Home Political science A Century of Fiscal Squeeze Politics : 100 Years of Austerity, Politics, and Bureaucracy in Britain
Electoral and Other Consequences
Finally, what did these various squeezes leave behind them? As far as electoral effects are concerned, there was no opinion polling at the time or even detailed write-ups of election campaigns, so election results are the only data available for assessing the electoral punishment or credit accruing to incumbents, in line with the retrospective voting ideas discussed in Chapter One. And such an assessment is tricky for several other reasons.
One is the 'noise' problem, the difficulty of isolating the impact of efforts to raise revenue and/or cut spending from all the other issues in play in a general election campaign. For example, in the snap election called by Stanley Baldwin in 1923, the Conservative Government's proposals for new protectionist and Imperial preference policies (presented as a way of reducing mass unemployment and arguably a key case of 'heresthetic', as discussed in Chapter One) were a key issue in the campaign, and it is not clear how far continuing spending cutbacks weighed relative to protectionism with the voters. Similarly, the 1924 election (caused by a vote of no confidence over the Labour Government's decision to drop the prosecution of a communist editor for publishing an open letter calling on soldiers not to use force against workers) included much discussion in the last four days of the campaign of the so-called Zinoviev letter. This letter, purporting to originate from a high official in the Communist International and published in a Conservative newspaper, said that more settled relations between the USSR and the UK (brought about by the Labour Government's diplomatic recognition of the USSR and conclusion of a trade deal with the new state in 1924, opposed by the Conservatives) would facilitate Communist agitation in Britain. The effect of this famous, almost certainly forged, document on the election outcome is still disputed.
Further, there is the question of whether it is really plausible to assume that voters would be heavily influenced by retrospection rather than consideration of future policy promises in circumstances such as those of 1918, at the end of a catastrophic war. Even if voters had chosen to behave in that way, the fact that all three major parties (Liberal, Labour, and Conservative) had been part of the wartime government at one stage or another would have made it difficult to differentiate blame among them for the substantial tax increases imposed during the war.
Third, the problem of identifying 'incumbents' (discussed in Chapter One and in section 3.6.2) is particularly tricky for the 1923-25 hard spending squeeze episode, constituting as it did a package of spending cuts planned, approved, and announced by a coalition of two main parties, that broadly continued under three successor governments, partly because all of them happened to be elected late in the budgetary cycle. That messy party-political pattern linked with policy inheritance also seems to have made blame attribution by the voters more difficult than it would have been in a world of two- party politics without policy inheritance.
Fourth, as we have shown, given that the period considered in this chapter includes one case of a spending-only hard squeeze accompanied by tax cuts, retrospectively minded voters in that case faced the choice of whether to punish incumbents for spending cuts or to reward them for tax cuts, and it is plausible to argue, as we suggested in Chapter One, that punishment for spending cuts or reward for tax cuts might apply asymmetrically to right-of- centre versus left-of-centre parties.
In the light of these considerations, the 1918 and 1929 general elections do not really seem to present a convincing test of electoral punishment for fiscal squeeze through retrospective voting. The 1923 and 1924 general elections provide at best a weak test of how far blame and credit attaches to governments continuing a package of spending squeeze and tax cuts that they inherit from their predecessors. So it is by-elections from 1919 to 1922 and the 1922 general election that seem to present the most direct test, with the former accompanying the double hard squeeze and the early stages of the spending-only squeeze and the latter coming six months or so after the government had set in train dramatic spending cuts and announced future tax cuts.
Both of these electoral tests show outcomes consistent with the 'asymmetric credit and blame' hypothesis we discussed in Chapter One, namely that left- of-centre parties may tend to be punished more for spending cuts and rewarded less for tax cuts, while right-wing parties may tend to be punished more for tax increases and rewarded less for spending increases. In the byelections, the party that seems to have suffered most from the voters from the double hard squeeze of 1919-21 was the Conservatives (as shown by the 1921 electoral appeal of the 'Anti-Waste League' in the south of England). And as we have shown in other work (Hood and Himaz (2014): 91) in the 1922 general election it was the National Liberals, that part of the Liberal Party that had been in the coalition government under David Lloyd George, that suffered the greatest electoral punishment, with the prime minister himself losing his seat, while the part of the Liberal Party that had not been in the government did not, and the Conservatives appear to have been rewarded.
When it comes to other possible consequences of these squeezes, given that the period discussed here includes the only 'double hard' fiscal squeeze over the whole century, and one of the more severe spending squeezes outside the two post-world-war military demobilizations, there is a surprising absence of constitutional and major institutional effects directly attributable to these squeeze episodes. The institutional expedient of the Geddes Committee, as an outside body to recommend drastic spending cuts, served as a model for the formation of a committee with an identical remit ten years later, albeit with some significant modifications, as we shall see in Chapter Four. Deep changes to the structure of the state or the delivery of public services are also hard to attribute to the squeezes over this period. It is true that the Geddes Committee came up with some radical restructuring proposals, such as the creation of a unified Ministry of Defence to replace the three ministries (Air, War Office, Admiralty) then responsible for separate fighting services, the dismantling of national public sector pay agreements in favour of local or regional variations, and radical alteration in the then national health insurance system by pushing most of the funding onto private or independent insurers. But none of these proposals survived the political process in 1921-22, and some have never been implemented up to the time of writing, despite regularly featuring in subsequent proposals for restructuring public services.
Other economic and social effects that might have flowed from the squeeze episodes discussed in this chapter include military rundown, arrested development of technical further education, and higher unemployment. But all of these are debatable too.
As for military rundown, both of the post-World War I squeeze episodes involved deep cuts in military spending, on the assumption that there would be no major war for ten years. Some (such as Wheeler-Bennett 1948 and Barnett 1970) have claimed that restraint on defence spending by successive governments in the interwar years left the UK militarily unprepared for war with a rearmed Nazi Germany in 1939, with a lack of up to date equipment and materiel that contributed to military failures in the early years of World War II and the UK's very narrow escape from defeat and invasion. But it seems more likely to have been continuing restraint on military spending after 1933, by which time Germany was spending three times as much as the UK on rearmament (Peden 1979: 7), that contributed most to this outcome. The unpreparedness problem seems less plausibly related to the military cuts in the immediate post-World War I years than to the failure to reverse those cuts in the early 1930s.
A second possible longer-term social effect of fiscal squeeze over this period is the 'Geddes Axe' suspension of plans for extending 14-18 technical education and the curbs imposed on other educational spending (a highly contested decision, as we saw earlier). Might the arrested development of technical and further education have exacerbated a long-term weakness in UK economic competitiveness relative to Germany and other competitor countries? Perhaps, but it is debatable whether it was spending cuts alone that had such an outcome (Barnard (1947): 274) as against deep-seated cultural and institutional factors that hampered such development, such as resistance by employers, parents' attitudes, and the lack of trained teachers (Curtis (1948): 246 and 251-7). Such cultural barriers are said to have still existed after the development of technical education formally resumed after the 1944 Education Act and indeed are often said to produce a bias towards 'academic' education to this day.
Finally, there is the common charge that at least the hard spending squeeze of 1922-25 and the last year or so of the double hard squeeze of 1919-21 could have exacerbated interwar mass unemployment. After all, both squeezes involved cutting spending and/or raising taxes in a recession—the precise opposite of the conventional Keynesian remedy for counter-cyclical fiscal policy, albeit championed again by advocates of monetary restraint in the 1980s and of 'expansionary contraction' in the 2010s.
As we saw earlier, there were practical difficulties in increasing borrowing at that time, given the very high level of post-war debt (whose servicing took up some 30 per cent or so of public spending) and high interest rates (in sharp contrast with the 2010s). It does seem likely that Austen Chamberlain's 1920 budget unintentionally served to increase unemployment, since it raised taxes and cut spending just as the economy plunged into deep recession. But things are more complicated when it comes to the 1922-25 episode of spending cuts accompanied by tax cuts, for two reasons. One is that it is difficult to separate the effects of cutting spending at that time from that of the currency exchange rate those spending cuts helped to prop up, and it has been argued (for instance by Temin (1976) and Eichengreen (2015)) that it was an overvalued exchange rate, rather than spending cuts as such, that most accounts for the UK's poor economic performance in the 1920s. The other is that it is debatable whether the strategy of cutting spending to cut taxes in 1922 went too far or not far enough. As we saw, there were reductions in income tax rates in 1922 to please middle-class voters, but there were no commensurate reductions in profits taxes which had risen so sharply in the World War I revenue squeeze, and Nason and Vahey (2007) argue that those high profits taxes are likely to have held back economic performance and employment during the interwar period, implying that taxes may have been cut too little rather than too much at that time.
Altogether, this qualitative analysis suggests there was both more and less to some of the apparently dramatic squeezes during this period than might appear at first sight, and that their consequences are remarkably hard to assess, even a century or so later.
Even the electoral effects are hard to show. But this analysis also shows the power of electoral politics in shaping fiscal squeeze policy, notably in the role of the Anti-Waste League in pushing the Lloyd George government from a double hard squeeze to a single hard expenditure squeeze.
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