If you are over 40 you might have a nasty sense of déjà vu. Think back to 1981.
The Tories, led by Margaret Thatcher, had recently been elected. They started by trying to cut Britain’s budget deficit by cutting spending where they could and by raising taxes. Unemployment rose above three million in early 1982. There were riots across Britain – they were triggered by different events, but all stemmed from economic deprivation and the anger of the many unemployed (“Maggie’s millions”). In 1981, real GDP fell by 2.2% and by 4.6% in total during the recession.
Then, just as everyone was feeling really down, there was an announcement from Buckingham Palace. There was to be a royal wedding! See what I mean?
Clearly, 1981 wasn’t exactly like 2010. David Cameron makes a big deal of not being a new Thatcher. No one is worried that the pound might suddenly soar. There is little risk of sterling being a petro-currency again. GDP has fallen by more during the recession (6.4%).
The inflation situation is very different. In 1981, the government’s core strategy was to reduce inflation (which had hit 27% in 1979). Today, despite Consumer Price Index (CPI) inflation regularly coming in at above the 2% level the Bank of England is supposed to target, the authorities aren’t much bothered.
Having it hovering at 2.5%-3.5% suits the government fine. It’s high enough to make sure that the austerity announced in George Osborne’s budget, which mainly consisted of freezes, not actual cuts, will turn into cuts in inflation-adjusted terms. But it isn’t really high enough to force a rate rise or spook most of the population. It should be – if inflation runs at 3.5% for five years, the value of your cash will have been eroded by not far off 20%. But we are so accustomed to thinking of CPI inflation of 2%-3% as mild, that we don’t worry.
Finally, there’s personal debt. In 1981, it came to around 18% of annual post-tax income. Today, it’s 118%. So in his 1981 budget, Geoffrey Howe had a weapon we no longer have. He removed the stiff controls there were on bank lending at the time. That, says Chris Dillow on Stumblingandmumbling.com, “unleashed an enormous pent-up demand for loans”. Consumer credit boomed, household borrowing more than offset government cuts, and domestic demand recovered. By the mid-1980s, GDP was growing at 5%.
That won’t happen today. Given existing levels of personal debt and the fact that credit remains pretty constrained, it’s hard to imagine us pulling out of our problems via a new personal borrowing boom. The news of the royal wedding had barely broken before retail analysts were touting around figures claiming its feel-good factor would give the economy a £600m boost. That’s nice. But it isn’t going to do the trick particularly quickly either.