The Disappearing 'Hard Revenue Squeeze'?

As noted above, it is striking from Table 2.1 that up to the early 1980s, 'hard' revenue squeezes were quite common and indeed on five occasions (the early 1920s, early 1930s, mid-late 1940s, mid-1970s, and 1980-81) such squeezes show up in the financial outcome records as coming before spending squeezes.

But that type of single revenue squeeze seems to have diminished if not vanished in the last thirty years of our period. There were individual years of 'hard' revenue squeeze on two occasions in the 1990s (sandwiched between longer periods of soft squeeze) but no revenue squeeze preceding a subsequent spending squeeze.[1] How can we account for the apparent absence for such a long period of this once quite common type of squeeze?

There is no received explanation of this observation, as far as we know. Did tax become more politically sensitive towards the end of our period for some reason? Does this apparent disappearance of the hard revenue squeeze simply reflect the fact that the three fiscal squeezes over that period, with the exception of the 'New Labour' period for two years after 1997, were all initiated by Conservative or Conservative-led Governments which may have been more politically predisposed to squeeze by cutting spending rather than raising taxes? Or again, might the answer be more administrative and economic? Might there have been more constraints on managing tax revenues associated with a move to a more open economy and the constraints imposed by membership of the European Union in the later decades? Might so-called 'Laffer curve' effects (Wanniski 1978; Laffer 2004)—in which increased tax rates do not produce commensurately increased overall revenue—have become more marked in the later part of the period for some reason? Or could this outcome be explained by long-term changes in tax structure (with relatively more reliance on VAT, income tax, and compulsory social insurance contributions related to earnings) making tax revenues rise and fall more sharply as GDP changes?[2]

  • [1] As already mentioned, one soft revenue squeeze observable from the 'levels' method does notappear in Table 2.1 but is shown in Table A2 in the Appendix, namely 2003-07, which did precedethe episode of double soft squeeze beginning in 2010.
  • [2] Such a change in the elasticity of revenues relative to GDP would augment so-called 'automaticstabilizer' effects in hard economic times (Hood, Heald, and Himaz (2014): 6), causing revenues tofall further in such conditions.
 
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