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International Socialism, March/April 1976


Jim Kincaid

Healey’s Axe


From Notes of the Month, International Socialism (1st series), No.87, March 1976, pp.3-4.
Transcribed & marked up by Einde O’Callaghan for ETOL.


Jim Kincaid writes: As the Financial Times of 20 February put it, the Public Expenditure White Paper, ‘is the final and most convincing sign of the demise of post-war Social Democratic orthodoxy. The triple pillars that have supported the Labour Party of Attlee, Gaitskell and Wilson – full employment, the Welfare State and the mixed economy – have crumbled under the blows of inflation.’

Keynes had argued that a rising trend of unemployment could be reversed by an increase in State expenditure, creating extra demand, which would in turn stimulate a revival in production. For nearly 30 years, these techniques of economic management by British government seemed to work. Unemployment was moderate, and there was steady, if unspectacular, growth. Then, abruptly, the situation changed. Unemployment, which averaged 3-400,000 during the 1950s and early 1960s doubled in 1968, and even in the boom year of 1973 stayed stubbornly above the 600,000 mark. In the 1970s, government attempts to use State spending to buy economic revival have helped only to boost inflation levels to undreamed of heights, failed to reduce unemployment, and created an enormous gap between State income and expenditure which has led to an explosive growth in the National Debt and in the interest charges which the State must pay to service it.

Now the Labour government propose to try remedies so far advanced mainly by economists right of centre in the Tory Party. The basic aim of Labour’s White Paper is, over a four year period, to reduce public sector use of physical resources from 35 per cent to 28 per cent of national production. The government hope that this 7 per cent of workers, raw material, productive equipment etc to be made redundant by the State sector, will be put to use by a revival of private capitalism and employed in increasing exports and raising industrial investment. To make sure that these productive resources are not used to improve the living standards of British workers, the government are promising further increases in taxation over the next four years, and are to attempt to carry on their policy of wage cuts and wage freeze through to 1980.

That the State in 1975 used only 35 per cent of total national production will come as news to anyone who has believed the recent barrage of official and media propaganda about the level of State expenditure. Healey keeps insisting that the State is now responsible for spending 60 per cent of national income. This amazing figure is arrived at by adding in all the transfer expenditure which the State organises – the switching of purchasing power from one sector of society to another, via the mechanisms such as taxation and the payment of social security benefits or investment grants to capitalists etc. Transfer payments are not State expenditure in any sense that matters. The money is spent by pensioners on rent and baked beans, or by companies on raw material and dividends.

Even if transfer payments are included State spending in Britain is pretty, much in line with comparable countries. The following is from OECD data.


% of National Income
spent by the State

(current spending only)

Taxation as
% of Gross
National Product

United Kingdom






West Germany















(The figure for Britain is lower than Healey’s 60 per cent because
the Table refers only to current, and excludes capital, spending)

If the government succeed in pushing through the new round of cuts, the effect on unemployment will be considerable. By 1978, there will be 15,000 trained teachers for whom there will be no jobs in education. Some 35,000 civil service jobs are to be axed. Since the main weight of the cuts is to fall on the building programmes of the social services, the major employment impact of the cuts will be in the construction trades and in sectors of industry supplying equipment to the public services. Programmes of school and hospital building are to be cut to the bone, together with plans for building clinics, old people’s homes, children’s homes, nurseries, hostels and day centres for the handicapped and mentally ill.

Politically, however, it may turn out that the smaller cuts which directly affect the living standards of the mass of workers will inflict the greatest damage to the government’s central social contract strategy. School meals are to go up from 15p to 20p in September. Food subsidies are to be eliminated by 1978, though food prices are scheduled to rise in this period under Common Market arrangements. The food subsidies last year were worth 71p a week to the average family, and 42p a week for pensioner couples. Council rents are to rise by 60p a week this year, and by a further £1.90 a week over the following two years. The operating subsidies provided for bus services are to be reduced by 28 per cent.

On the day the White Paper appeared, the TUC issued no public statement, and their silence was quite deafening. Yet what could they say? The White Paper was a solid punch in the snout for every union leader sizing up the problems of selling son-of-£6 to his members this summer and autumn.

The government is gambling desperately. By enormous subsidies to industry plus large cuts in the taxation paid by companies, Labour have already engineered a considerable rise in profits – up by 34.7 per cent over the past 12 months according to the Sunday Times indicator. Yet there is no sign of an upturn in investment. Companies are reporting an average of 20 per cent spare capacity, so have little incentive to increase investment even if they share the government’s hope of a boomlet in world trade happening next year. Healey has no way of guaranteeing that productive resources made idle by cuts in State spending will actually be set to work by the private sector of capitalism. He runs the risk that his cuts will only deepen recession into a full blown slump.

Despite the £2.4 billion a year of cuts to be carried out over the next four years, the fact is that projected public expenditure will actually be higher in 1979 than now. There are two reasons. First, a special contingency fund is to be established by the Treasury, and built up rapidly to £1.2 billion a year by 1978. Most of this money will be spent to supplement the already massive subsidies (£2.6 billion this year) being handed to industry. First charge on the contingency fund will be the compensation to be paid on nationalisation of the shipbuilding and aerospace industries. The terms of compensation have yet to be settled, but they will be generous and far in excess of the economic value of the assets being nationalised.

Second, the reduction in company taxation over the past 18 months has been a major factor in opening up a mammoth gap between government revenue and spending. Currently the annual deficit runs at around £12 billion – equal to about 12 per cent of national production. To fill the gap, the government has been borrowing heavily, and has been able to do so without too much difficulty because,

  1. the level of personal savings recently has broken all records, and
  2. because US support for Israel has made the oil powers anxious to keep part of their spectacular reserves in Sterling. (For fear that if open conflict breaks out again in the Middle East, Washington might freeze dollar assets held in the US by the Arabs.)

However the Labour government are now facing some of the consequences of two years of uninhibited deficit financing. The White Paper predicts that State expenditure on debt interest will rise at a fantastic rate, from £5 billion this year (10 per cent of the total local authority and Whitehall budgets) to £7.5 billion in 1978. This is the theme that lies half buried in the morass of statistics which fill the pages of the White Paper – the sacrifice of the social services to meet the mounting costs of the National Debt. Writing in The Times of 20 February, Peter Jay explained that:

‘The central fact is that the Cabinet has had to struggle might and main, stretching their political tolerances to the absolute limit, in order not, as they thought, to make room for more investment, exports and personal incentives through lower taxes, but to service the debt which the huge deficits built up since 1970 by Mr Barber and Mr Healey have caused’. This year’s £12 billion gap between government revenue and spending will recur next year, and maybe in future years as well. This opens the appalling prospect of the Cabinet having progressively, year after year, to cut back on direct spending programmes in order to accommodate the exploding cost of servicing debt. The political consequences of a world in which people pay taxes principally in order to meet the cost of interest on the national debt while the standard and quality of public services and national defence are eroded further and further, defy imagination.’

The tone is hysterical, but certainly the problem is a very serious one for the ruling class. The high rate of inflation in 1973-5 made the National Debt cheap to service. If interest rates are, say, 15 per cent, and price inflation is 25 per cent, the government actually makes money by borrowing. But as the rate of price increase falls, and interest rates have to be kept high to attract capital floating on the world market to London, the real cost of the National Debt takes off into the stratosphere.

Incidentally, if productive resources are to be redeployed from State to private sector use, as the White Paper intends – this can only happen if the banks, insurance companies, pension funds etc who collect the interest the government pays on the National Debt pass a large part of the cash over to private capitalism to finance industrial investment. But will they? This is another of Mr Healey’s little gambles.

Politically the effect of the cuts will be to compel somewhat broader forces in the labour movement to take a stand against social contract collaboration. The honeymoon of this government is finally at an end. No more wine and roses – instead a much sharper level of strife within the Labour Party and the unions. The leaders of public sector and transport unions wilt be forced, however reluctantly, to campaign against the cuts. This year the Left in the unions has a much better chance than in 1975 of winning Conference votes to tie union executives to a stance of opposition to wage freeze. At last year’s TUC Conference, half of the majority in favour of accepting the £6 deal came from the votes of the white collar unions. For socialists, the political environment is going to be a lot less hostile and isolating than over the past two years.

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