Britain is on brink of another 1973-style disaster
The events so far this decade mirror the start of the 1970s, suggesting we’re in for a difficult few years ‘If Starmer wins the next election, the parallels will be near-perfect though, hopefully, not too perfect’
The decade got off to a bad start. A pandemic raced around the world, exploding out of China where health authorities were uncooperative with the rest of the world. Energy shocks and war in the Middle East dealt a brutal blow to the global economy, driving inflation and unemployment up as Britain tipped into recession. This toxic combination – stagflation – hit a country mired in political turmoil. Union strikes brought workplaces to a grinding halt. An irate public turned on an unusually fractious political system that delivered five governments and four prime ministers in 10 years.
To date, the 2020s have closely tracked the 1970s. If Sir Keir Starmer wins the next election, the parallels will be near-perfect though, hopefully, not too perfect. After all, 1973-74 has a credible case for being Britain’s worst two-year stretch in the last century: inflation reached 9pc, the country entered a two-year recession driven by fuel shortages, a three-day week was imposed. And to top it all off, England failed to qualify for the World Cup.
Perhaps it was this line of thinking that saw the markets react so jumpily to yesterday’s inflation data. The FTSE 100 dropped almost 2pc yesterday after inflation rose month on month for the first time since February 2023, from 3.9pc to 4pc.
This might have struck some as an overreaction; the rise was driven in large part by an increase in tobacco duty, and core inflation stayed steady. But it reflects a growing unease that Britain’s economy is on a knife edge. The Bank of England appears to be in no hurry to cut rates down from 5.25pc, preferring instead to play it safe.
Inflation has proved troublingly persistent. It hasn’t helped that the economy has been battered by a series of shocks – lockdowns and a sharper rebound than anticipated, the Russian invasion of Ukraine and resulting rise in energy prices, the attacks on shipping in the Red Sea. But Britain has also proven itself quite capable of triggering inflationary pressures on its own: Covid restrictions led to the Government borrowing roughly £400bn more than it collected in revenue. What made 1973 so painful was the combination of policy failures and economic shocks. When oil prices soared, the government turned towards coal. In turn, unionised miners promptly started to badger for higher wages, hoping to stave off the effects of inflation. The predictable result was a series of strikes, and the eventual restriction of commercial energy supplies to three days per week.
These limits on energy rippled through the British economy, bringing activity to a grinding halt. Consumers found themselves effectively using their cash to bid for a smaller and smaller set of goods, driving prices up even as economic activity stagnated.
It’s not impossible to picture a comparable scenario unfolding in modern Britain. The mechanisms would be different; to begin with, despite all the drama and inconvenience strikes have generated over the last year, the unions are a greatly reduced force in British politics. In the 1970s, they could claim to represent roughly half of all workers. Today, the figure is around a fifth.
Instead, the most likely route to disaster is through government policy. Imagine, briefly, that supplies of foreign fossil fuels to Europe are disrupted again. Energy prices rise across the continent. Britain’s labour market appears to take this in stride. Without union bargaining tactics keeping real wages high, inflation is allowed to eat away at wages, keeping people employed. The system is working as intended, until a spanner is thrown in the works by the new Labour government.
Faced with a choice between raising benefits in line with inflation, or in line with average wages, it chooses the former, bending or outright breaking its fiscal rules in the process. This doesn’t just drive consumer demand (and prices) upwards; it makes work relatively less appealing. We’ve seen over the last two years that in this situation, some Britons will choose the path of least resistance, particularly with record tax burdens eating away at the incentive to work.
Things could be worse if Starmer persists in his plan to make the electricity grid zero-carbon by 2030. Britain has already come perilously close to blackouts, with the National Grid paying people to use less energy as supply is run ever tighter against demand. Right now, Britain makes it through dark, windless days by turning to fossil fuel generators – mainly gas power plants. These could be manipulated into net zero compliance through carbon capture and storage, but as intermittent renewables account for an ever larger share of generation and demand grows – particularly as gas heating is phased out for heat pumps – we may find we need more than the existing capacity to back up our grid.
It’s difficult to see Labour opting for the construction of new fossil fuel power plants. Nuclear projects, admirable as they are, have proven incredibly difficult to wrangle through Britain’s congested planning system. That leaves us with a creeping probability of blackouts, even without the added push of a sudden surge in global energy prices.
The final nail in the coffin would be a monetary policy blunder. In the 1970s, both the government and Bank of England believed inflation could be managed without raising interest rates. The right way to combat it, so they thought, was with price controls, tax changes and other fiscal measures.
The result was that, by 1975, inflation was running at almost 23pc, a level unmatched in the preceding 700 years. Despite Governor Andrew
Bailey’s repeated pleas for workers to forego pay rises, the modern Bank of England understands perfectly well that controlling inflation is the responsibility of monetary policymakers.
The problem is that they’re not very good at it; the Bank’s miserable record over the last two years should put to rest the idea that any surge in inflation would be swiftly tamed.
That leaves us needing a shock to set the crisis in motion. Regrettably, there’s no shortage of possible flashpoints.
Military action in the Middle East still holds the potential for a wider regional spillover. With 12pc of global trade making its way through the Suez Canal, and 20pc of global oil consumption through the Strait of Hormuz, any wider war could prove the catalyst for a deep contraction in supply, and a sudden surge in prices. The same goes for the possibility of a Chinese invasion of Taiwan, and the inevitable East-west decoupling that would follow.
And these are just the obvious problems; the thing about shocks is that they are, by their nature, hard to predict. Between the race to net zero, the failures of the Bank, and the dysfunction of the British state, we could be well on our way to a repeat of 1973.