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The Post-War Labour Squeezes

The six years of Labour Government after World War II were all a period of 'austerity' in a broad sense, and invariably described as such in general accounts of this period. Food, fuel, and consumer goods were rationed throughout the period, there was a huge backlog of construction and repair work on housing and infrastructure after years of bombing and neglect of public and private buildings, and the severe balance of payments challenges throughout the period meant continuing pressures to divert manufactured goods for export rather than domestic consumption. The six years can also be seen as a continuous period of fiscal squeeze in that taxes remained high by pre-war standards, and total government spending dropped dramatically after the war, as we showed in Chapter Two.

However, that aggregate picture needs to be qualified in two ways. First, as with the immediate post-World War I episode discussed in Chapter Three, the aggregate fall in government spending between 1946 and 1948 was entirely a product of deep reductions in defence spending associated with post-war demobilization, while every other major category of public spending showed an increase. And there were at least two (and arguably three) distinct subperiods of squeeze over these six years, each with its own characteristics. The first was the transition period immediately after hostilities ended, when massive demobilization led to huge falls in military spending (albeit temporarily offset to some extent by payment of lump-sum gratuities and other benefits to those being discharged from the armed forces), but at the same time the welfare measures promised during the war (particularly the National Health Service) had not yet been put fully into effect.

The second sub-period began in the later period of the Attlee Labour Government, after the immediate post-war cuts in military spending had taken place and the new welfare state measures were beginning to come fully into effect. Dependent on the data source used (difficult in this case because there is a major data break in 1949, as we noted in Chapter Two) a noticeable dip shows up in non-defence spending both relative to GDP and in constant- price terms between FY1948/49 and FY 1949/50. Those numbers reflect the first attempts to rein in civil expenditure, and that squeeze in civilian spending reflected a combination of balance of payments deficits and the need for government to borrow heavily from overseas, particularly in connection with a substantial 30 per cent devaluation of the currency in 1949.

Further, there is the final year or so of the Labour Government, when pressures for steeply increased defence spending associated with the outbreak of the Korean War in mid-1950 combined with electoral threats to that government, with two general elections barely a year apart witnessing calls by the Opposition Conservatives for spending cuts to fund tax cuts. Such challenges led to a further push for cuts in civilian spending in the final year of the Attlee Government under its third Chancellor, Hugh Gaitskell, which are partly reflected in falls in civilian spending relative to GDP in FY 1952/53, while rises in defence spending pushed overall government spending up. That final Labour year is thus on the cusp of counting as an 'episode' according to the thresholds we specified in Chapter Two, but it is certainly important qualitatively because tussles over spending cuts at that time produced a left- right split in the Labour Government that had lasting significance within the Party.

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