History sheds light on George Osborne’s current dilemmas over the next budget

15 March 2016

New Oxford University research has examined the successive fiscal squeezes by UK governments from 1915-2015. In the forthcoming book, A Century of Fiscal Squeeze Politics, Professor Christopher Hood of Oxford University and Dr Rozana Himaz find that recent governments have opted for fiscal policy akin to ‘boiling a frog alive’, small year-to- year reductions in public spending, rather than ‘surgery without anaesthetics’ or pain over a shorter period. In terms of public services, an episode of revenue squeeze in order to fund extra public funding has not been experienced in the UK since the mid-1970s. The last three squeezes on government spending have relied heavily on slowing the rate of growth of public spending rather than cutting spending in constant-price terms. This is despite the catch-all language of ‘cuts’ used by political opponents, as well as governments themselves when it suited them to portray themselves as bearing down hard on public spending.

Professor Hood commented: ‘What is distinctive about the UK’s most recent fiscal squeeze otherwise referred to as a period of austerity is that it has not featured a ‘hard’ revenue squeeze of tax rises, but was one of the longest spending squeezes over a century. This outcome raises interesting questions about whether the structure of modern state spending makes it harder than before to put the brakes on.’

The research suggests there have been 18 different types of squeeze episodes since 1915. ‘Hard’ fiscal squeezes are defined as increases in tax revenue or falls in public spending both in absolute (constant price) terms and relative to GDP, while ‘soft’ squeezes are revenue rises or spending falls in only one of those ways. Since 2010, the UK has experienced one of the longest periods of public spending restraint over the last century. However, the analysis shows that year-to-year cuts in public spending were notably less deep recently when compared with the period after both World Wars or the ‘Geddes Axe’ cuts of the 1920s.

They also show how unpopular taxes or spending squeezes are punished by the electorate: Hard revenue or spending squeezes were found to result in the incumbent parties in government losing at the next general election partly or wholly at roughly 60 to 80% respectively, compared with soft revenue and spending squeezes where the incidence was roughly 37 to 42 % respectively. For the single-party governments, hard revenue and spending squeezes were always linked with electoral defeat.

More squeezes have occurred under single party government rather than under coalitions or minority governments, and right of centre governments have initiated twice as many fiscal squeezes as left of centre governments (however, the research also says there have been more single party and right of centre governments in the UK over the century which may explain this). The squeezes that rank as the most intense or ‘painful’ for mainstream voters in the last 100 years were between 1931-1933, which broke Ramsay MacDonald’s minority Labour government and subsequently led to an electoral landslide; the 1977-1979 revenue and spending squeeze after the 1976 currency crisis; and the 1980-82 revenue squeeze in the early years of Margaret Thatcher’s Conservative government.

Increases in tax revenue, particularly since 2010, have played a smaller part in fiscal austerity packages in the UK over the last 30 years than in earlier periods. In recent decades, there has been an increase in stealth taxes, such as increases in taxes or charges outside the headline rates of income tax and the main indirect taxes such as VAT, for example, stamp taxes or parking charges. Another trend identified is a number of sudden ‘windfall’ raids on politically unpopular groups or institutions in terms of clamping down on public spending. For example, the Labour’s windfall tax on the privatised utilities in 1997, and the Conservative-Liberal Democrats’ tax on bank balance sheets in 2010. There have also been no wage caps, exchange controls or tight money policies. With the important and electorally costly exception of the Lib Dems’ election pledge to cut university tuition fees, squeezes have not involved breaches of election promises over spending and taxation, although there were numerous cases of taxes, tax increases or removals of tax offsets that had not been mentioned in election campaigns.

In terms of the ‘blame politics’ that often follows unpopular taxes or charges, they find that recent governments have not delegated decisions about where squeezes or cuts should fall since the 1930s. The lack of commissions of so-called experts, who would otherwise shoulder some of the blame, is described as a ‘curious’ development. This contrasts with more recent practice in Australia, where audit commissions have been given such a role, or with even more dramatic cases in the Eurozone, for example in Italy or Greece. In coalition governments, however, the blame has always attached to one of the parties rather than the other. This was witnessed in the 2015 general election with Conservatives winning a majority while the Liberal-Democrats appeared to be punished by the voters.

They find the rarest type of fiscal squeeze is ‘double hard’ when governments reduce public spending and increase tax revenue both in real terms and as a proportion of GDP. According to the research, such an outcome is unusual both internationally and in the UK. It has only happened once in Britain in the last 100 years, just after World War I (between 1919 and 1921) when high wartime tax rates were retained along with massive post-war demobilisation.

Despite military operations such as Afghanistan and Syria, there have been no special war taxes since those experienced in the two world wars. Nor have there been increases in regular taxes that are specifically justified by the need to fund wars, although wars have featured as a reason for not reducing taxes, for example in the 1990s, says the research.

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