What Callaghan can teach Labour Compromise won't save Starmer

James Callaghan is one of those prime ministers — like Gordon Brown or Rishi Sunak — who seems like a political footnote. That’s a bit unfair, though. True, his premiership only lasted three years, and ended when he led Labour to what was then its worst defeat since the war. But Callaghan, who died 20 years ago today, was a significant political figure in his own right.

Labour MPs recognised this when they voted him as successor to Harold Wilson in 1976, topping the best slate of leadership candidates ever offered to a British party, seeing off Tony Benn, Anthony Crosland, Michael Foot, Denis Healey and Roy Jenkins. He’s still the only person to have held all four of the great offices of state: PM, chancellor, foreign secretary and home secretary. And if that’s all a bit lofty, as transport minister in Clement Attlee’s government, he gave us zebra crossings and cat’s eyes, literally changing the look of the country.

But what he’s chiefly remembered for is the wave of public-sector strikes that paralysed the country in the early weeks of 1979. There were more days lost to industrial action that year than any since 1926 and the General Strike, and for the next two decades, the Winter of Discontent — as it became known — was the go-to line of attack for Labour’s opponents. It was the “I’m afraid there is no money” of its day. Indeed, it’s not dead yet. In January this year, Richard Littlejohn warned Daily Mail readers that the current government “would take us back to the Seventies” and the accompanying photo was captioned: “Rubbish piles up on the streets of London during the Winter of Discontent.”

This is a bit unfair as well. Callaghan’s stewardship of the economy had thus far been successful by most measures. Labour came to power in 1974 in the midst of a recession and with massive inflationary pressures left over from Conservative Chancellor Anthony Barber, who had done economic damage far beyond that attributed to Liz Truss and Kwasi Kwarteng. Under Wilson and then Callaghan — with Healey as Chancellor throughout — Labour steadied the ship. In 1976-78, GDP grew by an annual average of 3.2% while inflation was brought down from 24.2% to 8.3%. There was even, relatively speaking, industrial peace; more days were lost to strikes in 1972 under Edward Heath than in the first three years of Callaghan.

The key factor in all this was the partnership between government and trade unions. From 1975, a national pay policy was agreed, fixing the maximum wage increase that would be permitted, and for the most part the line was held. A decline in the standard of living was accepted, with some reluctance, by the unions as the price of restoring economic stability.

But by late 1978, the reluctance proved too great. Callaghan failed to secure an agreement with the unions, and instead the government unilaterally announced a pay policy of 5%. The Winter of Discontent ensued, Labour was driven out of office, and 18 years of opposition followed.

In his last days as PM, Callaghan predicted the dawning of a new era. “There are times, perhaps every 30 years, when there is a sea change in politics,” he told adviser Bernard Donoughue. “It then does not matter what you say or what you do.” Though he was right that this was a critical moment, there’s an unmistakable note of self-justification, because there was nothing inevitable about the country taking the direction that it did. Had he not launched that doomed pay policy, and done what everyone expected by calling a general election in the autumn of 1978, when the economic conditions were favourable, he would almost certainly have won.

But maybe the sea change had already come, back at the 1976 Labour conference, when Callaghan himself announced the death of Keynesianism. “We used to think that you could spend your way out of recession and increase employment by cutting taxes and boosting government spending,” he declared. “I tell you in all candour that that option no longer exists.” For 30 years, governments of both parties had pursued the target of full employment, but now the emphasis was to be on conquering inflation. We’d been living in a cosy world, avoiding “fundamental choices and fundamental changes” for too long. “That cosy world is gone.” As Margaret Thatcher, his successor in Downing Street, was later to say, “There is no alternative.”

And there was the problem for Labour. Callaghan’s move away from Keynes took him into Tory territory. The Thatcherite wing of the Conservatives had already concluded that inflation was the real enemy, and that state spending needed to be cut. Following her election victory in 1979, Thatcher pursued Callaghan’s argument to its logical extremes. He complained that his speech to conference had been taken out of context — “misused by Conservative spokesmen to justify their malefactions in refusing to increase public expenditure at a time of recession” — but the truth was that he had prepared the way for Thatcherism and was then horrified by what transpired.

He was the last prime minister of the old cross-party consensus, a time when — in the language of the day — union leaders had “beer and sandwiches” at No. 10, and deals were done in “smoke-filled rooms”. Displaying the conventional complacency of an ancien régime, he underestimated his rival, failing to take seriously her talk of being an outsider, “a plain straightforward provincial”, her rejection of “metropolitan liberal views”, her call for “a return to common sense”. In retrospect, Thatcher looks more and more like the harbinger of the era of populism, and Callaghan her facilitator. That 1976 speech is what he should be remembered for, the start of the sea change that he spoke about.

All of which seems increasingly relevant at a time when we are in the early stages of an even bigger sea change, with a Labour prime minister again trying to navigate the death of a cross-party consensus.

The features are very different, of course. And so are the two men. Keir Starmer didn’t exactly beat the cream of the crop when he defeated Rebecca Long-Bailey and Lisa Nandy to become leader. He had no experience of political office at all — let alone the great offices of state — before the general election last year. On the other hand, he has a massive parliamentary majority to fall back on — the 1974-79 government started with a majority of three and rapidly declined into a minority.

Despite the differences, there is the same sense of a new political mood and, as in the late Seventies, the ideological fervour is with a populist Right. Recently this has been with the rise in the polls of Reform, but a reinvented Conservative Party that can harness public discontent remains the real threat.

That looks a distant possibility right now, but the return of Donald Trump has accelerated the pace of events. Starmer’s premiership has certainly changed in response to Trump. The biggest challenge is clearly the development of a new version of Nato, but there are domestic implications as well. The noisiness of Trump and his outriders is changing the political agenda here. In particular, immigration — the key dividing line between mainstream parties and populists — looms larger.

Earlier this month, Health Secretary Wes Streeting had some fun at the expense of the Tories. “It must be so painful for them to watch a Labour government doing the things that they only ever talked about,” he teased: “reducing bloated state bureaucracy; investing in defence; reforming our public services; bringing down the welfare bill.” He was exaggerating for the sake of comedy, but there was an underlying truth to his boast. With that comes the danger that, as Callaghan found, the attempt to try to occupy the opponents’ ground can end up merely by legitimising the Right’s arguments. There’s been nothing in the advance briefing about Rachel Reeves’s spring statement today that looks particularly Labour.

Callaghan tried to hold the incoming tide halfway, offering a compromise that accepted spending cuts and a (hopefully short-term) rise in unemployment while retaining the structure of the old system, most notably co-operation with unions. That proved economically effective in the short term but it wasn’t enough to save Labour. By the time the party returned to power in 1997, it had accepted Thatcherism in full. As Callaghan said: “The cosy world is gone.”

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