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Tuesday, March 9, 1999 Published at 14:27 GMT


Budget blunders



Budgets are the making, but more usually the breaking of political reputations.

Chancellors are often more remembered for their famous mistakes than for the humdrum success of a Budget, however well judged.

Some of the more famous blunders this century seriously damaged the reputation of the chancellor who proposed them:

Mr Churchill and the Gold Standard (1925)

Winston Churchill's Budget of 1925 has become infamous for returning Britain to the gold standard, at a fixed rate of $4.80 to the pound.

The aim was to restore Britain's position at the centre of the world's financial system. It is now argued that the high rate made British industry uncompetitive and prolonged the slump.


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Alan Clark, the Conservative MP and biographer of the Conservative Party, argues that Churchill had his reservations, but the lack of alternative economic advice left him no choice.

Even Liberal economist John Maynard Keynes, who later criticised the fixed exchange rate, was convinced the move was inevitable.

Churchill himself had his private doubts, but unsure of his economic competence, accepted the official advice, after private questioning.

But as the slump worsened, the policy became discredited - Keynes called it a golden cage that imprisoned industry. Churchill soon was out of office, and favour, until 1940.

Snowden's Orthodox Budget (1931)

In 1931 the Labour Government split over the demands of the Bank of England that it should implement further Budget cuts to defend the pound.

Prime Minister Ramsay MacDonald and Chancellor Philip Snowden resigned from the Labour Party and won re-election in a "national" government, which was made up mainly of Conservatives.


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Philip Snowden then introduced an "orthodox" budget that cut unemployment benefit and public sector pay at the height of the Depression.

The results were riots in the streets by the unemployed, and a mutiny among sailors in the Royal Navy at Invergordon in Scotland, which virtually crippled the Fleet.

Britain sank deeper into a slump, which was only overcome when rearmament and war boosted government spending.

Ironically, the Budget failed to defend the pound; it was devalued anyway and Britain went off the gold standard.

Dalton's Leaky Budget (1947)

In November 1947, Labour Chancellor Hugh Dalton was forced to resign after introducing a deflationary Budget to defend sterling.

The immediate cause of his resignation was that Dalton had leaked details of the Budget to a journalist, John Carvel, who published them in a London newspaper, just minutes before the Chancellor announced them to the House of Commons.


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By today's standards the leak was fairly modest, as very few copies of the paper had actually been distributed before the Budget was announced.

But Mr Dalton immediately offered his resignation, which apparently was accepted with great reluctance by the prime minister.

According to his biographer Ben Pimlott, Hugh Dalton's resignation was as much the result of his frustration and physical exhaustion over the deteriorating state of the economy as the immediate circumstances of the leak.

The year 1947 was the "Annus Horrendus" for the Labour Government's economic strategy. The dream of post-war prosperity was replaced by the reality of a sterling convertibility crisis, the winter freeze-up, and the continuation of rationing for the foreseeable future.

Dalton's 1947 Budget represented a return to austerity, with cuts in public spending and tax increases amounting to 350m.

Although it curbed some of the inflationary pressures in the economy, it was not enough to prevent the ultimate devaluation of sterling in 1949, and the disillusionment with Labour that set in by 1950.

The Barber Boom (1972)

The Conservative chancellor during the Heath government, Anthony Barber, bears a considerable responsibility for the fundamental shift in British economic policy in the last few decades.

His unsuccessful "dash for growth" led to inflation, confrontation with the unions, and ultimately to the defeat of Edward Heath and his replacement by Mrs Thatcher.


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Anthony Barber told Parliament in 1972 that his Budget would add 10% to the UK's growth in two years, and he professed to be unconcerned by his own forecast of a 3.4bn public sector borrowing requirement.

He reduced income taxes by 1bn, and gave further huge tax concessions to industry in order to save jobs.

Unfortunately, events soon proved him wrong. Inflation soared, boosted by the newly-floated pound and the first oil crisis.

Within 15 months the chancellor was forced to bring in a deflationary Budget, and the government was forced into an incomes policy (wages freeze) to try to control inflation which led to a confrontation with the miners.

The UK's economic performance continued to deteriorate during the 1970s, and the stock market and housing boom went into reverse.

The debacle convinced many critics, not least in the Conservative Party, that Keynesian measures which used government spending to boost the economy and cut unemployment, no longer worked.

Lawson's 'Giveaway' Budget (1988)

Nigel Lawson was determined after the 1987 General Election to show the electorate that the Tories were the party of tax cuts.

In his two budgets of 1987 and 1988, he cut income tax rates from 29p to 25p, while the top rate was cut to 40p.

Initially, this made him a hero among Conservatives and boosted his prestige in his fight with MrsThatcher to join the Exchange Rate Mechanism, which he believed was the best way to control inflation.


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When he announced his April 1988 Budget, he believed that the economy was slowing down to a sustainable rate, and projected a huge surplus that justified his income tax cuts.

But it soon became clear that he had badly miscalculated. Economic growth was actually accelerating, and the tax cuts and interest rate cuts gave a huge boost to the housing market, with house prices rising by 20% a year.

Within a few months, interest rates had to be doubled, the UK was running its largest ever balance-of-payments deficit, and inflation began shooting up.

The cost of bringing the situation under control was a severe recession under his successor, Norman Lamont, and a series of budget deficits and tax increases that did much to undermine the credibility of Conservative economic policy.

In his defence, Nigel Lawson argued that he was a victim of poor information, let down by the vagaries of economic forecasters who underestimated the strength of the boom. He also said that no one anticipated the way in which the deregulation of the financial sector would boost lending, especially to the housing market.

But that was of little help to his reputation or that of his party. Carried away by optimism, he had failed to spot the obvious signs of an over-heating economy.

These examples all point to one thing - chancellors are usually more remembered for their errors of judgement than their successes. It is not surprising that the chancellorship can become the political graveyard of politicians.



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