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What Triggered These Fiscal Squeezes

Like the succession of squeezes described in Chapter Three, the period covered here comprises a revenue squeeze later turning into a spending squeeze. But in contrast to the early 1920s, the switch to a spending squeeze in 1931 seems to have been triggered not so much by a tax revolt as by financial market pressures on government to balance its budget in a severe recession and maintain the exchange rate of its currency.

The minority Labour Government that presided over the first squeeze episode during this period came to office in 1929 after a general election, fought against the background of rising unemployment and bitter memories of a General Strike in 1926, had swept out the previous Conservative Government and led to a hung parliament. The Liberal Party, by then again led by David Lloyd George, held the balance of power in the House of Commons, but did not govern in formal coalition with Labour.

As well as depending on the Liberals for survival, the Labour Government was itself divided. Like some of their counterparts in the eurozone some eight decades later, several leading figures in the Labour cabinet, notably the prime minister and the Chancellor, Philip Snowden, believed the only feasible route to economic recovery and stability was through fiscal and monetary orthodoxy (that is, balanced budgets for all public spending other than defence, and the maintenance of fixed currency exchange rates through the gold standard to facilitate international trade). But others thought employment should be protected by spending funded by borrowing and/or by protectionist tariffs. Such divisions, coupled with dependence on the Liberals for the government's survival both meant that what might otherwise have been the 'normal' propensity of a left-of-centre government to increase public spending was muted and that when financial market pressure hit, pressure from other parties (particularly the Liberals) circumscribed the options available to the government.

When we look at the politics qualitatively and go beyond the reported financial outcomes we analysed in Chapter Two, we find three distinct phases of this fiscal squeeze period, namely (a) decisions made by the minority Labour Government up to the point when it split in August 1931 and was replaced without an election by a National Government under the same prime minister and Chancellor; (b) decisions about an emergency package of spending cuts and tax increases made by that National Government from its formation in late August up to a general election two months later; (c) the decisions made by the National Government subsequent to its landslide victory in the October 1931 election and prior to its re-election with a large though reduced majority four years later in 1935.

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