The UK economy in the 1960s

The 1960s in the UK saw a continuation of the historically high rates of economic growth experienced in the 1950s and household incomes continued to grow in real terms. However, prospects for the UK economy appeared dimmer by the end of the decade than they were at the start. This briefing provides an overview of how the economy developed in the 1960s and how the government dealt with the macroeconomic challenges it faced.

1. Stop-go and the 1967 devaluation

As highlighted in the previous article in the series, the 1950s saw the beginning of the so-called ‘stop-go’ pattern of UK economic growth.^[1] Periods of rapid expansion were followed by periods of relative stagnation as macroeconomic policymakers switched between stimulating the economy (if growth was judged to be too low and unemployment rising) and deflating the economy (if prices were rising too fast and the economy was pulling in more imports than it could sustainably afford). This pattern continued into 1960s. GDP growth at the top of the ‘go-cycle’ in 1960 was 6.3%, before falling to 1.1% in 1962 in the midst of a stop-cycle.^[2] As illustrated in figure 1, this pattern occurred twice more in the rest of the decade, with growth peaking at over 5% in 1964 and 1968, and falling to under 2% during the stop-cycles in between.

Figure 1. Annual growth in GDP and real disposable household income per head, 1960–69

Although the pattern appears to hold for the whole decade, the nature of the last go-cycle in the late 1960s was different to the others, with it having occurred in the wake of a significant devaluation of the pound, which was revalued from $2.80 to $2.40 per pound in November 1967.^[3] One impact of this was that UK goods and services were now more competitively priced in international markets and export growth picked up, with the balance of payments (exports minus imports) swinging into surplus by 1969.^[4] The positive contribution of exports distinguished the post-devaluation growth cycle from previous go-cycles, where net trade had tended to be a drag on growth as consumption demand grew faster than production and the economy sucked in imports.^[5]

However, a corollary of devaluation was that it increased the cost of imported goods and services, reducing the purchasing power of the pound and increasing inflation.^[6] This appears to be one of several factors which meant that, unlike previous go-cycles, the post-devaluation growth cycle did not feed through to a significant increase in living standards. This trend can be observed in figure 1, which illustrates the slowing of growth in real disposable household income per head (a commonly accepted metric for living standards) towards the end of the decade. Whereas previous go-cycles saw this measure rise alongside GDP growth, its growth remained relatively weak in the aftermath of devaluation at around 1%, even as GDP growth rose to over 5%.

2. Fiscal dynamics

An additional factor constraining the growth of disposable incomes during the late 1960s was restrictive fiscal policy. The financial situation remained precarious in the wake of devaluation, with concerns that financial speculators could bet on (and thus help bring about) a further devaluation. Therefore, Labour chancellor Roy Jenkins implemented a wide range of tax increases and spending reductions to try to reduce demand for imports and shore up the balance of payments. This policy approach was in stark contrast to previous go-cycles, which were typically accompanied by credit easing and fiscal stimulus.^[7]

The sharp shift in post-devaluation fiscal policy is illustrated in figure 2 below. For most of the decade government spending exceeded tax receipts, with public sector net borrowing between 1.5% and 3.9% of GDP. However, in 1968/69 Jenkins’ restrictive fiscal policies took effect and the deficit shrunk to 0.6% of GDP. In 1969/70 this small deficit turned into a surplus worth 1.7% of GDP, as spending (as a share of GDP) was reduced further and tax receipts continued to rise.

Figure 2. Taxation and public spending (% GDP), 1960–70

The combination of relatively low public sector borrowing and relatively strong (if stuttering) GDP growth ensured that the government’s debt burden as a share of the economy continued to fall in the 1960s, as it had done since 1945. In 1960/61, the government’s debt to GDP ratio was 102.4%, but fell to 61.2% by 1969/70.^[8] Interest rates gradually ratcheted up over the decade, not least in the wake of devaluation when the Bank of England’s main interest rate was raised to 8% as part of the effort to shore up the pound’s new exchange rate. However, the falling overall debt burden ensured that debt-interest costs for the government remained stable as a share of GDP, even as interest rates rose.

3. Industrial context

Although GDP growth remained relatively strong, the profitability of private industry in the UK declined over the course of the decade. The Office for National Statistics (ONS) estimates that the economy-wide rate of return on capital fell from 28.8% in 1960 to 19.4% in 1967 (table 1).

Table 1. Profitability, 1960–69

(ONS dataset ‘Volume index capital services (VICS), annual, UK’, 9 November 2023 (NB: The ONS notes that this dataset represents experimental estimates rather than official national accounts data.))

Intensifying global economic competition appeared to be one factor behind this pressure on profit margins.^[9] For example, the UK’s share of global exports fell from 8.1% in 1960 to 6.4% by 1969, as the shares of industrial economies defeated in the second world war, such as West Germany and Japan, recovered strongly.^[10]

Another factor was the growth of industrial tensions and the uprooting of the system of industrial relations which had been in place in the UK since the war. The highly centralised, industry-wide collective bargaining system of that period was increasingly being usurped by employer-level agreements, creating a “fragmented” and “strike-prone” bargaining system.^[11] This reduced the possibility of a bargain between capital and labour at the national level which kept pay in line with productivity growth and maintained profit margins.

As such, the share of the national income which was earned by labour (in the form of wages and salaries) rose and the share earned by capital (in the form of profits) fell. The labour share of income rose from as 67.5% at the start of the decade (1960 Q1) to 71.1% on the eve of devaluation (1967 Q3), whereas the corporate profit share of national income fell from 24.0% to 18.4% over the same period.^[12] The corporate profit share and the rate of return on capital recovered slightly towards the end of the decade. However, this appears to largely be attributable to the boost in profitability that exporters experienced in the wake of devaluation rather than anything more fundamental.^[13]

These challenges contributed to a change in the sectoral composition of the economy. Sectors where international competition was strong and labour costs (compensation of employees) represented a high and rising share of total costs, such as manufacturing and mining, declined as a share of total output. Public services—such education, health and social work—and private sectors where labour costs represented a comparatively small share of total costs—such as financial services, business services, rent and real estate—rose by comparison. These trends are illustrated in table 2 below.

Table 2. Gross value added by sector (%), 1960 and 1969

(Bank of England, ‘Research datasets: A millennium of macroeconomic data’, 2016)

4. Swinging sixties or deepening difficulties?

Considered by conventional macroeconomic metrics, the 1960s can claim to be one of the UK’s most economically successful decades. GDP growth averaged 3.5%, unemployment 2.7% and inflation 3.5%. Real disposable household income per head was 25% greater by the end of the 1960s than it was at the end of the 1950s. However, such figures fail to take account of the trajectory of developments over the course of the decade, which tended largely in a negative direction. As well as slowing growth in real disposable household incomes and the declining profitability of industry, this trajectory can also be seen with respect to inflation and unemployment. As can be seen in table 3, inflation and the unemployment rate began the decade at 1.0% and 2.1% respectively, but gradually ratcheted up with every stop-go cycle. By 1969 inflation was 5.4% and unemployment 3.5%, a post-war high.

Table 3. Inflation and unemployment, 1960–69

(Inflation data from ONS series ‘CZBH’, 17 January 2024; and unemployment data from Bank of England, ‘Research datasets: A millennium of macroeconomic data’, 2016)

The coexistence of high inflation and high unemployment challenged the operating assumption of post-war economic policy, as set out in the famous 1944 white paper on employment policy, that the government could (and would) maintain full employment through the use of budgetary policy.^[14] By the late 1960s it was no longer clear that fiscal stimulus alone could sustainably reduce the unemployment rate, at least not without generating potentially greater macroeconomic problems further down the line.

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Cover image by H Grobe on Wikimedia Commons. Image shows Carnaby Street in 1968.