Everyone over the age of 50 remembers the year when rubbish was dumped on the streets and graves were left empty. With Boney M and Gloria Gaynor dominating the airwaves and Superman as the big Christmas movie, there was no one to save Jim Callaghan’s ailing government from imminent collapse in 1978–79. Those famous Conservative election posters who would soon say that Labor is not working summed it up with devastating simplicity.
Eighteen months into the COVID pandemic, another very hard winter continues to grow with fears about a resurgence of the virus combined with rising inflation and an energy and supply chain crisis. So what can we expect, and how meaningful are the parallels with the 1970s? We asked finance and economy expert Steve Schifferes to explain.
What are the main threats this winter and how do you see them playing out?
The first is an epidemic. We still have a large number of cases. We don’t have as many deaths or hospitalizations as in previous waves, but the onset of winter, with the more contagious nature of the delta variant, and the fact that many people are still unvaccinated, could mean more restrictions. When Boris Johnson recently announced a “Plan B” with more restrictions, nothing was ruled out and masks and remote working were mentioned as possibilities. This potentially means more economic disruption.
Several other economic problems have come to the fore during the recovery. Because the recovery has been faster than expected around the world, commodity producers have struggled to keep up, pushing up global commodity prices.
The biggest problem is oil and gas prices, with UK wholesale gas prices nearly tripling since early 2021. Gas is still one of the main components of the energy mix in the UK, so consumer prices for gas and electricity have risen sharply, while many businesses are being affected – for example, steel and fertilizer plants temporarily are closing.
Many consumer energy companies have already closed, and many others could be in trouble if they have too many customers on fixed tariffs and little room to make a profit with current prices.
Meanwhile, shortages of everything from lorry drivers to carbon dioxide are causing problems in retail and hospitality. We are seeing supermarket shelves increasingly empty. Brexit has made the whole situation worse as a lot of workers in the food supply chain came from the continent and are no longer allowed to work in the UK.
The government’s view that British workers will rush to fill the gap is wrong. Even if they can be trained in time, many British workers, after vacation or working from home, are unwilling to work in low-paying jobs with long and irregular hours. Many pubs and restaurants are struggling to stay open either because they are not getting enough staff or because of a lack of supplies. Employers in industries such as hospitality and transportation are already offering higher wages to attract employees.
Price and wage growth are producing high inflation data. Whether it is temporary or not depends on the expectations of the people. If people start expecting more growth, as they did in the 1970s, it will change their behavior. Firms will raise prices and more workers will want higher wages, causing an inflationary spiral.
To keep the economy buoyant in recent years, the Bank of England has cut interest rates and pumped huge amounts of money into the economy as part of quantitative easing. If it were to change direction due to high inflation, it could have a major impact on property prices, from stocks to homes, as they are all cheap money.
Higher interest rates will also have an impact on public finances, which Chancellor Rishi Sunak is apparently already very concerned about. This would mean that government debt would become more expensive in the future, which could put further pressure on public spending.
How do all these challenges affect public finance?
We are already seeing the government taking steps to reform public finances ahead of the crucial three-year spending review and budget on October 27. The levy on national insurance to finance the NHS and social care reform is a clear example, and so is the decision not to make the £20 sovereign debt raise permanent.
These decisions will push more people into poverty, as may the end of the furlough scheme. Meanwhile, the decision to temporarily eliminate the income-linked element of the “triple lock” would probably permanently reduce the generosity of state pensions. And the chancellor has already announced a tax increase for businesses from 2023. Overall, almost every section of the community is facing either a tax hike or a cut in benefits, although the super rich seem to have largely survived.
Despite these tax hikes, Sunak is setting a very ambitious goal of stabilizing public finances, which could require even bigger cuts. Public sector salaries are likely to be lower, as was the case in the previous spending review. If this is held back in cash and if inflation remains high, it will translate into a significant wage cut in real terms.
However, there are many more less visible ways a chancellor can increase revenue or cut spending. We may see an increase in tariffs on petrol taxes or road pricing, for example, as part of the green agenda.
The stage is also set for a major conflict between Johnson and Sunak over level. So far, the government has spent relatively little on this key agenda, except for the highly expensive and much delayed HS2 rail service. With the new permanent secretary to the level of Andy Haldane, former chief economist of the Bank of England, it’s going to be interesting: his view is that if the government is serious, it will only need to make a long-term commitment to spending more than . Investing in HS2
How does it compare to the 1970s?
In the 1970s, a series of economic crises caused major problems for the Heath and Wilson/Callaghan governments. OPEC’s decision to cut oil production in 1973–74 (and later in 1979–80) to raise prices hit the British economy hard, prompting the Labor government to switch over to the IMF and cut public spending. was forced to
Trade unions were much stronger than they are today, and were much closer to the government. At a time when inflation was indeed rampant, the government’s failure to persuade them to reduce their wage demands – it spent much of the late 1970s in double digits – led to widespread strikes during the “winter of discontent”. and opened the way for Margaret Thatcher’s 1979 victory.
Today, with more modest inflation and weaker unions, conditions are somewhat more benign – we probably won’t have to live through the famous “stagflation” in the 1970s. Yet the level of disruption caused by Brexit and the pandemic is unprecedented, as has the size of the public deficit for many years.
With rising energy prices in the world again under pressure at a time when public finances are straining, we may well return to the stagnation in living standards of the last decade. Poverty and inequality may well increase, and we are probably going to see strikes. There will be similarities and differences in the 1970s, but a new version of the winter of discontent could certainly be on the cards.