their economic competence had been destroyed, and believed that it would not recover in time for them to secure another term in office. Although people were very optimistic about the performance of the economy in the run up to the 1997 general election, they did not attribute the responsibility for the strength of the economy to the Conservative government.

Political factors play a central role in the way that the government manages the economy. Past governments have been criticised for ‘stop-go’ economic policies which ‘go’ for growth during the run up to a general election in order to win the approval of the electorate, but then ‘stop’ once the election has been held in order to prevent the economy overheating. In political terms it may represent a successful economic strategy, but businessmen are critical of the damage done to the economy through the instability and uncertainty that ‘stop-go’ creates.

The key train of economic thought in the post war period was based upon the theory put forward by John Maynard Keynes. Keynesianism economics dominated economic policy between 1945-76.

In his book, entitled “The General Theory of Employment, Interest and Money,” Keynes basically tried to explain why the capitalist economy regularly went into recession. He had noticed that the economy regularly went from boom to bust.

Keynes rejected the idea of laissez-faire, the terminology used to describe the attitude adopted by the government of not interfering in the economy, and believed that the government should intervene in the management of the economy. He believed that if the market was left to regulate the economy, the market would always stabilise below full capacity. Keynes argued that the main problem with capitalism was that it was not able to maintain full employment levels. This could effectively be explained as recession as resources are not being maximised. The reason for this was that stock managers , afraid of being left with unsaleable stock, will tend to cut back production leading to workers being laid off, or at least working reduced hours. Keynes thought that this would lead to a vicious downwards spiral as workers are also consumers. aced with reduced incomes they will spend less, leaving stock managers with no alternative but to cut back supply of goods even further, leading to even more job less.

What Keynes proposed was that the government should intervene in the economy to bring it out of recession. He suggested that the government should inject money into the economy to ensure that a fall in employment levels is halted before the economy slides into recession. He rejected the idea of the socialist policy of reflation, a reallocation of resources from rich to poor, as he said that it would lead to a disincentive to work.

Before Keynes, the government had always believed that it had to balance the books. Its income should equal its expenditure. This meant that in times of recession, governments would have to spend less as they would receive less money. Keynes said that the government did not have to worry about balancing the books. He suggested that the government should pump money into the economy. In times of recession the government should spend more money, and it could do this by borrowing money. This was the first time that the idea of deficit spending was widely accepted. Keynes believed that it was all right for governments to go into debt in times of recession. The first people to accept the principle of deficit spending were Roosevelt and Hitler. By spending money on capital projects, the government can create employment helping to bring the economy out of recession.

Keynes believed that an increase in government spending would result in an upward spiral. He believed that the government was responsible for injecting money into the economy at times of recession. and he also suggested that, in times of boom, the government could raise taxes to reduce consumer spending. The idea of these policies was to allow smooth stable growth, and full employment. This policy is called ‘demand management’ as the government controls demand within the economy.

Demand management was fully adopted in Britain in 1945. Full employment would prevent another rise of fascism as we had seen in the second world war, as fascism resulted from unemployment.

Keynesian methods of economics were adopted by both of the main political parties in Britain throughout the post war period. The fundamental aim of governments was full employment. The government also believed that the welfare state should be well financed.

In the 1950s and 1960s, Keynesian methods appeared to be working. Unemployment never exceeded 2 per cent in this period, inflation remained low, at about 4.5 per cent, and we had steady, although unspectacular, growth of about 2 per cent. However, despite the efforts of government, the economy still tended to go through mild booms and recessions. The economic cycle still fluctuated. The main problem was that a boom created inflation, and a balance of payments deficit. The government had to intervene in order to cut consumption. The problem with this is that it would send the economy into mild recession.

This was made worse by the fact that we had a fixed exchange rate. Sterling was very strong, making imports cheap, and it led to severe balance of payments problems. The value of the pound was only allowed to fluctuate by 1 per cent. These problems were slightly helped by devaluation in 1967 by Harold Willson. Exports became cheaper and imports more expensive. In the 1970s we changed to a free-floating exchange rate.

The trouble with Keynesianism is that its goal is full employment. Because of this, wages rise because workers have greater power, and this leads to inflation. These problems effectively led to the demise of Keynesianism, especially since 1974 when oil prices were quadrupled. The OPEC oil price rises pushed costs up dramatically causing great problems. Economic growth declined during the oil crisis and our balance of payments deficit grew to £5 billion. Inflation reached 25 per cent and unemployment continued to rise. Keynes had claimed that it was impossible for both unemployment and inflation to rise at the same time, known as stagflation. The intellectual basis of Keynesianism was seriously eroded. His critics said that his theory had failed, and highlighted the need for a fresh approach.

Government intervention in the economy is characteristic of a wartime economy. Nevertheless, peacetime governments have attempted to control aspects of the economy through intervention. In the fight against inflation, both Labour and Conservative governments have implemented prices and incomes policies.

Between 1960-79 the government adopted corporatism as a means of preventing wage increases. It involves the partnership of government, business, represented by the CBI, and workers, represented by the TUC. The government tried to ensure that pay increases were not above inflation. Unfortunately there efforts to control wage increases were unsuccessful. The CBI and the TUC broke their agreements with the government. The government failed to control inflation.

Between 1965-69, Labour pursued a prices and incomes policy, and the Conservative government which followed converted an informal incomes policy into a statutory policy which controlled all incomes between 1972-74. The Labour government which returned to office in 1974 developed a voluntary incomes policy known as the ‘social contract,’ which finally broke down, under the leadership of James Callaghan in the ‘Winter of Discontent’ of 1978-79.

The industrial disputes which took place during the ‘Winter of Discontent’ were a considerable contributory factor to Margaret Thatcher’s Conservative election victory in 1979. Thatcher entered Number Ten promising economic management which would rely much more on market forces and far less on government intervention. Mrs Thatcher was completely opposed to deficit spending.

Britain in the early 1970s was becoming ungovernable because of an economic breakdown. The Conservatives’ task was to restore prosperity, but in a way which caused the population to radically reappraise its understanding of how the economy works and, consequently, the legitimate extent of political intervention.

Perhaps the most distinctive features of Thatcherism were to be found in the economic policy followed during the 1980s. Previous post-war governments had identified unemployment as the key social evil, and thus gave high priorities to policies which would help them to achieve a goal of full employment. The Thatcher governments identified inflation as the greatest economic evil, and so followed policies which were designed to tackle inflation. Economists adopted monetarism, rejecting both the aims and techniques of Keynesianism. The main aim of monetarism was to achieve low inflation, even at the expense of unemployment.

Monetarism rejected the idea of state intervention in the economy, and said that the government should only intervene to control the money supply. Monetarists argue that pumping money into the economy not only causes inflation but also unemployment. The theory of monetarism, mainly the work of Professor Milton Friedman and the ‘Chicago School’ of economists, seemed to explain the British experience of stagflation. Thus, it was very attractive to the Thatcher government, and became central in Conservative economic policy.

The monetarist solution is that the government must impose strict limitations on the amount of money in circulation, in order to reduce inflation. Friedman said in 1968 that, “inflation is always and everywhere a monetary phenomenon.” He was obsessed with control of the money supply, claiming that the economy was not effected by taxation and government expenditure.

Every year the government attempted to control the money supply using the ‘Medium Term Financial Strategy.’ The government set targets for growth of the money supply in four year periods. They wanted to limit growth, using the broad M3 definition.

By the mid 1980s the money supply was higher than at any other point under Labour government. At the same time inflation was going down. This conflicted with monetarist theory. In November 1985 the Medium Term Financial Strategy was abandoned. The government changed from using the M3 definition of the money supply to the M0 definition. Economists argued that this definition was completely meaningless. It was clear that monetarism had either failed or else been abandoned. The money supply was rising and expenditure remained at 1979 levels.

Monetarism was effectively abandoned in 1985, when Nigel Lawson suspended M3 as a measure of the money supply. Lawson emphasised that the government would continue to fight inflation. Instead of controlling the money supply, Lawson used the exchange rates and interest rates to control inflation.

Monetarists argue that one cause of inflation is borrowing. The PSBR is the difference between what the government raises in tax and what it spends. Thatcher set out to reduce borrowing. She compared the management of the economy with the management of a housewife's budget.

A key tenet of Margaret Thatcher’s principles was a belief in balanced budgets. Thatcher did not agree with Keynesian theory that it was acceptable to have budgetary deficits. She believed that an increase in spending led to an increase in the money supply, which would inevitably lead to inflation. Thus, Thatcher sought to lower public spending.

In 1979, Geoffrey Howe was chosen by Thatcher to be her Chancellor. In 1981 he reduced government spending in his budget. The Thatcher government wanted to pay off the deficit created by the previous government. By the mid 1980s there was a budgetary surplus.

Although the government set out to reduce spending, it actually increased by the mid 1980s as a result of high unemployment.

The Thatcher Government believed that public expenditure was ‘at the heart of Britain’s present difficulties,’ and came to power promising substantial cuts in all areas except the NHS, defence, and law and order, to which Thatcher gave an increased commitment. Thatcher also increased spending on law and order.

There was little she could do to decrease spending by the welfare state due to unemployment. One way that Thatcher attempted to reduce borrowing was through privatisation. Privatised industries were no longer a burden on the tax payer, and the assets that were sold off also raised income. Margaret Thatcher was highly in favour of a free market economy. This reduced some of the government’s burden, as the nationalised industries had proven to be inefficient and costly. Thatcher introduced competition to the market through privatisation of nationalised industries.

The Conservatives also promoted marketisation, the introduction of market forces to public industries such as the NHS, which now has private sector style management.

Thatcher justified her massive programme of privatisation by saying that civil servants and politicians were not trained to run businesses, and that they should be left to entrepreneurs to manage. She said that firms would become more competitive and efficient in the private sector, and that businessmen would be better at managing firms than politicians. The state owned monopolies were not competitive, and there was no incentive for them to be efficient. They were guaranteed unlimited funding from government. Thatcher thought that by exposing these companies to competition, they would become more efficient.

Thatcher also introduced competition to local government services by tendering them to private companies through Compulsory Competitive Tendering, whereby, local councils had to tender their local services to the lowest bidder.

The Labour Government has formally announced that it intends to replace the Compulsory Competitive Tendering (CCT) regime, which covers some local government services, with a Comprehensive Best Value (CBV) regime, which will cover all local government services, but which is essentially the same.

The Thatcher government had ideological reasons for encouraging privatisation. They wanted to encourage greater share ownership. Margaret Thatcher wanted to create a ‘share- and property-owning democracy.’ This included the ‘right to buy,’ whereby council house tenants could buy their property.

Thatcher encouraged entrepreneurs. She wanted to build an ‘enterprise culture.’ She hoped that people would be encouraged to vote Conservative because they had a vested interest. She opposed the idea of state ownership and thought that property ownership was a great freedom.

Mrs Thatcher was in favour of the concept of ‘popular capitalism.’ She thought that everyone should be able to buy their own house and to be able to own their own shares in a privatised company. Initially privatisation was very slow, but after BT and British Gas had been sold off, privatisation increased its pace, and became popular. The 1980 Housing Act which introduced the ‘Right to Buy’ was also popular. No other Prime Minister privatised industry on the scale, or with the speed and enthusiasm, that Mrs Thatcher did.

Thatcher’s government aimed to curb public expenditure in order to prevent inflation. Thatcher despised the fostering of what she called a ‘dependency culture.’ She saw the welfare state as a burden on the tax payer. She wanted to create what she called an ‘enterprise culture.’ She favoured private ownership, and introduced a range of measures designed to boost the stakes of the consumer in British society.

Another aspect of the free market was the abolition of incomes policies. Thatcher thought that the labour market should set its own wages. If the labour market, like other markets, was left to settle itself, then there should theoretically be a reduction in unemployment, although wage rates may fall.

Thatcher’s chancellor from 1983 was Nigel Lawson. There was an open debate between Thatcher and Lawson. Thatcher favoured alignment of the pound with the US dollar. Lawson favoured a closer relationship with the currencies of our European trading partners, mainly because our trade with Europe was more significant.

The ERM had been set up in 1979. Immediately, Lawson wanted Britain to join. Mrs Thatcher fundamentally opposed Britain’s entry to the ERM. She was backed by her economic advisor, Alan Walters.

Lawson was being described as ‘the greatest chancellor of the century,’ but at the same time, the economy was overheating. The chancellor wanted to slow down economic activity but without causing a recession. A general election was looming, and a recession would have proven politically devastating for the Conservative Party. Britain’s economy was threatened by a massive balance of payments deficit and rising inflation, accompanied by high interest rates.

Unfortunately, with an election looming, Lawson was tempted to feed the boom, and allow it to get out of control. He actually introduced tax cuts, as an incentive to the electorate, borrowing was had been made easier and as a consequence there was an explosion in public spending.

Major became Chancellor of the Exchequer in 1989. He became leader in 1990. He was very careful to distance himself from monetarism and from the work of Nigel Lawson, who had allowed the boom in the late 1980s to get out of control.

In his economic policy, John Major was very much a continuation of Margaret Thatcher. The goals were very similar. He favoured privatisation, a more efficient public sector, lower taxation and lower inflation. Major was committed in his fight against inflation. This was highlighted further by his Chancellor, Norman Lamont, who commented that, “high unemployment is a price worth paying for low inflation.”

Major set out to show that he was different to his predecessor. He tried to be caring in his approach. He abolished the poll tax and was willing to increase public spending, even if it led to a budget deficit.

In 1992, Major lowered taxes and increased spending at the same time in the run up to the election. This was a major contributory factor to his election victory in 1992. This led to a huge deficit of £28 billion in 1992/3, immediately after the election victory. In the following year this increased to £50 billion (1993/4).

John Major put across in the election campaign that the Conservatives were the party of low taxation. The Conservatives effectively promised that they would not raise taxes in the run up to the 1992 election. The huge budget deficit put the Conservatives in an embarrassing position because they had to raise taxes. This, combined with the ERM debacle in 1992 destroyed the party’s economic credibility, and this was not to be recovered in time for the 1997 general election which was won by Labour with a landslide majority.

In there first six months of government, the Labour Party have made very few changes economically. The most significant change, handing over control of interest rates to the Bank of England, is widely supported by free-market supports. Labour has also promised to maintain current levels of income tax. There have been no significant increases in government spending, apart from the proposed welfare to work scheme, which will been funded by the windfall tax.

Labour’s position on a single currency is much more pro-European than their predecessors who took us into the ERM, and famously saw us crash back out of it again. Essentially though, there are very few differences between the current Labour government and the previous Conservative government. Labour seem to have accepted the market system, and seems happy to perpetuate a free market economy.