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The 1950s Butler Squeeze

As mentioned in the previous chapter, a snap election called by the Labour Government in 1951 resulted in a narrow victory for the Conservatives, who then remained in office for thirteen years under four different leaders (and six Chancellors). The 'Butler squeeze' at the beginning of this period represents an effort to go beyond Labour's efforts to restrain civilian expenditure (described in Chapter Five) to deliver on tax-cutting election promises. As we shall see, efforts to achieve this outcome ran up against 'inertia pressures' and a spike in military spending associated with the Korean War and other military commitments.

In 1951 the Conservative party, led by the ageing World War II leader Winston Churchill, had campaigned on a 'set the people free' platform of cutting taxes and reducing state activity and spending. But as we saw in Chapter Five, it had also committed itself to the National Health Service and other welfare state measures promised by the coalition parties in World War II. The Chancellor, Richard ('Rab') Butler, was a 'centrist' figure in the Party who, as a minister in the World War II coalition, had championed legislation providing for an expansion of free secondary education and saw the education cuts of the 1920s (discussed in Chapter Three) as having resulted in a waste of human potential (Butler 1971: 91). In a 1951 campaign speech Butler promised that if they won government, the Conservatives would maintain the NHS, develop educational provision, and try to help old-age pensioners. The day after Butler's speech, another leading Conservative politician, Sir David Maxwell Fyfe, publicly promised, 'We shall not cut social services.'[1]

After the election, Butler (together with the Financial Secretary of the Treasury, John Boyd-Carpenter, who Margaret Thatcher later described as her political model[2]) faced the problem of how to reconcile 'setting the people free' with those campaign promises to maintain welfare state services. In his memoirs, he recalls beginning his work as Chancellor at a meeting with Sir Edward Bridges (Permanent Secretary of the Treasury) and William Armstrong (who was to be his Private Secretary): 'Their story was of blood draining from the system and a collapse greater than had been foretold in 1931' (Butler 1971:157). He was pressed to cut spending in order to cut taxes both by some of his cabinet colleagues (and rivals) and some backbench MPs, notably Captain Waterhouse, whose attacks on 'government waste' under the previous Labour Government were mentioned in the previous chapter.

The new government took office close to the end of FY 1951/52, but Butler announced plans for curbing FY 1952/53 expenditure less than a fortnight after the election. He told his cabinet colleagues that military commitments (due to the Korean War and other colonial military activities of that time) meant an increase in defence spending of about ?300m, and that, since 'taxation is already at crippling levels... it is imperative that we should make a big reduction in civil expenditure', which was set to increase substantially in FY 1952/53 on current policies.[3] Butler did not propose targets for spending cuts, but urged ministers to impose or increase charges for services, reduce percentage grants to local authorities, cut capital spending plans, and freeze civil service staffing. Early in 1952 Butler also announced a plan to cut 10,000 civil service jobs in the first half of 1952 and more in the second half.[4] To restrain spending on the National Health Service, a particular concern, Butler proposed four measures: charges for NHS prescription medicines (a step that Hugh Gaitskell, his Labour predecessor, had planned for the 1951 budget, only for it to be dropped at the last moment); a big hike in National Insurance contributions, the social security tax, to help pay for the NHS; 'hotel' or 'amenity' charges for NHS hospital in-patients; and either charges for most NHS dental and ophthalmic services or the suspension of such services.

The response to such proposals by spending departments and ministers was unenthusiastic, and for two years Treasury ministers and officials struggled to restrain the growth of public expenditure. The outgoing Labour Government had bequeathed substantial increases in welfare benefits and public sector pay that its successor could not easily overturn, in the form of semi-automatic uprating of benefits or pay rises decided by independent tribunals (for example, over NHS doctors' pay in 1952), meaning the Treasury could only try to reduce the numbers being hired rather than rates of pay. In his 1952 budget, Butler was able to announce some increase in income tax thresholds and allowances, but he sharply raised road fuel tax and indeed (in a move reminiscent of Austen Chamberlain's post-World War I budgets) imposed a new Excess Profits Levy of 30 per cent on all firms, charged on profits in excess of their average profits in 1947-49. The budget also cut food subsidies by almost half (implying price rises in bread, flour, meat, tea, and other staple foods) while increasing welfare benefits. The extra charges for NHS dentistry and prescriptions that Butler had proposed were imposed, but there was only a modest increase in National Insurance contributions and the idea of suspending NHS dentistry and ophthalmic services was dropped.

Butler faced continuing political pressure to cut spending in 1952. The Conservatives suffered reverses in local elections, highlighting the electoral challenge they faced to keep or increase their slender parliamentary majority. Captain Waterhouse returned to the fray, chairing a Conservative backbench committee which reported before the 1952 party conference, identifying some ?500-600m of spending that could be cut to enable the standard rate of income tax to be reduced by 10 per cent. Returning to a theme of Waterhouse's attacks on the previous Labour Government, the committee recommended that the Treasury should cut its own spending and staffing:'... since 1939 the staff in the Treasury has increased fourfold and its expenditure eightfold... an example in economy should be set here.' Waterhouse's committee proposed abolishing all food subsidies except for milk, abandoning 100 per cent central funding of any service provided by local authorities (especially school meals), cutting state funding of universities, reducing the funding of semi-state bodies, and financing more capital spending through borrowing rather than out of general taxation.[5] Sending this report to the Chancellor, Waterhouse declared,'... a drastic reduction in taxation should... be... the prime objective of national policy.'[6]

Within cabinet, too, Butler was pressed by colleagues who wanted more vigorous spending cuts, notably Peter Thorneycroft, then President of the Board of Trade and Lord Woolton, Lord President of the Council and wartime crony of Winston Churchill. Indeed, in mid-1952 Woolton launched a personal drive for cutting government spending via the cabinet's Home Affairs Committee, calling on ministers to send him reports on cuts they could make. This unilateral initiative (apparently taken after Woolton had turned the civil servants out of the cabinet committee and written to ministers himself) ruffled bureaucratic feathers and raised demarcation issues with the Treasury ('I can't have a Peer writing about expenditure to my colleagues', fumed Butler).[7] But in any case, departments' responses to Woolton were generally defensive and focused on staff cuts rather than cuts in programme spending, leading the Treasury to conclude that the limit of cutbacks achievable through simple admonition had been reached and a tougher line would be needed over spending bids for FY 1953/54.[8]

On the defensive at the Conservative Party conference in October 1952, in the face of the Waterhouse Committee report and vigorous calls at that conference for further tax cuts funded by spending cuts, Butler said he was not satisfied with the level of public expenditure on domestic policies but defended his position as a 'centrist' Conservative:

If you have got to have big economies, you can only get them by big changes of policy... I do not think, in view of the immense burden upon us at the present time and the things we have to carry out, particularly in the defence programme, in atomic research, in the civil defence and many other things, that this is going to be an easy year in which to make lush promises of favours to come.

Even so, his 1953 budget was the first budget since World War II that contained neither proposals for new taxes nor increases in existing ones. It announced, along with some relatively modest spending cuts, the ending of the Excess Profits Levy in 1954, a cut in rates of Purchase Tax, the main sales tax, and a small cut in the standard rate of income tax from 47.5 to 45 per cent.[9] [10]

There is some parallel with the early 1920s, as described in Chapter Three, in these political pressures inside the Conservative Party for a squeeze on spending to enable cuts in taxes that had stayed high after the war, running up against election promises for post-war extensions of the welfare state. But there was no real equivalent of the 'Anti-Waste League' of 1921 and its byelection successes. And, like its Labour predecessor (and facing similar constraints, including rearmament associated with the Korean War from 1950 to 1953 and much the same menu of options for spending cuts presented by Treasury officials), the Churchill Conservative Government did not appoint an external Geddes- or May-type committee to propose spending cuts. Indeed Butler emphatically rejected such a possibility at the 1952 Conservative Party conference.11 Further, and again in contrast with the 1920s, the prime minister, Winston Churchill, seems to have seen a radical change in defence strategy as the key to dealing with the government's fiscal difficulties, in the sense of adopting a policy of first use of nuclear weapons which he believed would enable defence spending to be cut substantially (Raya (1999): 77). But Churchill had a major stroke in 1953 (concealed from the public at the time), which put him out of action for some six months.

Even in the face of continuing pressures from within the Party, and a further assault within cabinet from Peter Thorneycroft in mid-November 1952 (calling for spending cuts of more than double what Butler was aiming for, to enable tax cuts to help UK firms compete in world markets), spending ministers did not offer Butler major reductions in spending for FY 1953/54. Butler's proposal for a big hike in compulsory National Insurance contributions to fund rising NHS spending was rejected by the Minister of National Insurance on the grounds that it would undermine the contributory basis of social security. A memo to the cabinet proposing a long-term plan to raise the age of entitlement to retirement pensions also seems to have got nowhere.[11] Butler commented, 'My... colleagues are not trying... I am now forced to revert to the idea of an Enquiry on the whole of Civil Expenditure. We shall not get any sense till Whitehall is frightened... '[12]

Indeed, as time went on between 1952 and 1954, Butler turned from his original 'soft' and 'collegial' strategy of appeals to party solidarity without specific spending-reduction targets, and moved to a possibly more 'frightening' process in which the drive for spending reductions was led by cabinet committees and explicit targets were set. In 1953 the Treasury pressed for the establishment of a special committee (the Guillebaud Committee) to review the National Health Service, but in the event that committee did not provide support for cutting NHS spending: instead it showed that NHS spending had fallen between 1948 and 1953 relative to GNP and that capital spending was well below pre-war levels. There was a separate defence review, and the Chancellor chaired a cabinet committee set up early in 1953 (late in the run-up to the 1953 budget) to review last-minute proposals for cutting government spending for FY 1953/54 and further reductions thereafter. Even so, in October 1953, a draft letter from the Chancellor to his ministerial colleagues said, 'I am most disturbed about the paucity of the economies which we have been able to make in the last two years. Expenditure has remained at a high level... few major economies have been achieved.'[13]

By 1954, there were only two years to go before the latest date at which another general election had to be held, the Conservatives were facing Labour charges that government spending was over ?1bn year higher than under the Attlee Government, despite the Conservatives' 'set the people free' slogan in 1951,[14] and Butler faced his colleagues with the prospect of a substantial budget deficit for FY 1955/56 unless spending was cut. A draft briefing to the cabinet in March 1954 said,

It is clearly impossible for us to contemplate a deficit of the order of ?300 millions in what will be the fourth Budget during our stewardship... It is equally clear that we must at all costs avoid the need to impose fresh taxation, and particularly direct taxation... The only practicable way, therefore, of attacking the problem is by a substantial reduction of expenditure ... Previous experience suggests that if we are to achieve positive results, each of the [Cabinet] Committees should be given a definite target for... reduction in expenditure .. ,[15]

The result was a high-powered review of civil expenditure led by a cabinet committee chaired by the Commonwealth Secretary, Lord Swinton, a long- serving minister who had been one of the ten cabinet ministers in Ramsay MacDonald's National Government formed after the collapse of the Labour Government in 1931 (described in Chapter Four). Adopting a tactic repeated under the Thatcher Government some twenty-five years later, the Swinton Committee invited departmental ministers to say what would be needed to effect spending cuts of varying depth—in this case, making proposals about what would be necessary (a) to return forecast 1955/56 estimates to 1954/55 levels, (b) to cut spending by 5 per cent, and (c) to cut spending by 10 per cent.[16]

That review seems to have had some of the 'frightening' effect Butler wanted—for example, for good or ill it held up proposals for development of security and intelligence services for the Cold War (Adamthwaite 1992: 40-1)—but also seems to have prompted familiar strategic responses from departments. For instance, the Foreign Office produced no proposals for cutbacks, despite pointed Treasury calls for 'general reduction in Foreign Service standards of living abroad'. The Customs and Excise floated the idea of doing away with foreign exchange control and collection of trade statistics (knowing, presumably, that the Treasury would be bound to reject such cuts, as it duly did). Indeed, the Treasury resisted cuts in its own spending, on the grounds that such cuts would 'draw the teeth of the Exchequer watchdog.'[17] The idea of imposing 'hotel charges' on NHS hospital in-patients—something that had been on the Treasury's 'squeeze menu' ever since the advent of the NHS—was rejected by John Boyd-Carpenter, who said, 'I think it could have been politically possible as part of our measures to deal with the economic crisis which we found on assuming office', but that by 1954 the political moment had passed.[18]

As we saw in Chapter Two, the Butler squeeze of the 1950s produced a 'double soft' squeeze in that government spending fell relative to GDP but not in constant price terms, while revenue rose in constant price terms but not relative to GDP. Public spending was also checked by user charges, notably on school meals and on NHS prescription medicines (at which the previous

Labour Government had finally baulked). At the same time, income tax thresholds were raised and rates were cut over the period, such that the Conservatives went into the 1955 general election having cut the standard rate of income tax by two percentage points (to 42.5 per cent) during their time in office and claiming to have taken large numbers out of income tax by raising tax thresholds. (Of course, a combination of inflation and rising real wages throughout the period would have tended to push more people into the income tax net if thresholds had remained unchanged).

On the spending side notable reductions over the period included: big cuts in food subsidies, made in several stages; cuts in civil defence and related spending on strategic stocks and facilities, for example on oil storage (in effect leaving the civilian population to shift for itself in the event of the kind of emergencies such spending was directed at); cuts in other 'hangovers' from World War II, for example the abolition of identity cards and the associated wartime National Registration system in 1952 (though that survives to the present day as the basis for NHS registration) and of many of the extensive agricultural and food controls that had developed during the war (there were some 800 civil servants in the Ministry of Food's Potato Division alone in 1952).[19] And at the end of the episode the 1953 armistice ending the Korean War (following threats by the USA to use nuclear weapons) created conditions for defence spending to fall relative to GDP after FY 1954/55, a fall that continued up to the 1980s.

What was not changed, despite repeated canvassing of these policy options within the Treasury, were items such as the age of pension entitlement (which had been lowered by Churchill as Chancellor in 1926), school entry and leaving ages, free 'hotel services' for all NHS hospital in-patients except retirement pensioners, and no top-up fees for state schools. In that sense, the 1953-55 spending cuts could be seen as winning a battle to check public spending growth by one-off measures reversing specific World War II programmes, but losing the war to bring down public spending in the longer run by leaving all the big long-term drivers of welfare state expansion untouched.

In the event, the Conservatives were electorally rewarded after presiding over this double soft squeeze. In the 1955 general election (held a month after Churchill's eventual retirement as prime minister, to be succeeded by a new leader, Sir Anthony Eden), the Party secured a modest overall vote swing in its favour which served to increase its parliamentary majority from the seventeen it obtained in 1951 to a more secure overall majority of sixty.

  • [1] Recorded in T233/928 (Economy Drive).
  • [2] See Lady Thatcher's speech at Lord Boyd-Carpenter's memorial service in London in 1988,http://www.margaretthatcher.org/document/109303 accessed March 2015.
  • [3] T233/925 Economy Exercise 1952/53, letter sent by Chancellor of the Exchequer on12 November 1951 to all Ministers in Charge of Departments.
  • [4] Butler had talked of cutting civil service staffing by 20,000 or more, but in the event even theannounced target of 10,000 job cuts was in deep trouble by April 1952. See Treasury memo byE.M. Abbott to Mr Johnston 4 April 1952, T233 925 Economy Exercise 1952/53.
  • [5] T233/932. Report of the subcommittee of the Conservative Party's Finance, Trade and IndustryCommittee set up to Consider Taxation and Expenditure, and to make Recommendations,September 1952.
  • [6] Letter from Captain Waterhouse to the Chancellor, 16 September 1952, T233/932.
  • [7] Note from the Chancellor to Sir Edward Bridges dated 30 July 1952, T233 925 EconomyExercise 1952/53.
  • [8] T233/925 Economy Exercise 1952/53.
  • [9] HC Deb 14 April 1953, cc.50-9.
  • [10] 'I am not in favour of a Geddes Axe and of asking an outside Committee to do theGovernment's job for it...' Speech by R.A. Butler to Conservative Annual Conference 9 Oct1952, T233 926 Economy Exercise (1953-54 Estimates).
  • [11] T233 927 memo from J.G. Owen 13 December 1952 and memo from Sir James Crombie5 January 1952 'Expenditure 1953-4'.
  • [12] Note from R.A. Butler to Sir E. Bridges, 16 November 1952, T233/926.
  • [13] Draft of Chancellor's letter, 3 Oct 1953, sent by Sir. James Crombie to Sir Bernard Gilbert,T233 1030 Economy for 1953-4 Estimates.
  • [14] Douglas Jay, questions to the Financial Secretary of the Treasury, HC Deb 4 May 1954, c.183.
  • [15] T233 1048 Swinton Committee on Civil Expenditure, draft briefing 18 March 1954.
  • [16] T233 1053 Cabinet Committee on Civil Expenditure, letter to Ministers from the Rt. HonViscount Swinton 14 April 1954.
  • [17] T233 1053 Cabinet Committee on Civil Expenditure, note by A.J.D. Winnifreth 17 June 1954.
  • [18] T233 1053 Cabinet Committee on Civil Expenditure, note by John Boyd-Carpenter to theChancellor 5 July 1954, 'Swinton Committee—Hotel Charges for Hospital In-Patients'.
  • [19] T233/925 Economy Exercise 1952/53, Note of 20 June 1952 (unsigned) to Sir James Crombieon food and agriculture controls.
 
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