Consequences: What Did Fiscal Squeezes Leave Behind?

What did the fiscal squeezes we identified in Chapter Two leave behind? What happened afterwards? Were the leaders or parties doing the 'squeezing' systematically punished or rewarded by the voters; applauded or condemned by policy analysts as providing 'lessons' for what to do or what not to do in managing the public finances; were there constitutional or other major social developments that can clearly be attributable to those squeezes?

We here divide the consequences of fiscal squeeze into two categories: financial and economic outcomes, and political and constitutional/institu- tional outcomes, and we also consider fiscal squeezes both in terms of the amount of change taking place on reported financial outcomes and of qualitative assessment of squeeze intensity, as shown in Table 11.1 earlier.

For financial and economic outcomes, we explored whether debt and/or deficit significantly fell in the three years after the squeeze, what happened to other economic indicators such as unemployment or currency exchange rates, whether there were major long-term changes in policy direction, and the extent to which the episode came to be widely seen as a model to be emulated elsewhere or an example of egregious policy error to be avoided by later governments in the UK or in other countries.

For political and constitutional/institutional outcomes, we explored whether and how far governments handled the squeezes without collapse or major party splits, how incumbents initiating or carrying out the squeezes fared at the polls after those squeezes, and what if any constitutional or major institutional effects the squeezes had. Other possible consequences of squeeze episodes might include significant social disorder or protest (riots, demonstrations, or strikes or mutinies by police, armed forces, or other significant arms of the state).

Table 11.2 shows some readily measurable financial and economic outcomes of the eighteen fiscal squeezes considered in this book. What is striking is the variety of outcomes shown there. Anyone who believes either that fiscal squeeze is always a certain route to economic/financial improvement or disaster will find it hard to reconcile such beliefs with what is shown in Table 11.2. It is true there were cases where deficits came down, debt reduced, and unemployment fell after episodes of fiscal squeeze—but there were roughly the same number of episodes where those indicators moved in the opposite direction. There was only one case out of the eighteen where all three of those indicators moved in a positive direction after a squeeze (the episode of 1953-55), and there were only two episodes where all three of those indicators moved in a negative direction (1976 and 1980-81).

That variety of outcome may in part be explained by the different goals that have underlain the fiscal squeezes explored in this book. As we noted in section 11.2, not all fiscal squeeze efforts over the century were triggered by

Table 11.2. UK fiscal squeeze episodes 1900-2015: economic aftermath

Overall

episode

Subperiods

Type of overall squeeze

'Substantial'

deficit

reductiona

'Substantial'

debt

reductionb

Fall in

unemployment

rate?c

Quantitative: R= revenue, E=Expenditure

Political loss, cost, effort (H=High, M=Moderate, L=Low)

1916-18

1916-18

Hard R

H, L, H

Yes

No

No

1919-25

1919-21

Hard R/Hard E

L/M, M, L

Yes

No

No

1923-25

Hard E

H, M/L, M

No

Yes

Yes

1931-35

1931-32

Hard R

H, H/L, H

No

Yes

No

1933-35

Hard E

M/H, L, L

No

Yes

Yes

1941-45

1941-45

Hard R

H, L, H

Yes

No

Yes

1946-49

1946-49

Hard E/Soft R

M, M, M

Yes

Yes

No

1953-55

1953-55

Soft E/Soft R

M, M, M

Yes

Yes

Yes

1960-61

1960-61

Hard R

H, H, M

No

Yes

Yes

1964-67

1964-67

Hard R

H/M, M, H/M

Yes

Yes

No

1968-69

Soft E/Hard R

H, H, M

Yes

Yes

No

1973-78

1973-75

Hard R

H/M, M, H/M

No

Yes

No

1976

Hard E/Soft R

H/M, M, M

No

No

No

1977-78

Hard E

H, H, H

Yes

No

Yes

1980-88

1980-81

Hard R

H, H, H

No

No

No

1983-88

Soft E/Soft R

M, M, M/H

No

Yes

Yes

1993-00

1993-00

Soft E/Soft R

M, M/L, M

Yes

No

Yes

2010-15

2010-15

Soft E/Soft R

M, M/H, H/M

n.a.

n.a.

n.a.

Notes:a 'Substantial' if primary deficit/GDP three years after the end of the episode was at least two percentage points below level at the start. b 'Substantial' if debt/GDP three years after the end of the episode was at least five percentage points below level at the start. c Coded yes if the unemployment rate in the year after the squeeze ended was less than the rate the year before the squeeze started.

determination to reduce budget deficits, and a few were even undertaken at times when the budget was approximately balanced. That is one of the reasons we set out in Chapter One in arguing that the degree of reduction in deficit, although the favoured metric of numerous 'budget consolidation' studies in the econometric style, is a far from reliable or valid measure of political effort put into fiscal squeeze. But as we have also already noted in the previous section, the more recent episodes seem to have been mainly driven by the goal of reducing deficit, and those squeezes mostly do seem to have been followed by deficit reduction.

We also see variety in the policy changes that accompanied or followed fiscal squeezes, and in their perceived significance in international perspective. As we have seen in previous chapters, in every case fiscal squeeze episodes left something behind them in policy change—such as the shelving of some of the more ambitious post-World War I 'reconstruction' plans for extending secondary education in the 1920s, the abandonment of the gold standard after the Invergordon naval mutiny provoked by naval pay cuts in 1931, the beginning of user charges for the NHS and abandonment of elaborate civil defence and protection in the 1950s, the abandonment of 'East of Suez' military bases in the late 1960s, the beginning of the modern era of privatization in the squeezes of the 1970s and 1980s, the ending of mandatory grants for university students, abandonment of the principle that savings for retirement should only be taxed once and the first decision to raise the age of eligibility for retirement pensions in the 1990s, and the tripling of university tuition fees (outside Scotland) in the 2010s. But those policy changes were themselves highly varied and their relative significance is not easy to show. Some had a certain once-for-all character, like the abandonment of civil defence, while others were later partially or fully reversed, like the charges for prescription medicines in the NHS, and the extent to which they were 'mould-breaking' is debatable in many cases.

Similarly, the squeezes seem to vary in terms of the extent of international attention they attracted as models to be imitated (or avoided) elsewhere. Only two of the squeeze episodes up to 2010, namely the 1920s Geddes Axe and the 1980s Thatcher 'cuts', seem to be plausibly countable as cases attracting significant international attention as 'models', and in both cases, they sharply divided international opinion as to whether the model was an example to be followed or avoided. It is still too early to say whether the 'boiling frogs' squeeze of the 2010s will come to be seen internationally as a model or an awful warning, or neither, but as we noted in Chapter Ten, during its lifetime it attracted in fairly short order both condemnation from IMF economists for being too fast and deep, and subsequent praise as a successful route to fiscal consolidation and economic recovery.

Turning from the economic, financial, and policy consequences of fiscal squeeze to electoral, political, and constitutional/institutional consequences, the pattern also looks varied, at first sight at least. In general, constitutional or major institutional change directly linked to fiscal squeeze seem to have been the exception rather than the rule. The only unambiguous case is that of 1931, when King George V's role in putting together an emergency National Government to implement fiscal squeeze attracted continuing party-political criticism in a way that almost certainly had a restraining impact on later monarchs' behaviour. Another instance is that of the often-argued effects of the Thatcher Government's 1980s squeezes on later pressures for Scottish devolution and indeed independence, but in that case it is harder to separate the effects of fiscal squeeze from those of other causal factors (such as the longterm decline of religious sectarianism as a primary cleavage in Scottish society). And as we noted in Chapter 10, the same goes for any link between the 2010-15 squeeze and the subsequent 'Brexit' vote in the 2016 referendum on the UK's membership of the European Union. The direct effect of fiscal squeeze is hard to separate from other factors.

Turning to electoral effects and party splits following fiscal squeezes, the pattern shown in Table 11.3 appears varied, at first sight at least. The table shows how each episode is classed according to our measures drawn from reported financial outcomes and those reflecting our assessments of qualitative severity as discussed earlier. It also reports electoral outcomes for incumbent parties in the general elections following each squeeze, and the incidence of government collapses or major party splits over squeezes. As we have seen, there is only one clear case in the century of a government collapsing as a result of conflicts over how to conduct a squeeze (1931), though there are several cases of significant party splits, in all cases on the left and in all cases over spending rather than revenue.

When it comes to the relationship between 'austerity' policies and the likelihood of incumbent parties losing office, we noticed in Chapter One that welfare state retrenchment studies as well as some econometric studies have analysed comparative electoral data for OECD countries since the 1970s, related electoral outcomes to measures of fiscal outcomes expressed as falls in deficit relative to GDP, and reported erratic electoral punishment for fiscal correction policies measured in those terms (see in particular Alesina etal. 2012). Such findings challenge the expectations of the simpler variants of 'economic' retrospective voting theory that we discussed in Chapter One, in which electoral punishment follows policies that impose losses on key interest groups and voters (Wenzelburger 2014).

But such results may depend on precisely how we define the slippery concept of 'austerity' or 'fiscal correction', and as we showed in Chapter Two, there are numerous cases out of the eighteen considered here in which fiscal squeeze was not accompanied by deficit reduction. Indeed, when we look at the case of the UK over a century and measure 'austerity' in terms of the intensity of fiscal squeeze in terms of hardness or softness (which, as we have seen, broadly corresponds to our qualitative indicator of the degree of loss imposed on voters), we reach a conclusion different from that arising from the work of Alesina and his colleagues.

When we look at fiscal squeeze in that way, 'high loss' squeezes look more electorally toxic. The overall casualty rate for incumbent parties partially or wholly losing office at elections over the whole century from 1900 to 2015,[1] whether or not a fiscal squeeze had been applied, was just over 62 per cent (eighteen out of twenty-nine cases), or 50 per cent in the case of single-party governments. The incumbency casualty rate for the seven elections over that period that were not preceded by a fiscal squeeze (in all cases involving singleparty governments) was some 42 per cent.

Overall

episode

Sub-

episodea

Type of overall squeeze

General election outcome for incumbent

Government collapse or major party split?

Quantitative: R= Revenue, E=Expenditure

Political loss, cost, effort (H=High, M=Moderate, L=Low)

Lost office? (election yearb)

Swing in vote sharec

Difference in seat shared

1916-18

1916-18

Hard R

H, L, H

Partly (1918)

n/a

n/a

No—war coalition

1919-25

1919-21

Hard R/Hard E

L/M, M, L

Partly (1922)

n/a

n/a

No

1923-25

Hard E

H, M/L, M

Yes (1923)

-0.5

0.1

Not over squeeze

Yes (1924)

2.6

-0.42

No

1931-35

1931-32

Hard R

H, H/L, H

Partly (1931)

n/a

n/a

Collapse and split

1933-35

Hard E

M/H, L, L

Partly (1935)

n/a

n/a

No

1941-45

1941-45

Hard R

H, L, H

Partly (1945)

n/a

n/a

No—war coalition

1946-49

1946-49

Hard E/Soft R

M, M, M

No (1950)

-1.6

0.03

Internal party split

Yes (1951)

2.7

-0.04

Internal party split

1953-55

1953-55

Soft E/Soft R

M, M, M

No (1955)

1.7

0.11

No

1964-69

1964-67

Hard R

H/M, M, H/M

Yes (1964)

-6.0

-0.02

No

No (1966)

3.9

0.18

No

1968-69

Soft E/Hard R

H, H, M

Yes (1970)

-4.9

-0.07

No

1973-78

1973-75

Hard R

H/M, M, H/M

Yes (1974a)

-8.5

-0.01

No

No (1974b)

2

0.03

No

1977-78

Hard E

H, H, H

Yes (1979)

-2.3

-0.11

Internal party split

1980-88

1983-88

Soft R/Soft E

M,M, M/H

No (1983)

-1.5

0.29

No

No (1987)

-0.2

0.23

No

1993-00

1993-00

Soft R/Soft E

M, M/L, M

Yes (1997)

-11.2

-0.38

No

No (2001)

-2.5

0.37

No

2010-15

2010-15

Soft R/Soft E

M, M/H, H/M

Partly (2015)

n/a

n/a

No

Notes:a 1960-61,1976, and 1980-81 sub-episodes excluded as therewas no general election held during ortwo years after squeeze ended. b The 1906,1/1910,12/1910,1929,1959,1992, 2005, and 2010 elections excluded as theydid notoccurduring orwithin two years ofepisodeend.c Difference betweenvote shareatcurrentand previous electionsforsingle party incumbent. d Difference in parliamentary seat share between incumbent and closest competitor. Only single-party incumbent governments are considered.

Against that background casualty rate, Table 11.3 shows that during or immediately after a hard revenue squeeze, the incumbent parties in government lost office partly or wholly at a general election 77 per cent of the time (seven out of nine elections), whereas during or after a soft revenue squeeze they lost office 38 per cent of the time (three out of eight elections). Likewise, a hard spending squeeze was associated with incumbents wholly or partly losing office 86 per cent of the time (six out of seven elections), whereas during or after a soft spending squeeze they lost office 42 per cent of the time (three out of seven elections).

If we ignore the complications that arise over scoring what happened to incumbents in general elections when there were two or more parties in coalition and look only at fiscal squeezes carried out by single-party governments (that is, excluding the 1916-18, 1919-21,1931-32, 1933-35, 1941-45, and 2010-15 squeezes) we find a similar pattern. Hard revenue or spending squeezes were associated with a higher probability of the incumbent losing office at subsequent general elections (at roughly 60 and 80 per cent respectively), compared to soft revenue and spending squeezes (where the incidence was roughly 37 and 42 per cent, respectively). Moreover, soft revenue or spending squeezes are not associated with a casualty rate markedly above that observable in elections not preceded by fiscal squeeze.

As already noted, hardness and softness as we defined it in Chapter Two broadly corresponds with our first qualitative indicator of the effort put into squeeze, namely the degree of loss or pain imposed on core or mainstream voters. We found some differences in the relationship between electoral outcomes and the other two qualitative indicators, namely political cost to incumbents and effort on the part of the state machine. On the second indicator, most (66 per cent) of the single-party government squeezes involved low or moderate reputational risk or related political costs and were associated with mixed electoral outcomes, with the incumbent party losing office in seven out of twelve elections. The few single-party government cases of squeezes involving high political cost were always associated with electoral defeat for incumbents.

The same broadly applies to the third indicator, that of effort exerted by the state machinery. Most of the single-party government squeezes involved moderate effort on this indicator, and were associated with a roughly fifty per cent incidence of subsequent electoral defeat that was not clearly distinguishable from the incidence of defeat by incumbents whether or not there was a squeeze. But for the single-party government cases, high-effort squeezes were always associated with electoral defeat for incumbents.

These findings do not necessarily invalidate the claims of scholars such as Alberto Alesina, who base their analyses on different ways of identifying episodes and intensity of austerity, and compare different countries rather than looking at one country over time. But what they do show is that different—and we have argued, possibly more meaningful ways—of identifying episodes and measuring the intensity of fiscal squeeze—lead to very different conclusions, indicating that, on those measures, fiscal squeezes can be highly consequential for election outcomes.

Two other points can be noted from the electoral and party outcomes summarized in Table 11.3. One is that while, in general, hard or high-effort squeezes seem to have been toxic for incumbents in subsequent elections, there are one or two notable exceptions of incumbents securing re-election after hard squeezes, all on the left. That is, the Labour Party was re-elected in 1950 after imposing a hard spending squeeze, and was re-elected in 1966 and 1974 (October) after imposing hard revenue squeezes. The first is scarcely an exception, since the Party was undoubtedly punished by the voters as retrospective voting theory might predict (as we noted in Chapter Five, the Party suffered an adverse vote swing of some 3.6 per cent, lost seventy-eight parliamentary seats and saw its previous 146-seat majority cut to a mere five). But in the other two cases of elections following hard revenue squeezes (the swingeing tax increases, including increases in the standard rate of income tax, introduced in the post-election budgets of 1964 and 1974) the Party saw an increase in its electoral support, particularly in 1966. Those episodes indicate that in some conditions a party on the left has been able to benefit electorally from a hard revenue squeeze to support higher public spending, and are consistent with the 'asymmetrical punishment theory' that was mentioned in Chapter One.

Second, electoral outcomes following a coalition that imposed a squeeze indicate no cases in which both or all the political parties forming the coalition were equally punished by the voters. In all such cases one of the parties in the coalition was rewarded by the voters in the subsequent election, while another (in all cases the party on the left, unless we count the Conservatives following the World War II tax squeeze) was punished. That suggests that during fiscal squeeze, coalition has not so much been about sharing the subsequent blame as a zero-sum competition for post-squeeze blame and credit among the incumbent parties.

  • [1] Excluding the 1901 election in this analysis.
 
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