Although it involved a serious split within the Labour Party towards the end of the period, this period of squeeze is rather less politically dramatic than that described in Chapter Four, but it involves far higher levels of taxation and striking levels of non-fiscal austerity. As in earlier chapters, we conclude by discussing the three sets of issues raised in the opening chapter about the politics of fiscal squeeze.
Tax and Spending, Depth and Duration, Blame and Control
The ten-year period covered by this chapter involves the wartime tax squeeze applied by the three-party coalition which on our measures in Chapter Two rates as the second most severe tax squeeze over the whole century considered in this book. That tax squeeze was accompanied by steeply rising government spending overall, but when we take out defence spending we find it conceals a 'hard squeeze' on non-defence spending between FY 1937/38 and 1943/44.
Equally, as we have seen, the deep fall in aggregate spending in the first few years after the war conceals a big jump in all the major areas of civilian spending in FY 1946/47 and 1947/48. On the tax side, the post-war Labour Government kept taxes high by pre-war standards, but tried to alter the distribution of taxation to protect lower earners, and produced a 'soft' revenue squeeze with taxation rising in constant-price terms but not relative to GDP. Later in the government's life, civilian spending was squeezed in FY 1948/49 and 1949/50 (and beyond that on some data sources, as we noted in Chapter Two) as pressures built up to negotiate overseas loans and cut taxes in the face of Conservative electoral challenges.
The issue of tax versus spending in fiscal squeeze figured large toward the end of this period and Martin Daunton (2002: 221 and 224) argues that by 1950 there was a 'clear sense that the [Labour] government had reached the limits of its fiscal strategy' (of funding an expanded welfare state by high levels of redistributive taxation on the better-off) and that the Treasury itself and the government's economic advisers had come by that time to advocate a spending squeeze to finance tax cuts that would in turn stimulate private savings and investment.
On the issue of blame and control, the wartime revenue squeeze (and associated squeeze on civilian spending and non-fiscal austerity) resembled the World War I case discussed in Chapter Three in that it involved a 'grand coalition' of political parties such that it was hard for voters to attribute blame for particular measures among the partners in the coalition.
The later Labour revenue and spending squeezes, in contrast to the spending squeezes discussed in Chapters Three and Four, broadly involved normal political processes within government, though it is notable that one of them, the 1949 economy drive, was led by the prime minister rather than the Chancellor. There were elements of outside involvement in these spending squeezes in that the UK was dependent on soft loans from the USA and Canada at that time and the 1949 economy drive was part of a strategy for renewing those loans. But neither of those spending squeezes involved an outside committee of the type represented by the Geddes or May Committees, and that probably reflected sour memories of the May Committee fifteen years or so earlier among Labour leaders during this period.