The Welfare State under Threat

Abstract

Despite its historic achievements, the welfare state in Britain — as elsewhere — was widely perceived to be in crisis in the mid-1970s. The immediate causes were economic. The quadrupling of oil prices after the Arab-Israeli war of October 1973 so accelerated the underlying annual rate of inflation that it reached the unprecedented level of 27 per cent in 1975. Simultaneously, there was a slowing down in the rate of economic growth and an actual fall in GDP in both 1973 and 1975 which pushed the number of people out of work, for the first time since the war, to over one million and to a peak in 1976 of 1.5 million This denied government the rising revenue it required to meet increasing demands for welfare, not least from the unemployed themselves; and in the ensuing ‘fiscal crisis’, it was forced to borrow heavily. This in turn undermined foreign confidence in sterling so that the value of the pound fell below $2 for the first time ever, and then plunged rapidly to $1.55. The Heath (1970–4) and Wilson (1974–6) governments responded to these disasters by implementing a series of public expenditure cuts; by imposing, after November 1975, cash limits on all expenditure programmes to make the cuts effective; and finally, in the battle against inflation, by abandoning reflationary demand management and thus the postwar commitment to ‘full’ employment.