'Hairshirt' Budget back to haunt Labour

Roy Jenkins's austerity in 1970 was blamed for poll defeat. The lessons have been learned, says Andrew Grice

After Alistair Darling presented his pre-Budget report in December, some Labour figures answered criticism that he had not announced detailed spending cuts by hinting that further measures would be included in the Budget.

With a general election imminent, it seemed an unlikely prospect. Now ministers appear to be backpedalling, as they prepare the ground for a Budget a week tomorrow that is being seen in Whitehall as a “treading water” operation rather than a repeat of the most famous “hairshirt Budget” of modern times. In 1970, the Labour Chancellor Roy Jenkins resisted the pressure to deliver the eve-of-election “giveaways” to which many of his predecessors and successors have succumbed – and was blamed by many in his own party for losing the election that followed two months later.

The parallels are not exact. In 1970, the country had already suffered what the late Lord Jenkins of Hillhead called “two years’ hard slog” as he worked to balance the nation’s books. This time all the parties agree on the need to cut the £178bn public deficit but Labour and the Conservatives accuse each other of hiding coy the painful truth until after the election.

But the political arguments are similar to those in 1970. George Osborne, the shadow Chancellor, said yesterday that Mr Darling had “a very difficult judgment to make about whether he puts his country before his party”. He added that the choice facing the Chancellor was of “honesty versus dishonesty”.

Last night the Tories promised to give more detail of their proposed cuts before the election –but after the Budget. “We have always said more than the Government and we will go on saying more,” David Cameron told the BBC. The Tory move is significant and high-risk. Previous plans for cuts and talk of an “age of austerity” have harmed the Tories in the opinion polls.

Vince Cable, the Liberal Democrats’ Treasury spokesman, told The Independent: “Alistair Darling has a real choice. He can make himself popular with his next door neighbour by entering into pre-election giveaways or he can follow the example of responsible Labour Chancellors like Roy Jenkins who put the national interest first, by announcing a clear plan for sorting out the country’s finances and ensuring recovery.”

Mr Cable argued that the analogy with 1970 was relevant because Mr Darling had “fluffed his lines” in his pre-Budget report by raising taxes and committing Labour to extra spending, which had “the unfortunate by-product” that the deficit was not being taken seriously.

The Chancellor announced in December that schools spending would rise by more than inflation, and that budgets for the NHS and police numbers would be maintained, thereby putting more pressure on other departments to ensure Labour delivers its pledge to halve the deficit over the next four years. The independent Institute for Fiscal Studies calculates that non-protected budgets may face cuts of between 18 and 24 per cent.

But we will probably not be much wiser after next Wednesday on how Labour would find the £31bn of cuts implied by its spending plans (on top of £19bn of tax rises already announced). Mr Darling has shelved the comprehensive spending review of all departments until the autumn – conveniently after the election. He insists that this is due solely to the uncertain economic outlook.

Liam Byrne, the Chief Treasury Secretary, is in negotiations with Cabinet ministers about their budgets and this process is expected to yield some further efficiency savings next Wednesday, on top of the £20bn announced in December. Ed Balls, the Schools Secretary, will show willing by bowing to the Treasury’s call for £500,000 of savings. The aim is to reassure the financial markets that Labour is serious about halving the deficit, though the City may be looking for more cuts of red meat than the Budget will serve up.

Mr Darling insists that it is too early to cut this year, that the Tories’ pledge to “make a start” this year would put the recovery at risk and could plunge Britain back into recession.

The Chancellor has already played down the prospect of a traditional giveaway package. “I don’t think anyone’s expecting some sort of Christmas-tree-of-a-Budget. They’re not going to get anything like that,” he said. He promised “sensible” measures that would “reflect the times in which we live”.

The betting in Whitehall is that he will steer a middle course between a Jenkins-type approach, which would point to a more detailed plan for cuts next week, and a traditional giveaway of tax cuts (off limits because of the deficit) or other sweeteners.

Mr Darling is bound to be pressured by Mr Brown to find room to safeguard frontline services or even announce new commitments – perhaps funded by “savings” from lower-than-expected unemployment or the higher than expected revenue from the 50 per cent supertax on bankers’ bonuses over £25,000.

As The Independent revealed in January, the Labour manifesto is expected to include a new list of commitments to improve public services in an echo of Tony Blair’s 1997 pledge card. These new entitlements or guarantees are bound to cost money. Mr Brown’s critics say he cannot resist his old instincts to carry on spending. On Sunday, for example, he promised the Netmums group in a webchat to expand maternity services.

Mr Darling’s friends insist that he will do what is right for the British economy rather than the Labour Party. “He doesn’t need a guiding star, whether it’s Jenkins or anyone else,” one said yesterday.

Jenkins' Budget: Prudence prevailed

When Roy Jenkins delivered his 1970 Budget, Labour MPs hoped for a pre-election bonanza. But they underestimated the Chancellor's fiscal rectitude. Cabinet colleagues including Barbara Castle, Tony Crosland, Richard Crossman and Peter Shore had pressed the Chancellor for a generous Budget that would woo traditional working-class supporters who had not yet felt much benefit from an economy that he steered from sickness back to health.

But Jenkins did not want to risk either his reputation or the economic gains made from turning round the balance of payments figures. Borrowing of £2bn in 1967-68 had been turned into a surplus of almost £600m. A giveaway Budget would have been "a vulgar piece of economic management below the level of political sophistication of the British electorate," he later explained. His strategy won the support of then Prime Minister Harold Wilson, but the 14 April Budget left Labour MPs disappointed. When the party unexpectedly lost the June election to the Conservatives, led by Edward Heath, many Labour MPs, especially on the left, blamed an over-cautious Budget. Jenkins took his share of responsibility, but there were other factors, such as bad trade figures just four days before the election, and a delay in devaluing the pound earlier in the Wilson Government's life, which would have ensured a longer period of growth before the election.

With hindsight, Lord Jenkins (as he became) believed he should have delivered a slightly more expansionist Budget. But his reputation as a Chancellor who managed to balance the books was intact, and was recalled in tributes across the political spectrum when he died in 2003.

Had Labour won, Jenkins might well have succeeded Wilson as Labour leader, possibly preventing the split which saw him found the breakaway Social Democratic Party in 1981, along with fellow "Gang of Four" members David Owen, Shirley Williams and Bill Rodgers. Instead of being hailed as the architect of the party's victory, he was rather unfairly branded the cause of its defeat.