The Later Conservative Squeeze, 1993-97
Norman Lamont was succeeded in mid-1993 by Kenneth Clarke, a highly experienced minister who had headed three major departments during the Thatcher and Major Governments and had also been a key member of the EDX committee. Clarke's political position within the Party differed from that of his predecessor in several ways (in that he was pro-EU and more to the left) and he described himself and his Chief Secretary from 1994 (Jonathan Aitken) as 'poachers turned gamekeepers' who had been in charge of big spending departments but neither of whom espoused what he called 'the slash and burn approach to public spending'.
Nevertheless, Clarke broadly continued with the soft spending and revenue squeeze initiated by his predecessor over the course of the four subsequent budgets of the Major Government. In his November 1993 budget,8 Clarke announced plans to reduce the deficit over the course of the Parliament (to the point where borrowing would equate only to government's capital spending by FY 1996/97) and to eliminate government borrowing entirely by the end of the century. In his first year as Chancellor, he said that about half of the cuts in the deficit came from changes in public spending plans and the other half from increased taxes, but in his later years as Chancellor, relatively more emphasis was laid on reductions in planned spending.
That spending squeeze was carefully packaged politically as one that provided extra real-terms spending in the most electorally salient policy domains—notably in the key party battlegrounds of education, healthcare, and policing, but also including training and science—at the expense of savings in domains that were seen as less electorally salient for swing voters. Accordingly, in the non-cyclical parts of public spending, there were notable 'cuts', mostly in the form of reductions in planned increases, in defence, roadbuilding and transport, local government, public sector running costs, and parts of social security (the latter including the imposition of tighter tests for invalidity payments and the introduction of a new taxable incapacity benefit).
Cuts in government running costs—a classic 'valence' issue in electoral competition—figured large in credit-claiming passages in three of Clarke's four budget speeches. For instance, in 1994 he declared that cost reductions had focused on 'cutting the back office and protecting the front-line delivery of our key public services', introducing a front-line/back office distinction that had been less prominent (though by no means completely absent) in earlier spending squeezes but which became familiar in later decades and indeed led to a complete reclassification of 'running costs' in the 2000s. By 1996, Clarke claimed to have reduced central government's running costs by no less than 8 per cent in constant prices since 199211—a remarkable result which contrasts sharply with the failure to cut those costs under the Thatcher Government in the previous decade (Hood and Dixon (2015): 74-5). At the same time, the cyclical parts of public spending (notably on unemployment benefits and employment programmes) fell as a result of falling unemployment, while a reduction in the inflation rate (for example in 1994) meant that spending in several years undershot what had been planned. The effect of all these changes, as we saw in Chapter Two, was not to cut public spending in constant-price terms (except in a single year, 1996/97), but to slow its growth while GDP grew, such that the ratio of spending to GDP fell, and government borrowing fell by almost a half between 1993 and 1996.
In addition, a long-term cost-reducing change to retirement pension eligibility was announced during this period which, as with the de-linking of pension payments to earnings by the Thatcher Government in 1979, had a delayed but substantial impact. That was the announcement in the 1993 budget that state retirement pension entitlement ages for men and women (sixty-five and sixty, respectively, at that time) would be equalized at sixty-five from 2010—something that had not been mentioned in the 1992 Conservative manifesto but which was justified as a way of making the social security budget grow at more affordable rates in the long-term, while honouring manifesto commitments to protect the real value of pensions and benefits. (The same budget speech also announced a long-term plan to introduce a system of electronic charging for motorways when the technology permitted it, a policy proposal first floated in the 1960s but which had not yet happened at the time of writing.)
On the revenue side, as already mentioned, the planned second stage of the controversial imposition of VAT on domestic energy bills, legislated for in the 1993 Finance Act, was derailed by a backbench revolt in 1994. That revolt left VAT on energy at the first-stage level of 8 per cent rather than 17.5 per cent, and thereby removed ?3bn or so of extra revenue that the second-stage increase had been expected to bring in, while adding to spending by a careful package to compensate electorally important losers, notably retirement pensioners, from the second-stage VAT charge that never happened. But nevertheless, Clarke's first budget raised taxes substantially by freezing income tax and inheritance tax thresholds, while further cutting tax offsets from mortgage interest payments, beginning a policy of increasing road fuel duties and tobacco taxes each year by at least 5 per cent and 3 per cent, respectively, in constant-price terms. It also announced two new taxes, Air Passenger Duty (a levy on passengers departing from UK airports) and a tax on insurance premium payments.
Clarke's second budget in 1994 held income tax rates constant while raising thresholds and allowances by the rate of inflation, introduced more aboveinflation increases in road fuel and tobacco taxes, and announced another new tax, Landfill Tax on waste disposal, to start in 1996. But (in a pattern that was to recur in the 2010s) tax revenue outcomes fell below what had been planned, both on VAT and on direct taxes, in 1994/95 and 1995/96.
As the next general election approached, Clarke's third and fourth budgets in 1995 and 1996 cut taxes overall, in both cases widening the 20 per cent rate band, raising direct tax allowances by slightly more than the inflation rate in
- 1995 and by much more the following year, and cutting the standard rate of income tax by one percentage point in each year, from 25 per cent to 23 per cent between 1995 and the pre-election budget of late 1996. Presenting that
- 1996 budget, Clarke claimed credit for introducing the lowest standard rate of income tax for nearly sixty years,14 but still applied the real-terms 'accelerator' to road fuel and tobacco taxes and left the standard rate of income tax above the Conservatives' often-announced goal of 20 per cent.
HC Deb 30 November 1993, c.932.
What is therefore noticeable about the financial year (1996/97) leading up to the 1997 election is that the 'hard' revenue squeeze of the previous two years turned into a soft squeeze for the election year, but there was also a notable reduction in spending in that financial year (much but not all of it due to the reduction in cyclical social security spending associated with falling unemployment). The reported numbers indicate only a fairly modest 'electoral cycle' effect, and indeed according to Prime Minister John Major (2000: 689) in his memoirs, the pre-election budget disappointed Conservative backbenches who wanted a pre-election bonanza along the lines of the 1992 budget or some of the Conservative pre-election budgets of the 1950s.