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World War II and Post-War Labour Austerity

Background: The Period in Perspective

This chapter explores a long period of fiscal squeeze stretching from the formation of the World War II Churchill coalition government in 1940 (comprising the three main parties, Labour, Liberal, and Conservative) to the final years of the Labour Government that won a landslide victory in the post-war 1945 general election. The World War II coalition government imposed a revenue squeeze not matched in any of our other episodes to pay for the war—including development of mass income taxation, a broad sales tax with variable rates on different goods, and confiscatory top tax rates. Along with those tax increases went a Soviet-style command economy and reduced spending on many civilian services such as road-building, together with vertiginous increases in defence spending.

Further, on top of that fiscal squeeze went a high degree of non-fiscal austerity. Conscription began for single men in their early twenties shortly before the war but extended by 1942 to include all men between eighteen and fifty-one and women between twenty and thirty who were unmarried or had no children. Government rationed scarce goods, beginning with petrol at the outset of war and by 1942 extending to almost all foods except vegetables and bread (Zweiniger-Bargielowska (2002)).

As in World War I, those exposed to these squeezes also temporarily lost the right to vote out the government in general elections, with no such elections during the war and electoral competition among the main political parties largely suspended.[1] But during the war the three main parties in the coalition all committed themselves to several 'jam tomorrow' promises to the voters that implied steep rises in post-war spending on civilian public services.

The fiscal squeeze imposed by the post-war majority Labour Government included continuation of very high levels of direct and indirect taxation together with massive cuts in defence spending. As a result, the gigantic wartime budget deficit turned into a surplus by 1947, and remained in surplus for the rest of that government's life (Cairncross (1985): 421, Table 15.2). But the government still had to manage a huge debt overhang accumulated from the two world wars and depended for its survival on overseas borrowing after the war. It also faced pressures for checking the growth of spending on civilian public services as a result, not of budgetary deficits but of persistent balance of payments deficits, associated currency-management issues, pressures to cut taxes, and later by a big spike in defence spending associated with the outbreak of the Korean War in 1950.

The Attlee Government was therefore caught politically between resistance within its own ranks to efforts to restrain the growth of welfare state spending and electoral challenge from the Opposition Conservatives' (who first overtook Labour in the opinion polls in 1947) calls for spending cuts to fund lower taxes. That electoral challenge all but wiped out Labour's huge 1945 majority less than five years later in the 1950 general election and resulted in a narrow defeat for Labour in the 1951 general election.

  • [1] Under electoral law a general election was due by 1940 but general elections were suspended bylegislation each year from 1940 to 1944, with almost no dissent expressed in Parliament.
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