Tax Revolt and the Shift to Expenditure Squeeze, 1921
However, those 1920 tax increases took effect just as the economy went into a sudden, deep, and unexpected trade slump after the post-war boom. Having been only 2 per cent in 1920, unemployment suddenly doubled in three months between December 1920 and March 1921 and rose to over two million in June 1921, reaching 11.3 per cent in that year—one of the highest rates recorded over the whole century considered here.
The government's first reaction was to stick to its policy of keeping tax rates high. Sir Robert Horne, a Unionist who succeeded Chamberlain as Chancellor (after Chamberlain became Conservative leader), finally scrapped the Excess Profits Tax in 1921, but even though the previous large budget deficit had turned into a reported surplus (of ?0.2bn or 3 per cent of GDP) for FY 1920/21, Horne kept other direct taxes at their previous levels, including the Corporation Profits Tax that had been introduced alongside the Excess Profits Tax in 1920.
However, within months of Horne's 1921 budget, the government abruptly shifted from double hard squeeze to a severe expenditure-only squeeze. And this shift to a hard spending squeeze, which did not apply to military spending alone but also to the policies of improved housing and education on which Lloyd George's coalition had swept to electoral victory in 1918, seems to have been triggered mainly by sudden domestic electoral pressure to cut taxes.
It is true that there were at least three other closely interlinked pressures for that policy shift. One was a widespread belief that public spending cuts to finance tax reductions (not fiscal expansion through borrowing, Keynesian- style) were the key to economic recovery through revived trade and employment. At that time the Treasury followed a modified balanced-budget rule, the so-called 'McKenna Rule', which required non-defence expenditure to be met by revenue year-by-year (Daunton (2002); Nason and Vahey (2007)). More broadly, the prime minister and many other politicians saw 'public economy' as a way to reduce unemployment (Jones (1969): 124).
Interlinked with that view was the challenge of financing existing levels of public spending at a time when tax revenues were falling in a slump, and of re-financing government debt amounting to some 150 per cent of GDP in 1921.
At that time, the UK government not only had a large 'floating debt' (that is, continuously refinanced short-term debt), but nearly 14 per cent of its other internal debt was due to mature within the next three years, and repayments on large debts to the USA incurred during World War I were due to start in 1922/3 (McDonald (1989): 654-5). To refinance the debt, interest rates had to be kept high, meaning debt interest accounted for some ?300m—a third or more of total public spending. With little immediate prospect of debt redemption, it is perhaps not surprising that the Treasury saw little headroom for even more borrowing to compensate for falling tax revenues.
A third element in the pressure for spending cuts was the view that the slump and associated unemployment could only be effectively tackled by restoring pre-war international trade, which in turn required a return to currency convertibility through restoration of the pre-war gold standard, abandoned by many countries during World War I. And, much as occurred with the 'Maastricht rules' for the euro in the late 1990s, balanced budgets were seen as the route to restoring the gold standard. Senior Treasury officials were keen to see a return to the pre-war gold standard, and Prime Minister David Lloyd George declared in 1922: 'before trade can be fully restored you must be able to establish everywhere the convertibility of currency into gold or its equivalent... to achieve that, one of the first considerations is to induce the nations to balance their budgets.'5
However, the immediate trigger for major spending cuts in 1921 seems to have been political, in the form of a middle-class electoral backlash against the high tax rates which had been carried over from the war. It began at the start of the year, when a leading press magnate, Lord Rothermere, sponsored a movement called the 'Anti-Waste League', which attacked the coalition government's policy of maintaining high taxes for post-war reconstruction and campaigned for cuts in 'wasteful' public spending to allow taxes to be reduced. The Anti-Waste League successfully challenged the incumbent parties in by-elections by appealing to financially hard-pressed southern English middle-class voters on whom the coalition government (and particularly the Conservatives) depended for re-election. And given that income tax rates had risen four-fold since before the war (as noted earlier), there was a constituency for the League to appeal to—particularly from those living on fixed incomes from investments, who had experienced a fall of approximately two-thirds in the real value of their income since 1914, as well as a fall in the value of their assets of about 30 per cent.
The Anti-Waste League made a major political splash by winning three byelections against Coalition Conservative candidates in southern England in
1921 and induced Liberal and Conservative candidates in other elections to re-brand themselves as 'anti-waste'. The League's first by-election victory in January saw a Conservative coalition candidate defeated by a large majority in a previously Conservative-held seat. In June 1921 the League won two other by-elections against Conservative Unionist candidates, and in August and September, it threatened two Conservative candidates in what were considered to be safe seats for the Party, with those candidates only narrowly scraping home in both cases.
It was those by-election losses and the associated threat to their Southern English electoral base that dismayed the Conservatives, the biggest party in the Coalition, and panicked David Lloyd George, the Liberal prime minister, into an abrupt switch from the expansionary policy of post-war reconstruction to spending cuts and tax reductions designed to outflank the Anti-Waste League electorally and keep the Conservatives in the coalition.
The institutional arrangement used by Lloyd George for this policy switch was a five-person semi-autonomous 'Committee on National Expenditure', comprising a group of prominent businessmen, headed by the retiring Minister of Transport, Sir Eric Geddes. The prime minister announced the Committee's formation in August 1921 (following Conservative by-election losses to the Anti-Waste League in July). It worked in stages, delivering reports to the government every month from December 1921 to February 1922.
There was no pretence of party, let alone gender, balance on the Committee, which was controversial both in its composition (as a group of wealthy businessmen) and in its form, as an external body imposed into the normal process of bilateral bargaining between the Treasury and spending departments (Jones 1969: 166). Its chair, Sir Eric Geddes (1875-1937), was one of Lloyd George's close political confidantes, having worked with Lloyd George since his days as Minister for Munitions in World War I, first as a special civil servant (one of the 'men of push and go' Lloyd George recruited from business) and later as a political colleague in the cabinet (Stevenson 1971: 225). Though its appointment had been announced by the prime minister, the Committee's brief was to make recommendations to the Chancellor of the Exchequer 'for effecting forthwith all possible reductions in the National Expenditure on Supply Services, having regard especially to the present and prospective position of the revenue'. But the Committee's formal power was only to recommend: proposals for changes of 'policy' had to be approved by cabinet committees and its three reports were considered by such committees before they were published in February 1922.
Sir Robert Horne, the Chancellor of the Exchequer, set the Committee the target of finding ?100m of savings from total supply expenditure for FY1922/23 on top of ?75m of reductions already agreed between the Treasury and spending departments following a call by the Treasury in May 1921 (shortly before the Anti-Waste League's by-election victories over the Conservatives in June) for proposals for cutting back 1922/23 spending by about 15 per cent compared to 1921/22.
Much of this ?75m in 'savings' offered by departments—closer to 10 than the requested 15 per cent—comprised decidedly 'low-hanging fruit', in that they included special war-related spending that was due to end anyway, or simply reflected falling prices as a consequence of the recession (Committee on National Expenditure (1921): 3). The Geddes Committee's task was therefore to find higher-hanging fruit in the form of over 15 per cent of additional cutbacks from total spending, such that government spending would fall by over 27 per cent between 1921/22 and 1922/23.
The Committee apparently worked virtually full-time from its appointment in summer of 1921 to February 1922. In the event, it fell slightly short of its target of ?100m of extra cutback proposals, recommending reductions of ?87m, of which ?52m were finally accepted by the cabinet. Even so, those are remarkable reductions in historical perspective, amounting to about 20 per cent of central government spending, when the 'Geddes' cuts are put together with those agreed earlier between Departments and the Treasury.
The Committee approached its task in a way followed by many subsequent cutback exercises. Its first interim report analysed what could practicably be cut and what was beyond the reach of 'economy', at least in the short run. In the latter category it put debt charges, payments that could only be unwound by legislative changes (such as road-building grants), pension obligations, and various politically sensitive financial commitments to war veterans and the bereaved (notably war graves and grants to veterans). The Committee therefore concluded that most of the cuts had to be concentrated on three main classes of spending, namely defence, operations in the Middle East arising from World War 1 (mainly Palestine and Iraq, which had become British mandates under the League of Nations after the fall of the Ottoman Empire), and other items of civilian expenditure that were not statutory obligations that it would take primary legislation to overturn (Committee on National Expenditure 1921:164-8).
The Geddes cuts came on top of the deep post-war reductions in defence spending, and the axe again fell sharply on defence, reflecting a cabinet resolution that no major war was to be expected within ten years. Over half (nearly ?53m) of the ?87m of extra cuts recommended by the Committee fell on defence and war pensions. But what was different about the Geddes cuts was that they also fell heavily on civil spending, striking hard at the coalition government's expansionary plans for post-war reconstruction. Almost a quarter of the Geddes Committee's proposed reductions (?18m) were aimed at education spending, and the remaining quarter of proposed cuts was distributed in smaller packages among other items of civilian spending. The Committee declared that the remaining ?13%m of its original ?100m target could easily be achieved as a result of naval disarmament agreements that would cut naval shipbuilding, further reductions in other military spending, and by the effect of a greater than anticipated fall in prices (Committee on National Expenditure (1922): 165-70).
In the event, the planned cuts agreed by the cabinet in early 1922 amounted to some ?127m in total, comprising the ?75m 'low-hanging fruit' cutbacks agreed before the Geddes Committee was appointed, plus ?52m out of the ?87m suggested by the Geddes Report. Cabinet committees watered down the Geddes proposals in most policy domains (for example, accepting ?28.5m of Geddes' proposals for cuts of ?46m in military spending, and ?11.7m out of the proposals for ?22.7m cuts in 'social services' spending, which included ?18m of proposed cuts in education (Higgs 1922: 257)).
The main resistance to the extra proposed cuts seems to have come from the education departments and the Admiralty (Grigg (1948): 77), the latter probably encouraged by Winston Churchill (then Colonial Secretary), who chaired the cabinet committee considering the proposed defence cuts. In education, the Geddes proposals included suspension of some key provisions for expanding tertiary education in the Education Acts of 1918—a high political cost proposal given that the principal architect of those Acts, the Liberal Herbert A. L. Fisher, was a senior cabinet minister as President of the Board of Education for England and Wales. ?10m out of Geddes' ?18m package of proposed education cuts was targeted at elementary education (replacing matching grants to local education authorities with cash limits, raising the school entry age, closing small schools, increasing class sizes, cutting teachers' pay and administration spending), while ?8m of the proposed cuts was directed at higher levels of education (Committee on National Expenditure (1922): 103-23). Those latter proposed cuts comprised substantial increases in tuition fees, a cap of 25 per cent on free places for lower-income students, a 20 per cent reduction in grants to universities and in particular suspending plans for developing Technical Schools that were a key part of the extension of compulsory part-time education in the 1918 Education Act.
Unsurprisingly, these proposals were strongly resisted by the Board of Education, which initially offered only ?2% million out of the ?18m proposed cutbacks (Jones 1969: 191-2). The prime minister had to back down over the Geddes proposals for cuts in teachers' pay after teachers protested that they were being singled out for harsher treatment than other public service workers, and to promise Fisher that the suspended parts of his cherished 1918 Education Act would be reintroduced in better economic conditions. George Peden (2000: 169) argues that less than one-third of the Geddes proposals for cuts in the education budget were realized, but an analysis based on Brian Mitchell's (1988) historical data indicates that the overall cuts realized in education spending amounted to substantially more than that, and that in constant-price terms the total cuts effected between 1922 and 1923 were some ?176m—almost exactly the target the Geddes Committee was set in 1921.
Such a conclusion is remarkable, indicating that (in contrast to many plans for cutting public spending) the Geddes proposals were more than implemented: actual spending cuts in 1922/23 exceeded the ?127m the cabinet had agreed and even the ?162m that the Geddes Reports had recommended. The Geddes cuts certainly amounted to a substantial spending squeeze, but the extent of the fall in spending differs as between different data sources, and the fact that prices were falling at the time meant some kinds of spending reduction in nominal terms cut less deeply than would have been the case if prices had been stable or rising.
In any event, the cuts sufficed to deliver the tax reductions needed to outflank the Anti-Waste League electorally. In his 1922 budget the Chancellor, Sir Robert Horne, duly announced a cut of income tax rates by approximately 1/6th (to take effect in 1923), cuts of about one-third in some politically salient indirect taxes (notably those on tea, coffee, cocoa, and chicory) and cuts in postal and telephone charges. And those tax cuts seem to have taken enough electoral pressure off the Conservatives for the coalition government to survive for another few months until October 1922. The break-up came after a by-election victory by an Independent Conservative (indicating that the Conservatives could win power on their own) and over a different issue (the Chanak crisis over the conduct of foreign policy) when Conservative MPs led by Stanley Baldwin voted to pull out of the coalition, rejecting the views of their leader, Austen Chamberlain.
-  The others were Lord Inchcape, Lord Faringdon, Sir Joseph (later Lord) MacLay, and Sir GuyGranet—all senior business figures closely connected to government and politics.
-  See Table A1 in the Appendix. Using Mitchell's (1988) data, the Geddes cuts amount to about3 percentage points of GDP a year, amounting to the deepest spending cuts over the wholecentury (if post-war cuts concentrated entirely on military demobilization are excluded). But onMiddleton's (1996) data the fall in total public expenditure was about 1.3 percentage points ofGDP a year, while another set of data (White and Chapman (1987)) indicates a fall in totalpublic expenditure of about 1.9 percentage points of GNP (rather than GDP) a year.
-  When Lloyd George (in the absence of the Conservative Foreign Secretary, Lord Curzon)threatened to declare war on Turkey as Turkish troops advanced on the Dardanelles neutral zonethen guarded by British and French troops.