Fiscal Squeeze and The Labour Government, 1931

Labour's 1929 election manifesto2 blamed the Conservatives for inaction in the face of recession and rising unemployment. It offered an 'unqualified pledge to deal immediately and practically' with unemployment, to improve unemployment benefits and pensions, extend social housing, abolish taxes on food and instead fund its programmes from higher taxes on the better-off, such as estate duties, extra taxes on higher incomes, and taxes on land values. The latter was a long-cherished policy aspiration of the left, which Snowden had tried to pursue during his brief Chancellorship in 1923-24 (Williamson (1992): 237).

But the Party's ability to deliver on these ambitious goals was limited both by its lack of a parliamentary majority, and by the economic crisis that accompanied the 1929 stock crash. The government's first budget statement in 1930 showed that the budget surplus for FY1929/30 envisaged by the previous Conservative Chancellor (Winston Churchill) had unexpectedly turned into a deficit of some ?14m as a result of a collapse in tax revenues along with higher welfare spending. In response, the Chancellor retained the food taxes the 1929 Labour manifesto had pledged to remove, while increasing Beer Duty, raising the rate and progressivity of Estate Duty, increasing income tax on the highest incomes (formerly called 'supertax', now 'surtax') and putting up the standard rate of income tax while raising the threshold for that tax in a way designed to extract extra tax from only 25 per cent of taxpayers.3 These post-election tax rises were intended to deliver a budget surplus in FY1930/31 and Snowden indicated that taxes would not be increased the following year.

But the government's finances remained precarious, and in February 1931 a currency crisis, combined with pressure from other parties, pushed the government into appointing a Committee on National Expenditure, redolent of the Geddes Committee of ten years earlier, and indeed with exactly the same formal terms of reference, but with at least two significant political differences, namely that it was not a response to an electoral threat posed by an anti-tax movement and that its membership consisted of two representatives of each of the three main political parties. The committee, which was chaired by Sir George (later Baron) May, a prominent business leader with experience in

1929 Labour Party manifesto, http://labourmanifesto.com/1929/1929-labour-manifesto.shtml. Financial Statement, HC Deb 14 April 1930, c.2676.

government during World War I,[1] started work almost at once and reported at the end of July, having split on party lines.

The Labour Government used the fact that the May Committee was at work on proposals for fiscal correction to justify a do-nothing stance in its April 1931 budget. The Chancellor offered a relatively optimistic view of the likely deficit in FY 1931/32 and neither cut spending nor raised taxes, apart from an increase in the tax on petrol (gasoline) and the announcement of another plan for a land values tax. But three months later, the May Committee majority report (disowned by the two Labour representatives on the committee) painted a dark picture of the fiscal situation and recommended swingeing public spending cuts to balance the budget, with about half of the savings coming from cuts in unemployment benefit and increased social security contributions (a tax increase in all but name).

The Labour Government set up an 'economy committee' of cabinet ministers to respond to these politically challenging proposals and that committee was due to meet on 25 August. But that timetable was overtaken by another currency crisis, itself partly caused by what critics saw as the excessively bleak account of the government's financial position that the May Committee's majority report had given to make the case for urgent and drastic corrective action. So instead of a cabinet committee, debate over what to do about May's proposals took place in prolonged meetings of the whole cabinet for five successive days in August. On 24 August the cabinet split 9-11 after a deadlock over proposed cuts in unemployment benefit as part of the spending cuts package, after which the prime minister, Ramsay MacDonald, offered his resignation to King George V.

Precisely what package of spending cuts and tax rises the Labour cabinet had agreed to before 24 August became heavily disputed in the 'blame game' that followed the fall of that government. Although the Trades Union Congress had opposed all cuts to public sector pay as well as welfare benefits, the Labour cabinet was said to have agreed to public sector salary cuts, including staged cuts in the then civil service 'bonus'.[2] Indeed, after the fall of the Labour Government, both Ramsay MacDonald and Arthur Henderson (the new leader of the Labour Party, now leader of the Opposition) said the Labour cabinet had agreed to a package of spending cuts of about ?56m (as against the ?70m proposed by the National Government just over a fortnight later).[3]

MacDonald also claimed that the Labour Government had contemplated a tax squeeze package greater than the ?80m later proposed by the National Government, though a senior Labour figure, George Lansbury (who had been a minister and later became leader of the Party), denied that the Cabinet had agreed to extra taxes on tea and sugar.[4]

  • [1] Sir George May (1871-1946) was Secretary of the Prudential Assurance Company up toretirement in 1931 and had been Manager of the American Dollars Security Committee duringWorld War I. In 1932 the National Government appointed him chair of the Import Duties AdvisoryCommittee, overseeing the introduction of general tariffs.
  • [2] Memorandum on the Measures Proposed by His Majesty's Government to Secure Reductions inNational Expenditure, Cmd 3952 1931, London, HMSO: 3.
  • [3] HC Deb 8 September 1931, c.32 and 256.
  • [4] Debate on the Second Reading of the National Economy Bill, HC Deb 11 September 1931, cc.424-5.
 
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