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Triggers for Squeeze

Another changing aspect of the fiscal squeeze game over the period considered here relates to what triggered fiscal squeezes.

As we have seen in earlier chapters, two of the revenue squeezes were specifically driven by the pressures of war finance, particularly in World War II, when politicians who had lived through the 1920s were anxious to avoid the massive post-war debt management problems caused by the decision to fund World War I largely by borrowing. And as we have seen, financial market pressures are arguably always in the background as triggers for fiscal change in any capitalist democracy like the UK, whose debt and currency is traded on international financial markets and risk-assessed by ratings agencies.

Indeed, dramatic currency crises and post-crisis devaluations seem to have been the trigger for several of the fiscal squeezes considered here (notably in 1931, 1967, 1976, and to some extent 1992) and three of the squeezes in the middle of our period, all involving Labour governments, involved direct (or more or less direct) bargaining with outside lenders. They were: the so-called 'bankers' ramp' (the pejorative term used to denote the discussions with international bankers in the 1931 fiscal squeeze), the negotiations at prime ministerial level over bailout loans from Canada and the United States in the late 1940s, and the 'letter of intent' conditions attached to the 1976 IMF bailout. Those episodes thus had something of the character of 'negotiated bailouts', but recent decades have witnessed a remarkably long bailout-free period, in sharp contrast to what happened to several of the smaller eurozone economies in the 2010s.

Similarly, an episode of revenue squeeze intended to fund extra public spending has not been seen since the mid-1970s. The opposite of that, namely spending squeezes intended to facilitate tax cuts (as in the Lloyd George Government's response to the electoral threat posed by the 'Anti-Waste League' in 1922, and in the Conservatives' efforts to squeeze spending in the 1950s) did seem to play a part in the 1980s and 1990s squeezes, but budget deficit reduction seems to have been the main trigger for the more recent squeeze episodes. Whether the earlier triggers for fiscal squeeze—currency crisis linked to balance of payments, war finance, pressures to finance tax cuts, or spending increases—have gone for good is obviously debatable.

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