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The Revenue Squeeze of the Early 1960s

Pressures for fiscal squeeze of one kind or another continued for the remaining nine years of Conservative Government up to 1964, though most of the squeezes fell below the threshold we set for the analysis of reported financial outcomes in Chapter Two. Indeed, the 1955 general election was immediately followed by a deflationary mini-budget and the following spring, Butler's successor as Chancellor (Harold Macmillan)[1] announced a plan to cut ?100m from total spending in FY 1956/57.[2] And in 1957, after Macmillan had succeeded Eden as prime minister following the crisis surrounding the failed Anglo-French attempt to re-take the Suez Canal from Egypt, the government announced the end of conscription to the armed forces by 1962, meaning a loss of half of army personnel, a third of the air force and a tenth of the navy. That policy was intended to cut costs and reflected Macmillan's long-standing belief that most spending on defence was ineffective. The year after that, Macmillan's successor as Chancellor (Peter Thorneycroft) and two other Treasury ministers (Enoch Powell and Nigel Birch) resigned after Macmillan rejected their proposals to cut spending by about ?153m in 1958/59 to protect the currency, which would have meant unemployment rising in the runup to a general election (see Lowe (1989); Cooper (2011)). This event is a notable case of a Chancellor's efforts for spending squeeze being overcome by counter-pressures from the prime minister and cabinet and is the only instance in the entire century considered by this book in which a Chancellor resigned after failing to get spending cuts through cabinet. Like the Labour ministerial resignations over Gaitskell's spending cuts in 1951, this episode resonated in the Conservative Party and helped shape 'Thatcherism' a decade or more later.

Even so, some candidates for spending cutbacks that had escaped the 'Butler squeeze' were targeted during this period. One case in point is the removal of 'pensioners' tobacco tokens' (mentioned in Chapter Five), a measure introduced by Hugh Dalton in 1947 to soften the blow of a doubling in tobacco tax in that year, and finally abolished in 1958 after years of campaigning by the Treasury, despite the electoral sensitivity of removing 'grey' benefits in the run-up to a general election.[3] But as we saw in Chapter Two, such political efforts did not result in reported financial outcomes that registered as a spending squeeze on the thresholds used here.

However, what does show up in Chapter Two is a revenue squeeze in 1960/ 61, coming immediately after the Conservatives' third successive election victory in 1959, which saw their parliamentary majority increase to one hundred seats, despite a slight decline in their vote share. A month before the 1959 general election, Peter Thorneycroft's successor as Chancellor (Derek Heathcote Amory) presented a classic pre-election 'giveaway' budget, which among other things cut the standard rate of income tax by some seven percentage points (more than double Butler's giveaway in 1955), and also cut beer duty and the higher rates of Purchase Tax. In the election campaign the Conservatives pointed to Labour's plans for higher spending (especially on retirement pensions), estimated them as implying an increase of some ?1bn over the course of a parliament, and warned the voters of higher taxes to fund these spending promises if Labour was elected. That tactic forced the Labour leader (Hugh Gaitskell) to pledge not to raise taxes, and thereby opened up scope for the Conservatives to query how the promised extra spending would be funded.

After the Conservatives' re-election, continuing inflationary pressures linked to a balance of payments deficit led to a post-election revenue squeeze (which the Labour Opposition decried as a repeat of 1955, with a giveaway pre-election budget followed by tax increases immediately after the elec- tion).24 The post-election 1960 budget raised tobacco taxes and increased Profits Tax from 10 per cent to 12.5 per cent, and in the following year's budget, [John] Selwyn Lloyd, Heathcote Amory's successor as Chancellor (and the fifth Conservative Chancellor in a decade) sharpened the squeeze by raising Profits Tax by a further 2 per cent and increasing indirect taxes (for example on fuel, car licences, and TV advertisements), as well as cutting spending and raising Bank Rate. In the same year, 1961, the compulsory National Insurance contributions became earnings related (up to a threshold) for the first time, to accompany a new graduated state retirement pension, making those contributions more like income tax, and that meant a huge jump in revenue in the short term before the costs of the new graduated pension started to be incurred (Chote, Emmerson and Simpson (2003): Chapter 5). On top of that, a major currency crisis in the summer of 1961 led to a further emergency budget, along with a package of other measures tobacco duty of about ?16.5m. The length of time it took to withdraw that benefit reflects ministers' concerns to ensure that no pensioner of any description could claim to be worse off as a result of the policy change. (T223/137 Future of the Tobacco Token Scheme for Old Age Pensioners.)

24 Hugh Gaitskell, HC Deb 4 April 1960, cc.76-9.

intended to stabilize the currency by combating inflation, including the exercise of a newly enacted power to impose surcharges on customs and excise duties by delegated legislation[4] and a measure of non-fiscal austerity in the form of a pay freeze for all public sector workers that heralded a new phase of attempts to develop a coordinated incomes policy under both Conservative and Labour Governments (Evans and Taylor (1996): 122).

  • [1] T273/331 Draft of a letter from Harold Macmillan to the Prime Minister, 10 November 1955:'If unpleasant decisions are to be taken, the earlier in our period of office we take them, the lessdifficult they will be.'
  • [2] T233 1456 1956 Review of Government Expenditure ?100m cut. Notable cuts includedgovernment armaments factories, public buildings, civil defence, strategic food stocks, bread andmilk subsidies, emergency oil storage and distribution, plus increases in passport fees and schoolmeal charges.
  • [3] By the time these tokens were withdrawn, some 2.6 million pensioners (roughly half of allpensioners) were claiming them as self-certified 'habitual smokers', implying an annual loss of
  • [4] The power had been enacted in the 1961 budget, along with a similar power to surchargeemployers' National Insurance contributions that was scrapped the following year.
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