The Varying Spending/Taxation Composition of Fiscal Squeezes

Table 2.1 shows the different mixture of revenue and spending that went into the squeezes we have identified. Of the eighteen cases shown in column 2, ten were 'single' squeezes—seven revenue-only squeezes, three expenditure-only squeezes (the two interwar cases, plus the late-1970s Labour squeezes)—while the remaining eight were a mixture of the two. As can be seen, governments quite frequently carried out hard revenue squeezes over much of the earlier part of the century (we comment on the later period shortly). Single hard expenditure squeezes were rare over the century as a whole and seemed to come only in particularly dire economic circumstances.

The table also shows variations in the relative part played by expenditure and revenue in those nine squeezes which involved a mixture of the two. 'Double hard' squeezes (that is, spending decreases and tax increases in both constant prices and as a proportion of GDP) were so rare over the period as a whole that only one of the nine cases (that taking place immediately after World War I) comprised such a squeeze. More generally, fiscal squeezes were rarely symmetrical, in the sense of equal pressure being applied on spending and revenue (at least on these financial outcome measures). In some episodes, spending was squeezed so that taxes could be cut (as happened in the early 1920s, in response to electoral pressures for tax cuts), while in others revenue was increased so that spending could be increased (as in most of the revenue- only squeezes shown in Table 2.1). Two of the hybrid squeezes were 'hard' on spending and 'soft' on revenue (those occurring in the aftermath of World War II and the Labour squeeze associated with the IMF loan of 1976), while one was 'soft' on spending side and 'hard' on revenue (the 1968-69 Labour squeeze). The remaining squeezes were all 'double soft', and that mixture seems to be associated with more recent episodes.

Third, of the periods shown in Table 2.1, two (1916-18 and 1941-46) were instances of war finance under wartime coalition governments, and show up here as 'single hard revenue' squeezes, in that taxes were sharply raised while overall government spending and borrowing shot up. But as we note in the chapters that follow, it can be argued that those periods were effectively cases of 'hybrid' or double squeeze, at least as far as civilians were concerned, since most non-military expenditure was cut back while defence spending soared.

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