New Labour in the UK: Era of Neo-Liberal Consensus on Economic and Social Policy

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Dhruva Murugasu Christ’s College Part I Economics

“Under New Labour, Britain is witnessing a new era of neo-liberal consensus on economic and social policy.” Discuss

The election of Tony Blair in 1997, it is commonly said, brought about a new era in Britain’s Labour party, with the party moving to the centre of the political spectrum and adopting very similar policies to the preceding Conservative government. Tony Blair coined the term New Labour to distinguish his government from the more socialist ones of earlier Labour governments and adopted a largely neo-liberal stance, similar to that of Margaret Thatcher. This ideological shift was actually already in motion after Labour’s heavy defeat in 1983, which was due to their extreme-left manifesto which was later referred to as the longest political suicide note in history. The Labour party more or less accepted that the median voter had shifted to the right, as suggested by Knight, and responded to that by doing the same. In most senses, there was a neo-liberal consensus, especially outwardly, although this was not always true as close examination of Labour’s policies will reveal. I will approach this essay by first outlining the main characteristics of the Conservative policy during the Thatcher and Major administration and then proceed to point out the similarities and differences between these policies and those employed by New Labour. No particular effort will be taken to discuss the desirability or effectiveness of the policies implemented but rather whether or not there was a consensus and whether it was based on neoliberalism.

First, let me deal with economic policy, which can be divided into demand-side and supply-side policy. In terms of demand-side policy, there was a clear shift from Keynesian demand-management to Friedman’s monetarism with the coming to power of Thatcher. This also involved a shift in the focus of economic policy, from full-employment to the maintenance of stable prices according to Knight. A somewhat balanced budget obviously followed on from this and that was the core of the demand-side economic policy. On the whole, there was a consensus with New Labour on these issues. The creation of an independent Monetary Policy Committee (MPC) by the then Chancellor of the Exchequer, Gordon Brown, was, according to Knight, due to the reputation that Labour had for ‘poor economic management’. This act essentially removed monetary policy decision-making from the hands of the government, with the exception that the Chancellor still set the inflation target the MPC had to hit. This move, in my opinion, indicated that the government acknowledged the fact that monetary policy was ‘the principal instrument of macroeconomic policy’ (Knight) as the government saw the need for its determination to be independent and separated from the government’s poor reputation. In terms of fiscal policy, New Labour, outwardly at least, maintained the notion of fiscal prudence, and actually accepted the Conservatives’ spending plan for the first two years in power. The Chancellor’s introduction of the ‘golden rule’ illustrated this. This rule stated that the government’s expenditure, without its capital expenditure, must not be in deficit over an economic cycle. However, the ‘tax and spend’ policy was not fully absent from New Labour’s policies. While they did not raise direct taxes, they did raise indirect taxes in an effort to finance public spending. This was referred to as a stealth tax as it was much more subtle and less often blamed on the government as opposed to direct taxes. The golden-rule was also, as Knight argues, not as it was made out to be. In 2005, Brown extended the business cycle from 7 to 9 years allowing the government to borrow additional sums for current spending without violating the golden-rule. Thus, in terms of demand-side policy, there was some sort of a consensus...
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