Mid-Term Fiscal Squeeze Pressures, 1947-49

1947 was the first full calendar year of peacetime finance, and it proved to be highly problematic for the Labour Government both in politics and public finance. Non-fiscal austerity continued and even increased for the civilian population, with potatoes rationed for the first time in that year, coming on top of the bread rationing that had been introduced in the summer of 1946. Despite the government's emphasis on expert planning, there was a severe shortage of coal—then the main fuel source for domestic heating and many industrial processes, as well as electric power generation—at the end of one of the two hardest winters of the century, followed by major floods and associated damage. A few months after that, there was a major balance of payments crisis in the summer of 1947, which led to suspension of the convertibility of the currency (required as a condition of the 1946 loan from the United States). That crisis underlined the fragility of the British economy at that time[1] and showed how dependent UK public finances would be on continuing overseas loans from the US and Canada, which needed to be negotiated at the highest political level in the face of sceptical questioning from those governments about the affordability of Labour's plans to expand welfare state services. Following the balance of payments crisis, a supplementary budget raised taxes further, on top of tax increases already imposed in the April 1947 budget, and the government decided to accelerate the run-down in the armed forces for financial reasons.

Those economic and financial difficulties in 1947 contributed to political unpopularity for the incumbents. The Conservatives pulled ahead of Labour in opinion polls in that year, and the political stresses also led to dissatisfaction with the prime minister's leadership among some of his leading cabinet colleagues, producing an unsuccessful move by party heavyweights Herbert Morrison and Stafford Cripps in 1947 to unseat Clement Attlee as prime minister and replace him with the Foreign Secretary, Ernest Bevin.

In the same year Stafford Cripps replaced Hugh Dalton as Chancellor (after Dalton resigned over a minor indiscretion in leaking budget details to a journalist) and came to personify 'austerity' in his personal image as well as his policy actions. Cripps raised taxes on alcohol, tobacco, and betting in the 1948 budget and imposed a special 10 per cent extra tax on investment income for those with annual incomes over ?2000. Despite his austerity image, Cripps cut income tax for the lower paid and also cut beer duty in his 1949 budget ahead of a general election in 1950, but the continuing high tax levels on the better-off gave an opportunity to the Opposition Conservatives to campaign for tax cuts, to be paid for by reduction of 'waste' in government spending.

On the expenditure side, we have already seen that what happened in the early post-war years was a mirror image of wartime spending, with sharply increasing civil expenditure outweighed by a huge drop in military expenditure. Over those immediate post-war years those falls in defence spending outweighed the corresponding increases in civilian spending, and as has already been mentioned, more than half of the rises in social spending on family allowances and the National Health Service were offset by higher National Insurance contributions and the free national health care system did not begin until three years after the end of the war.

But if we look at the reported financial outcomes data we explored in Chapter Two and exclude defence spending, we see a 'hard' fall in civilian public service spending in both constant prices and relative to GDP in FY 1948/49. In 1949 the Treasury expressed anxiety about the outlook for financing government expenditure,[2] and Sir Bernard Gilbert wrote,

There is no rapidly growing national income out of which a rapid growth of existing services and the undertaking of new services can be met... all the social estimates are... increasing rapidly and are likely to go on so increasing, and... there is little sign of... compensatory reductions in other ways... Even if there were such a margin our difficulties would still be considerable because we should merely have shown that we could finance our present programmes out of the produce of taxation at existing rates. But those rates are so high as to be bound to bring discouragement.[3]

Perhaps in line with this gloomy assessment, Cripps' 1949 budget marked a notable political turning point. His budget speech proposed a cap on food subsidy payments (which meant a rise in retail food prices), stated there was little scope for extra redistributive taxation to pay for expanded public services, and indicated that, with taxes already running at more than 40 per cent of GDP, it was necessary to slow welfare state expansion.[4] Only a few months after that, the emphasis went from slowing expansion to attempts at reversal, with an initiative to cut civilian spending by 5 per cent introduced by the prime minister in August. That initiative was part of an overall package that included a big devaluation of the currency by some 30 per cent from $4.03 to $2.80 linked with high-level negotiations with the International Monetary Fund (IMF) and the US and Canadian governments to secure further soft loans. Currency devaluation, which was scheduled for 18 September 1949 after those talks, represented an embarrassing political U-turn for the government, and particularly for the Chancellor, Stafford Cripps, who had repeatedly gone on the record saying currency devaluation was not the way to solve the country's economic difficulties. Part of the package, designed to convince the IMF and other lenders that further devaluation would not take place, was an attempt to show that vigorous measures were being taken to rein in government spending and halt the long-term growth of such spending.[5]

This squeeze initiative was led by the prime minister rather than the Chancellor, with Clement Attlee writing to all ministers in August 1949 to say the cabinet believed that 'the present economic circumstances make it necessary, not only to avoid new increases in expenditure, but to introduce measures of retrenchment—if only to offset the increases which must automatically follow from the expansion of policies already approved'.[6] Attlee's memo announced an intention to cut spending by about 5 per cent and asked departments to come up with proposals for spending cuts, under two heads. One was 'curtailment of services which are not essential to major Government policy', and the memo indicated there were many such services that could be delayed or cut out entirely. The other was 'more economical administration of policies which must be retained' (to which was added the observation 'I am confident that there is room for a... substantial reduction in the numbers of Government staffs'). Ministers of civil departments who could not achieve a 5 per cent reduction in their spending by those two means were asked to indicate what further action would have to be taken to cut spending by that amount.

A week after the prime minister's memo, the Permanent Secretary of the Treasury, Sir Edward Bridges, urged his fellow Permanent Secretaries to keep the 'economy drive' confidential for the time being (it was not to be mentioned to local authorities, presumably to limit the political backlash) and declared that 'what was really needed for submission to Ministers in September was a substantial collection of economy measures (involving in all a large sum of money) which Ministers might find difficulty in approving individually', but which, when presented as a group might secure collective approval.[7] The plan was for the cabinet's Economic Policy Committee to consider the politically sensitive issue of economies in the social services and any cases for termination of particular policies or activities (one that was floated was the scrapping of the 'Festival of Britain', a feel-good public celebration project planned for 1951, the centenary of the 1851 'Great Exhibition'), while the administrative Treasury dealt with the individual departments which had made specific economy proposals.

That 1949 economy drive followed a pattern which was to be repeated in several subsequent economy drives over the next decade or so. What began as confidential discussions behind closed doors in Whitehall soon came to light through leaks to the press, in the form of stories in The Manchester Guardian and The Yorkshire Post on 25 August, apparently coming from the US Embassy, which had briefed the American press the previous day about a UK government initiative to cut spending ahead of the talks over further bailout loans that were scheduled to take place in Washington the following month.[8] But in a pattern also to be repeated in numerous cutback episodes in the following decades, the reductions in 'inessential services and administration' volunteered by departments in response to the prime minister's memo amounted to a grand total of ?26m.

That was roughly one-eighth of the total required to secure the 5 per cent spending reduction target, and indicated that few if any departments would propose a 5 per cent spending cut without raising policy issues that could prove politically difficult or embarrassing to the government. Indeed in several cases, the departments included under 'proposals that would achieve the 5% cut but require a change of policy' a number of schemes certain to be deeply unpalatable to Labour ministers facing the prospect of fighting an election within a year or two. For example, the Ministry of Education mooted the introduction of fees in primary and secondary schools (saving ?20m), the National Assistance Board raised the possibility of more stringent means testing for welfare payments and the Ministry of Pensions offered a cut in the basic state pension. At the end of September (also drawing conclusions that would apply to future spending cut exercises), a Treasury official concluded from the submissions offered by departments by that time:

'(1) Administrative economies and cutting out inessential services will only produce a fraction of the required reduction in the level of civil expenditure...

(2) The 5% objective can only be achieved by cuts in the Social Services.'[9]

As Treasury officials tried to handle what they could at official level, the Chancellor, Stafford Cripps, engaged his fellow ministers in bilateral discussions, and the cabinet's Economic Policy Committee collectively applied a political reality check to the various proposals for spending cuts in social services. In that winnowing-down process, the serious runners started to emerge and politically unfeasible options were laid aside (including reduction in the basic rate of war pensions, top-up fees for state schools at primary and/ or secondary level, alteration of the school entry or leaving age, an increase in the retirement age for schoolteachers, and the abolition of non-contributory old age pensions). The proposals that remained on the table included reductions in the government contribution to the National Insurance Fund (in effect breaking the intention that the fund should operate on an insurance basis), increasing National Insurance contributions to help pay for the NHS, add-on charges for hospital patients and for some NHS services that had previously been free at the point of delivery (such as supply of dentures or spectacles), rent increases for local authority housing, increases in school meal charges, and cuts in food subsidies.[10] Defence was not heavily hit, although a Treasury minute reported 'a strong feeling [among officials] that there was a lot of waste in Research Matters connected with Defence, but it was almost impossible for officials to attack this'.[11]

Following these deliberations, the Chancellor at the end of October announced a package of spending cuts that included reductions in foreign information services, extra charges for school meals above what was already in train, and reduced school transport facilities, a delay in de-requisitioning property that had been taken over by government in World War II, delay in the introduction of the Legal Aid scheme for support of litigants, a cut in the funding for the Festival of Britain planned for 1951, charges for NHS prescriptions, removal of subsidies for animal feedstuffs and fish, and reduction of some other food subsidies. Not included in those announcements, but still under discussion within government, was the possibility of cuts in the fire services, dropping the National Registration (identity card) scheme that had been introduced at the start of World War II, and postponing the census due to be conducted in 1951.

However, in the event, the cuts announced amounted to some ?90m, less than half of the 5 per cent signalled by the prime minister in his August memorandum, and though the legislation needed for the introduction of NHS prescription charges was passed in 1949, it turned out to be another three years before such charges were introduced.

  • [1] See Economic Survey 1949, London HMSO, Cmd 7647.
  • [2] Paper by Robert Hall dated 25 February 1949, T230/151, 'Forward Planning of GovernmentExpenditure'.
  • [3] Memo by Sir Bernard Gilbert dated 10 March 1949, T230/151, 'Forward Planning ofGovernment Expenditure'.
  • [4] HC Deb 6 April 1949, cc.2083-4.
  • [5] 'Top Secret' draft brief for Ministerial Talks in Washington by E.H.W. Atkinson, 4 September1949, T229/212 (Devaluation of the Pound, 1949).
  • [6] 'Government Expenditure', memorandum by the Prime Minister, CP (49) 170, 4 August 1949in T233/276.
  • [7] Minute dated 12 August of a meeting between Sir Edward Bridges and nine selectedPermanent Secretaries held on 10 August 1949, T233/276.
  • [8] 'Curb on Government Spending: Treasury Order to Departments', Manchester Guardian,25 August 1949.
  • [9] Memo by Mr Compton, 26 September 1949, T233/276, Review of Government Expenditure—Autumn 1949.
  • [10] 'Top secret' memo from Sir Bernard Gilbert, 29 September 1949, T233/276, Review ofGovernment Expenditure—Autumn 1949.
  • [11] Record of a meeting between Sir Edward Bridges and eight other senior Treasury officials,28 October 1949, T233/276, Review of Government Expenditure—Autumn 1949.
 
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