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The 1970s proved to be a disastrous time to be in government, and faced with a world-wide economic downturn and a badly suffering British economy, the Labour Government would be forced to go to the IMF for a loan to ease them through their financial troubles. However, conditions attached to the loan meant the adoption of a more liberal economic programme by the Labour Government, meaning a move away from the party's traditional policy base.
The 1970s were also dogged by a host of industrial problems, including widespread strikes and trade union militancy. The Labour Party's close ties to the increasingly unpopular trade unions caused the party to gradually lose support throughout the decade.
In 1976, citing his desire to retire on his sixtieth birthday, Wilson stood down as Labour Party leader and Prime Minister, and was replaced by James Callaghan. In the same year as Callaghan became leader, the party in Scotland suffered the breakaway of two MPs into the Scottish Labour Party (SLP). This breakaway was prompted by dissatisfaction with the lack of progress being made by the then Labour government on delivering a devolved Scottish Assembly. Whilst ultimately the SLP proved no real threat to the Labour Party's strong Scottish electoral base it did show that people were beginning to think of breaking with the mainstream UK Labour Party,
Ultimately, the economic problems facing the Labour Government of the 1970s, and the political difficulties of Scottish and Welsh devolution, proved too great for it to surmount despite an arrangement negotiated in 1977 with the Liberals known as the Lib-Lab Pact. In 1979 they faced the disastrous winter of discontent, and in the 1979 general election they suffered electoral defeat to the Tories, led by Margaret Thatcher.
The aftermath of the election defeat in 1979 provoked a period of bitter internal rivalry in Labour. In the late 1970s and early 1980s, the party became bitterly divided between left wingers under Michael Foot and Tony Benn, who dominated the party organisation at grassroots level, and right wingers under Denis Healey. The election of Foot to the leadership (where he proved an electoral disaster) led in March 1981 to the formation of a breakaway group, the Social Democratic Party, under the Gang of Four: new SDP leader and former Labour deputy leader Roy Jenkins, and former senior ministers David Owen, Shirley Williams and William Rodgers. It formed an alliance with the Liberal Party (UK) under David Steel. The new SDP-Liberal Alliance initially was highly popular, leading Steel at one stage to tell his party, during a conference speech, to "Go back to your constituencies, and prepare for government".
The Labour Party, having lost most of its right-wing to the SDP, lurched to the left. With Michael Foot as leader they went into the 1983 General Election with what many regard as the most left-wing manifesto the Labour party ever conceived. The manifesto contained pledges to unilaterally disarm Britain's nuclear deterrent, withdraw from the EC, and pledged a programme of mass nationalisation of industry.
The right-wing press took full advantage of this and wasted no time in attacking the party. Labour's chances of electoral success were further damaged by the fact that the Thatcher government's popularity was on the rise after successfully guiding the country to victory in the Falklands War. This bolstered Thatcher who had been low in the polls due to a severe economic downturn. The 1983 manifesto was arguably the 'nail in the coffin' to Labour's campaign and was famously described by the senior Labour politician Gerald Kaufman as being 'the longest suicide note in history'.
After suffering a landslide defeat at the 1983 election, the Labour party underwent a fundamental rethink as to its policies. The left wing Michael Foot was replaced by Neil Kinnock, who though initially a firebrand left winger, moved the party to the centre, expelling far left groups such as the Militant Tendency. Despite another General Election defeat in 1987 Kinnock managed to hold onto the party leadership and continued his reform of the party. By 1992, the party had reformed to such an extent that it was perceived as a credible candidate for government. However a disastrous electoral platform and an embarrassingly triumphalist party rally ahead of the election produced a backlash that saw the Conservatives under John Major unexpectedly returned to power. Following the 1992 defeat, Kinnock resigned as leader and was replaced by John Smith, a popular moderate socialist from Scotland, who continued Kinnock's reforms of the party. However in May 1994, Smith died suddenly from a heart attack.
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