The creation of the welfare state remains at the centre of most accounts of the 1945 Labour government. It would indeed be hard to deny that the setting up of a comprehensive National Health Service, a major extension of social insurance and the extension of free secondary education to all children marked major changes in British society. Accounts of British social policy give full weight to these changes, especially to their long-run implications. On the other hand, accounts of British economic policy deal rather cursorily with this aspect of the Attlee government's activities. To a large extent accounts of social policy and economic policy have gone along separate channels. A partial exception to this separation has been the work of those, such as Barnett, who have analysed social welfare policy as imposing a ‘burden’ on the economy. However, this approach, whatever its popularity, rests not only on a very vague understanding of the nature of the welfare state in the 1940s, but more particularly on a simplistic view of the economic impact of social welfare.

The main purpose of this chapter is to combine the analysis of social policy and that of the economy in this period by looking at the economic impact of the welfare state. Within that broad purpose one aim is to explore the complexity of the relationship between social policy and the economy. But, more substantively, it will be argued that the literature which emphasises the ‘burden’ of the welfare state is not only conceptually confused but even in its own terms exaggerates the size of that ‘burden’.