The Economy of Great Britain
Little more than a century ago, Britain was ‘the workshop of the world’. It had as many merchant ships as the rest of the world put together and it led the world in most manufacturing industries. This did not last long. By 1885 one analysis reported, „We have come to occupy a position In which we are no longer progressing, but even falling bock.. We find other nations able to compete with us to such aan extent as we have never before experienced.“ Early in the twentieth century Britain was overtaken economically by the United States and Germany. After two world. wars and the rapid loss of its empire, Britain found it increasingly difficult to maintain its position even in Europe.
Britain struggled to find a balance between government intervention in the economy and an almost completely free-market economy such as existed in the United States. Neither system seemed to fit Britain’s needs. The former seemed ccompromised between two different objectives: planned economic prosperity and the means of ensuring full employment, while the latter promised greater economic prosperity at the cost of poverty and unemployment for the less able in society. Neither Labour nor the Conservatives ddoubted the need to find a system that suited Britain’s needs, but neither seemed able to break from the consensus based on Keynesian economics .
People seemed complacent about Britain’s decline, reluctant to make the painful adjustments that might be necessary to reverse it. Prosperity Increased during the late 1950s and in the 1960s, diverting attention from Britain’s decline relative to its main competitors. In 1973″ the Conservative Prime Minister Edward Heath warned, „The alternative to expansion is not, as some occasionally seem to suppose, an England of quiet market towns linked only by steam trains puffing slowly and peacefully through green meadows. The alternative is slums, dangerous roads, old factories, cramped schools, stunted lives.“ But in the years of world-wide rrecession, 1974-79, Britain seemed unable to improve its performance.
By the mid 1970s both Labour and Conservative economists were beginning to recognise the need to move away from Keynesian economics, based upon stimulating demand by Injecting money into the economy. But, as described in the Introduction, it was the Conservatives who decided to break with the old economic formula completely. Returning to power in 1979, they were determined to lower taxes as an incentive to individuals and businesses to Increase productivity; tto leave the labour force to regulate itself either by pricing itself out of employment or by working within the amount of money employers could afford; and, finally, to limit government spending levels and use money supply (the amount of money in circulation at any one time) as a way of controlling inflation. As Prime Minister Margaret Thatcher argued in the Commons, „If our objective is to have a prosperous and expanding economy, we must recognise that high public spending, as a proportion of GNP gross national product;, very quickly kills growth.. We have to remember that governments have no money at all. Every penny they take is from the productive sector of the economy in order to transfer it to the unproductive part of it.“ She had a point: between 1961 and 1975 employment outside Industry increased by over 40 per cent relative to employment in industry.
During the 1980s the Conservatives put their new ideas into practice, income tax was reduced from a basic rate of 33 pet cent to 25 per cent. (For higher income groups the reduction was greater, at the top rate from S3 per cent to 40 per cent.) This did not lead to aany loss in revenue, since at the lower rates fewer people tried to avoid tax. At the same time, however, the government doubled Value Added Tax (VAT) on goods and services to 15 per cent.
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