In his recent speech announcing a £15bn spending package to tackle the cost-of-living crisis, the Chancellor, Rishi Sunak, confidently told Parliament: “We have the tools and the determination we need to combat and reduce inflation.” Although there was talk of fiscal prudence and supply-side reforms, and a windfall tax on energy companies, the main thrust of his plan was to make direct transfers to help families out with energy bills and council tax.

It’s not the first time a Conservative Chancellor has faced accelerating inflation and reacted with more government spending. Anthony Barber, who described stagflation as “a new and baffling combination of evils”, had already overseen a rapid rise in inflation which, having been less than 5 per cent for most of the 1960s, was touching 10 per cent by the time of his infamous 1972 “Dash-for-Growth” Budget. Like Sunak, he saw more government spending as the solution to a stagflationary spiral and,  unperturbed by a burgeoning budget deficit, he did not believe that his stimulus to demand was “inimical to the fight against inflation”. He was wrong, of course. Two years later, UK inflation was over 20 per cent – albeit with an oil crisis to spur it on.

It took a dire situation to open the political establishment’s mind to the simple message of Keith Joseph’s 1974 Preston speech: inflation is caused by governments. Joseph, a Tory minister, intellectual and architect of Thatcherism, upended cross-party orthodoxy in UK politics with the assertion that inflation was a self-inflicted wound, the result of “trying to do too much, too quickly” or, more specifically, “the creation of new money – and the consequent deficit financing – out of proportion to the additional goods and services available”.

Having previously presided over the Department of Health and Social Security, with the largest bureaucracy of any government department, he understood first-hand how successive governments had, in his words, “gone astray”. The ratchet effect which led to ever-higher government spending had, by 1974, led to economic instability not seen since the Second World War. In his words: “All other social and economic objectives will be lost unless inflation is abated. Growth, social peace, full employment, regional balance, social services – no one of these aims can be sustained if inflation is allowed to continue at its present or anything like its present pace”.

In the run up to the stagflation of 1974 and the demise of the “Barber Boom”, it was the spectre of 30s-style mass unemployment which led successive governments to persistently spend their way out of problems, even before it was truly manifest. As Joseph pointed out, however: “There never was serious unemployment since the War on anything remotely like the scale or conditions of the 1930s”. Yet this fearful sentiment remained at the heart of the ratchet effect driving government spending.

What insight does Joseph’s Preston speech offer on the inflation we see today and how it should be dealt with?

As in 1972, we are witnessing surging commodity and energy prices. Primary product prices were rising sharply before the Yom Kippur war of 1973, 11 months before Joseph’s speech, but the OPEC crisis seriously compounded that problem. Similarly, the Ukraine crisis has hit as energy markets were already tightening for structural reasons – this time under-investment in fossil fuel rather than the growing power of OPEC.

Although Joseph acknowledged that the rise in world prices in the early 70s created inflationary pressure, it was the reaction of governments, he thought, that did most damage and the inflation it engendered was much more menacing.

Commodity prices won’t keep rising forever and it is possible that in today’s capital-light, dematerialised world they don’t play as large a role as they once did. In the end, conflicts end, and new production capacity will be brought on-stream to moderate price tension. Inflation caused by governments doesn’t self-correct, though. It requires a shift in policy.

Once again, the UK finds itself with government spending at historic highs relative to GDP. In 2020, partly due to lockdowns, government spending was more than 50 per cent of GDP and is expected by the OBR to remain around 45 per cent until 2023, a similar level to that at the time of the Preston speech. Previous post-War spikes in government spending – 1974, and to a lesser degree in 1953 and 2009 – were followed by a spike in inflation in the ensuing years.

The latter-day version of trying to do too much, too quickly is, in a way, more troubling than it was in the 70s. Not only are governments, especially the UK government, taking responsibility for an ever-growing portion of economic activity, they are in many cases trying to shrink economic activity in the private sector. Covid lockdowns – the first policy in history aimed at deliberately stopping economic activity on a grand scale – were an extreme example of this but the accelerating impact of the green agenda will, over time, prove to be equally destructive to large parts of the private economy. A government doing too much, too quickly while reducing the number of goods and services available from the private sector is actually more inflationary than the dynamics which Joseph described.

None of this is to say that government policy isn’t borne out of good intentions. Once again from 1974: “Government after government chose to take the risk, for several – in themselves not ignoble – reasons. The assumptions were probably always the same; that the inflation would only be mild; that it could be stopped; and above all, that mild inflation seemed a painless way of maintaining full employment, encouraging growth, and expanding the social services… Thus, excessive injections of money, undertaken by intelligent and enlightened men with good intentions, have wrought great havoc in our economy and society”

There’s always a theoretical justification for government action. Today we have Modern Monetary Theory but as Joseph observed, in the 70s there was no shortage of experts to justify state expansion: “Influential groups in Whitehall, Cambridge and the National Institute of Economic and Social Research seem to deny the proposition that rapid money supply growth leads to inflation.”

In summary, as in the 70s, governments are trying to mitigate the adverse impact of exogenous and self-inflicted phenomena through monetary expansion, deficit financing and the relentless expansion of the state’s role in the economy. One particularly troubling aspect of state expansion is exponential growth in regulation. As Joseph observed: “Over and above the budget damage, industry has been having to put up with the anti-business, anti-profit attitudes of Ministers and the threat of state grab and state interference to every large firm… by extending ever since the War government intervention we have politicised our economy. A result is that longer-term considerations have since the war often been subordinated to short-term political convenience”.

The expansion of government doesn’t simply crowd out private sector activity in a way that we are taught in first year university. The concurrent rise of the regulatory state crowds out endeavour, innovation and the very competition which drives individuals and companies to be more efficient, more productive, and simply better. Private sector competition is naturally deflationary. Firms, when left to their own devices, generally out-compete each other to provide better goods and services ever more cheaply. If government hinders that process through excessive and complex regulation, it will find it harder to tackle inflation itself.

There are now over 90 regulatory bodies in the UK, many at arms-length from more democratically accountable government. The civil service, in terms of headcount, has increased by 24 per cent since 2016. Moreover, the motives behind regulation morphed in recent decades from the promotion of stability, fairness, and safety to also encourage a change of behaviour amongst the population to be in line with incumbent political and social agendas. Of the 91,000 civil servants added to the public payroll since 2016, by far the largest group, nearly 12,000, are working in policy creation.

Although it seems the current UK government’s default is a Barber-style response to crises, dissenting voices are now getting louder in political circles with respect to the size of the state and its role in economic life. The government itself is now looking to cut the number of civil servants back to 2016 levels, and some of the more influential think-tanks are starting to contemplate the scale of the regulatory issue.

Keith Joseph’s Preston speech fired the starting gun on an economic revolution that would prove to be as contentious as it was disruptive. It will take an unusual politician by today’s standards, however, to deliver its modern equivalent. For Joseph’s message came with an implicit admission that we rarely hear from politicians today – culpability. He began by accepting his “full share of the collective responsibility” in creating the environment the UK then faced.

The writer is chief executive of Equitile Investments and author of Debtonator: How Debt Favours The Few And Equity Can Work For All Of Us.