JPMorgan Economic Research note UK fiscal policy: some lessons from the 1976 crisis

UK fiscal policy: some lessons
from the 1976 crisis

• On many metrics, the UK’s fiscal position is currently
worse than observed around the IMF loan in 1976

• The UK is leaning heavily on the credibility of the policy framework established since the mid-1970s
The UK’s £2.3 billion (2.2% of GDP) loan from the IMF in December 1976 is among the iconic events of its postwar
economic history. With concern on the viability of sovereign debt growing in Western Europe and the UK now running a
very large budget deficit, we take a look back at the circumstances around the IMF loan and ask what we can learn from
that episode. On a number of metrics, the UK’s fiscal position now looks significantly worse than in the mid-1970s.
However, the unmanageable weakness of sterling and the sharp rise in government bond yields that occurred back then
has been avoided (at least so far). Three key differences with the position in 1976 appear to have contributed to stabilizing
the situation this time around.

•First is that the pool of global capital on which the UK is currently drawing to finance it’s budget and current account
deficits is much larger, and the attitude on exchange rate management is different. Second, both institutional design
and history over the last generation have given the current policy framework significantly more credibility than in the
mid-1970s. That policy credibility is supported by the third key difference, which lies in the political dynamic this time
around. As an election looms in May, all three major parties have explicitly recognized the need for fiscal consolidation
and to limit spending and tax commitments as a result. Back in the 1970s, the need to make such choices was recognized
later, and faced more serious public resistance.-JPMorgan Chase Bank,

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