Did the 1981 Budget refute naïve Keynesianism?

Abstract

The 1981 Budget was undoubtedly a turning point in British macroeconomic policy-making. It stimulated a sharp controversy about the role of fiscal policy in economic management, with 364 economists writing a letter to The Times in protest against the raising of £4 billion extra taxes (about 2 per cent of gross domestic product) in a recession. They warned that ‘present policies will deepen the depression’, and ‘threaten . . . social and political stability’. It is fair to say, first, that the overwhelming majority of British academic economists disapproved of the 1981 Budget and, secondly, that they were quite wrong in their prognoses of its consequences. This essay discusses some of the issues in economic theory which it raised.