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Squeeze Intensity and Reported Financial Outcomes Compared

Building on the tables at the end of each of the previous eight chapters, Table 11.1 brings those analyses together into a summary comparative assessment of the fiscal squeezes identified in Chapter Two in terms of loss imposition, political cost or risk to incumbents, and state effort involved in fiscal

Table 11.1. Fiscal squeeze episodes compared: quantitative type and qualitative evaluation of loss, cost, and effort involved

Overall episode (ratio method)

Sub-episode (ratio method)

Quantitative type

Qualitative evaluation of degree of voter loss, political cost to incumbent parties, and state effort

Imposed loss

Political cost to incumbent parties

State effort

1916-18 WW1

1916-18

Hard Revenue

High

Low

High

1919-25 Post-WW1

1919-21

Hard Spending/Hard Revenue

Low/Moderate

Moderate

Low

1923-25

Hard Spending

High

Moderate (Nat. Lib); Low (Cons., Labour)

Moderate

1931-35 Financial crisis

1931 -32

Hard Revenue

High

High (Labour); Low (later National Govt)

High

1933-35

Hard Spending

Moderate/High

Low

Low

1941-45 WW2

1941 -45

Hard Revenue

High

Low

High

1946-49 Post-WW2

1946-49

Hard Spending/Soft Revenue

Moderate

Moderate

Moderate

1953-55

1953-55

Soft Spending/Soft Revenue

Moderate

Moderate

Moderate

1960-61

1960-61

Hard Revenue

High

High

Moderate

1964-69

1964-67

Hard Revenue

High/Moderate

Moderate

High/Moderate

1968-69

Soft Spending/Hard Revenue

High

High

Moderate

1973-79 Stagflation

1973-75

Hard Revenue

High/Moderate

Moderate

High/Moderate

1976

Hard Spending/Soft Revenue

High/Moderate

Moderate

Moderate

1977-78

Hard Spending

High

High

High

1980-88 Thatcherism

1980-81

Hard Revenue

High

High

High

1983-88

Soft Spending/Soft Revenue

Moderate

Moderate

Moderate/High

1993-2000

1993-00

Soft Spending/Soft Revenue

Moderate

Moderate (Cons.); Low (Labour)

Moderate

2010-15

2010-15

Soft Spending/Soft Revenue

Moderate

Moderate (Cons.); High (Lib. Dems)

High/Moderate

squeezes. We have shown that such an analysis necessarily involves tricky judgement calls and some episodes are easier to classify than others on some or all of those dimensions. That is why we avoid aggregating the qualitative dimensions into a single measure of squeeze intensity and restrict the rating to a high/moderate/low judgement in each case.

Limited as this qualitative assessment is, Table 11.1 clearly demonstrates three points. First, only three of the eighteen squeeze episodes analysed in Table 11.1 rated high on this assessment on all three of the qualitative dimensions of squeeze intensity. They were: the 1931/32-1932/33 squeeze (showing up only as a revenue squeeze on the financial outcome data in Chapter Two[1]) that broke Ramsay MacDonald's minority Labour Government and subsequently led to an electoral landslide never matched before or since in modern UK election history; the 1977/78-1978/79 revenue and spending squeeze that followed the 1976 currency crisis amid deep internal conflict between right and left in the Labour Government led by Harold Wilson and then James Callaghan; and the 1980/81-1981/82 revenue squeeze in the early embattled years of Margaret Thatcher's Conservative Government.

A second and related point about Table 11.1 is that the intensity of fiscal squeeze when rated in terms of 'hardness' or 'softness' on financial outcome indicators (as set out in Chapter Two, Table 2.1) broadly corresponds with our qualitative assessments of the amount of loss inflicted on voters or citizens (summarized as 'imposed loss' in Table 11.1, column 4). That correspondence is perhaps not very surprising, since the basis of the qualitative assessment overlaps somewhat with the quantitative analysis. But there was only a weak, indeed, sometimes negative, association between periods of sustained deficit reduction relative to GDP (the measure conventionally used in the econometric literature) and fiscal squeeze episodes classified as 'high' on the three dimensions shown in Table 11.1. We showed in Chapter Two that deficit reduction by no means corresponds exactly with fiscal squeeze as measured by hardness or softness of spending or revenue changes, and the correspondence is even weaker for the qualitative assessments of squeeze intensity. And, as we shall show later, that divergence between different ways of identifying episodes and measuring the intensity of 'austerity' is really important when it comes to identifying the consequences and particularly the electoral outcomes of fiscal squeeze.

The other two qualitative elements of squeeze intensity identified in Chapter One seem to be rather less closely linked to our hardness and softness measures, perhaps particularly the second element, that of political cost to incumbent politicians. That means that some politically crucial elements of fiscal squeeze intensity do not seem to be satisfactorily captured either by deficit reduction or by our 'hardness' and 'softness' metrics of changes in spending and revenue. For example, the most severe revenue squeezes observed in the whole century (those imposed in the two twentieth-century world wars, particularly World War II) cannot be rated as involving especially high political cost or risk to incumbents, because although those squeezes undoubtedly involved high state effort to raise revenue (again, particularly in World War II), they were undertaken by grand coalition governments, with overt party competition suspended by the mainstream parties.

It is also notable that the only case of a double hard squeeze on spending and revenue in the whole century (the 1919/20-1921/22 episode), does not rate especially high on our qualitative measures of squeeze intensity. That is because, although direct taxes on middle-class voters and firms remained very high (disappointing expectations of relaxation after World War I), the overwhelming bulk of the spending cuts at that time were on defence demobilization, did not break election promises about post-war reconstruction, and state activity related to fiscal matters does not appear to have been particularly frenetic either. Certainly, as we showed in Chapter Three, there were related challenges for the state machine, for example in handling major strikes over pay and industrial working conditions and indeed military action involving some 10,000 troops to suppress the rioting associated with strikes over working hours in Glasgow in January 1919. But as far as specifically fiscal matters were concerned, it seems hard to rate that episode as involving markedly greater effort than many of the other cases we have discussed in this book.

A third feature is a certain apparent shift to 'fiscal squeeze without tears' over the most recent episodes of the century considered here (as reflected in Table 11.1, column 5). 'Fiscal squeeze without tears' is perhaps too strong a description; but it is notable that for the second qualitative dimension of squeeze intensity, namely the risk or cost to incumbent political parties in imposing squeezes, the degree of political effort put into fiscal squeezes broadly seems to have been lower in the last third of the period considered here than in a number of earlier episodes.

Over that final thirty years or so, fiscal tightening was not supplemented by other types of austerity in the form of rationing, conscription, wage caps, exchange controls, or especially tight money policies (indeed, quite the reverse on that last item over 2010-15). With the important and electorally costly exception of the Liberal Democrats' 2010 manifesto pledge to cut university tuition fees, those squeezes broadly did not involve outright breaches of election promises over spending and taxation, although as we have seen, there were numerous tax increases, new taxes, or removals of tax offsets that had not been mentioned in election campaigns (such as the Conservatives' 1993 tax 'raid' on retirement pension funds, described in Chapter Nine, which provided the precursor for New Labour's dramatic and unexpected follow-up in 1997).

Moreover, in the most recent three episodes, squeezing on the expenditure side tended to rely heavily on slowing the rate of growth of public spending while the economy grew rather than cutting spending in constant-price terms—a process obscured by the catch-all language of 'cuts' used both by political opponents and on a few occasions by governments themselves when it suited them to portray themselves as bearing down hard on public spending. Whether that 'fiscal squeeze without tears' formula—involving relative rather than absolute spending reductions and arguably less electoral risk than in some of the earlier dramatic episodes—can be continued in the future is an issue we comment on later.

  • [1] As noted earlier, that outcome may reflect the fact that efforts to squeeze spending tend toshow up with more lag than revenue squeezes in financial outcomes data. And in this case,Middleton's (1996) historic spending data, following calendar rather than fiscal years, doesindicate a spending squeeze in 1932.
 
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