Fiscal Policy and Stabilization in Britain *

In his major work on the Management of the British Economy, published in 1964, which deals with the period up to 1960, Dow concluded that ‘As far as internal conditions are concerned then, budgetary and monetary policy failed to be stabilizing, and must on the contrary be regarded as having been positively destabilizing’ [3, p. 384]. ¹ Little pointed out that Dow’s conclusion was open to misunderstanding [6, p. 983]. If all that was meant was that policy had contributed to the boom in 1953 and 1954 and that again the stimulation of the economy in 1959 was excessive, this could be accepted, but that was quite a different thing from claiming that monetary and fiscal policy from 1952 to 1960 was positively destabilizing in the sense that the actual fluctuations observed were greater than would have occurred under some ‘neutral’ policy held unchanged throughout the period. Little’s comment was, and remains, fully justified. Nevertheless, Dow’s conclusion has found its way into conventional wisdom and has lately been reinforced by Professor Prest in a lecture to the British Association in 1967 [7] and more recently by Richard and Peggy Musgrave in their chapter on fiscal policy in the Brookings study of Britain’s Economic Prospects [2]. In the first part of this paper the arguments of Prest and the Musgraves are closely scrutinized, as well as an interesting counter-argument by Bristow [1]. The conclusion will be that the case was never made out in the first instance and has in no way been strengthened by the further work. The main thesis of the second part of the paper is that stabilization as such was never in any case an objective of the authorities and a mistake is being made if we try to seek, with the benefit of hindsight, some ideal combination of fiscal and monetary policy which would have suceeded in preventing the emergence of major problems for the British economy. The argument will be that the fiscal and monetary policy instruments alone were insufficient for achieving a reasonably satisfactory performance with respect to all the various economic objectives which the British people and their governments were setting themselves.