How Britain’s New Government Will Impact Its Economy

If history is any indication, the new British Conservative-Liberal Democrat coalition government could be the catalyst needed to rejuvenate Britain’s economy. An effective coalition government could be well …

If history is any indication, the new British Conservative-Liberal Democrat coalition government could be the catalyst needed to rejuvenate Britain’s economy. An effective coalition government could be well positioned to take the actions needed to reduce government spending and reign in the country’s deficits. See the following article from Money Morning for more on this.

In the depths of the Depression-ridden 1930s, two years after a British General Election that yielded a “hung parliament” – came the formation of a coalition government that resulted in one of the strongest decades the British economy has ever enjoyed.

Seventy-nine years later, in the throes of another global downturn – with another “hung parliament” and yesterday’s (Tuesday’s) resignation of Britain’s prime minister paving the way – could history be repeating itself?

Anatomy of a “Hung Parliament”

The British General Election produced a truly knife-edge result. With 326 of 650 Members of Parliament (MPs) needed for a majority, the Conservatives have 306 (with one more almost certainly to come, because one election had been delayed because of a candidate’s death), Labour has 258, the Liberal Democrats 57 and minor parties 28. That’s brought about a government nobody had considered much before the election – a Conservative-Liberal Democrat coalition.

Out from the shadows comes the wrongly derided ghost of the last such coalition – the 1931 First National Government.

The British electorate really had to try very hard to get this result. Before the election, when people considered a “hung parliament” with no majority party, they expected a Liberal Democrat-Labour coalition – the two parties are philosophically quite close.

However, in order for a Lib-Lab coalition to be possible, the combined parties would have needed 326 seats, or maybe about 320 (they have some natural allies among the minor parties). As it stands, they can only muster 315 – so a Lib-Lab pact would be short-lived, liable to be outvoted in the House of Commons at any time. Maybe a few extra MPs could be recruited from minor parties like the Scottish nationalists, but such a government would be very unstable – and indeed unpopular, since it would perpetuate the Labour party in power after it had lost almost 100 seats in the election.

If the Conservatives had got more than about 314 seats, their best alternative would have been a Conservative minority government. They could count on eight Ulster Unionists as allies, while five Sinn Fein MPs never turn up at all (they want Northern Irish independence). Thus, at that level, the Conservatives would be pretty sure of a tiny-but-secure majority, and could carry on for at least a year or so – all the while searching for the most-favorable moment to call another election and gain the extra few seats for an outright majority.

That’s what Labour did back in 1974 – the last time the British General Election resulted in a “hung parliament.”

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So the electorate picked the one result in which a Conservative-Liberal Democrat coalition was possible.

Forgotten Achievements of the National Government

The last such coalition took place in a time of equivalent financial crisis, the autumn of 1931. Then – as now – a Labour government (then a minority government) had increased public spending and run up deficits.

Given the troubled capital markets of that time – remember, we’re talking about a period that was only two years removed from Wall Street’s “Great Crash,” and one in which the global Great Depression was deepening – it was not at all clear that Britain could avoid defaulting on its debts.

The National Government was formed to solve the financial crisis. It took a few top figures from the Labour party, including the prime minister, Ramsay Macdonald. However, its largest non-Conservative base – by far – was 69 MPs from the Liberal party, including two Liberal leaders: Sir John Simon as foreign secretary and Herbert Samuel as home secretary.

The Conservatives, in a large overall majority after the 1931 election, were led by the moderate Stanley Baldwin, but the strongest political figure was the chancellor of the exchequer Neville Chamberlain.  In other words, if Lib Dem leader Nick Clegg became foreign secretary or home secretary, it was a set-up very like a possible Conservative-Liberal Democrat coalition today.

The National Government acquired a mixed posthumous reputation. In its full form, it lasted only a year, as Home Secretary Samuel resigned over the issue of modest Imperial Preference tariffs in 1932. It then became a largely Conservative government, although it retained several “Liberal National” Cabinet ministers, including Simon.

Its foreign policy was fairly heavily pacifist, with strong support for the ineffectual League of Nations even as Hitler was beginning to rearm – thus it was derided by Winston Churchill’s supporters and Labour supporters alike after 1940.

However, its economic policy was remarkably successful. It took Britain off the Gold Standard, devaluing the pound by about 20%.  It cut public spending sharply, reducing public sector pay by 10% and ended the British policy of unilateral free trade, introducing modest tariffs with exemptions for the British Empire.

Starting in 1932 – and lasting until 1937, largely as a result of these policies – Britain enjoyed the highest five-year gross-domestic-product (GDP) growth in its history. New industries – such as automobiles, chemicals and aircraft – energized the economy, as did such new inventions as radar, nylon, and the intellectual underpinnings of the jet engine, the computer and atomic power.

Déjà vu All Over Again?

Relative to other countries, most of which remained in deep depressions, it was Britain’s most successful decade of the 20th century – by far: The nation’s growth rate during its highly touted Margaret Thatcher era during the 1980s was matched by many other countries and beaten by some.

The National Government was able to take unpopular decisions because of its broad popular support: 67.2% of the voters had supported it in 1931, and it was to be re-elected (minus the Samuel Liberals) in 1935 with 53.3% of the vote.

This would be the principal advantage of a Conservative-Liberal Democrat coalition today, which would have 59.1% of the vote, compared with a LibDem-Lab coalition’s 52.0%. A Con-LibDem coalition would also have a House of Commons majority of 76 seats.

Provided the two parties entered into a pact with a fixed term of, say, three years, the coalition government would be able to take the tough decisions needed to cut back the public sector and reduce the deficit, without the danger of either losing House of Commons votes or being wiped out in a subsequent election. As in the 1930s, that could produce an economically very successful government.

For the Conservatives, having such a coalition emanate from the British General Election would have advantages in providing them with a chance to govern, which would be offset by the need to grant at least a referendum on changing the electoral system (any likely change would produce fewer firm Conservative majorities and more coalitions).

For the Liberal Democrats, it would have the incalculable value of giving its top people ministerial experience (no Liberal Democrat has sat in government since World War II – a great pity for the country, since Liberals/Liberal Democrats like Jo Grimond and Paddy Ashdown were major talents).

Overall, it would unquestionably provide the best government for the country.

It may not happen. And if it doesn’t, it will be a huge missed opportunity for a country that could really use it.

This article has been republished from Money Morning. You can also view this article at
Money Morning, an investment news and analysis site.

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