Introduction

If there is one area where New Labour seems clearly distinct from the Old, it is public spending. It seems inconceivable that a senior Labour politician today would argue that government should ‘launch a massive programme of expansion’ to spend its way out of recession, as the Leader of the Labour Party did in the early 1980s. The apparent closeness that New Labour has to prominent figures in the world of business suggests an acceptance of and by the private sector unimaginable 15 years ago. This chapter examines the transformation – if transformation it is – with respect to any change in position by both Conservative and Labour towards public expenditure during the period. It then assesses the significance of this transformation for Labour's policy in government.

‘Rolling back the State’: Conservative policy 1979-97

Public expenditure

During the eight decades from the turn of the century to the year before Margaret Thatcher came into office, the share of the nation's income spent on the welfare state grew from 2% of GDP to 24% (Glennerster, 1998a). By the end of the succeeding two decades, it stood at just 25% of GDP – a far slower rate of growth than previously. Some important change had taken place. However, as Figure 2.1 illustrates, it would be a mistake to think of the arrival of Thatcherism as the decisive break – welfare spending fell sharply in 1976-79 in relation to GDP before rising again slightly in the early years of Conservative rule. It was the oil crisis of 1976, and the resulting International Monetary Fund intervention, that preceded a reduction, not the change in government.

Whatever the initial trigger for a downturn in welfare spending, there can be no doubting the Conservatives’ commitment to reducing it still further. The first White Paper on public spending declared: “Public expenditure is at the heart of Britain's present economic difficulties” (HM Treasury, 1979). Glennerster (1998b) identifies four possible reasons for this approach:

• • the levels of taxation required to finance public spending had become unsustainable;

• • as the real post-tax income of families fell in the immediate aftermath of 1976, public attitudes towards public spending and the taxes required to pay for it were unfavourable;

• • fiercer global economic competition and the need to sustain international trade meant limited opportunities to raise revenue from employers;