II Selected Periods of Fiscal Squeeze over a Century

World War I and the 1920s. From Tax Squeeze through Double Squeeze to Spending Squeeze

Background: The Period in Perspective

The period from 1916 to 1925 has at least four notable features as a time of fiscal squeeze. First, it includes the only episode of 'double hard' squeeze in the whole century (that is, significant spending falls and tax rises both relative to GDP and in constant-price terms). Second, it includes both an episode of very hard revenue squeeze (with sharply increased direct tax rates, later to be maintained at their wartime levels for some years after World War I) and sudden and deep cuts in public spending in the 'surgery without anaesthetics' style.

Third, this decade witnessed a succession of three types of squeeze, running from a hard wartime revenue squeeze (while military spending ballooned but civil spending was held back), to a double hard squeeze immediately after the war, followed by an abrupt switch to a deep spending-only hard squeeze. That latter shift, with deep spending cuts applied to a budget already in balance without sudden pressure from financial markets (albeit at very high levels of debt to GDP), reflected a remarkable political U-turn by the government of the day, for which there is no exact parallel in the period covered by this book. And fourth, that final hard spending squeeze, initiated by a coalition government, extended over the lifetime of the subsequent two short-lived governments (Conservative and Labour), during a period of messy and volatile electoral politics.

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