The Future of Fiscal Squeeze Politics: Can We Extrapolate?

What can we extrapolate from the history of fiscal squeeze in the UK, from the past to the future, or from the UK to other states or political systems?

Starting with the first type of extrapolation, if the history of fiscal squeeze, as examined in this book, is any guide to the future, there is no reason to expect fiscal squeeze to be a thing of the past. As we have seen, over the century explored in this book, fiscal squeeze episodes of one kind or another tended to occur at least once a decade on the financial outcomes data we explored in Chapter Two. The main exceptions to that were the decades of the 1900s and the 2000s, the second of which happened to be sandwiched between the long- drawn-out but 'soft' spending squeeze of the 1990s initiated by the Conservatives and followed by New Labour in its first two years, and the spending squeeze initiated by the Conservative-Liberal Democrat coalition in 2010 after a short-lived fiscal stimulus immediately following the 2008 financial crash. Given that record, the question is when, not whether, fiscal squeeze will be back. And projecting the historical pattern into the future, the odds are that there will be further episodes of fiscal squeeze in the 2020s if not before that.

So what is the nature of those future fiscal squeezes likely to be? If we simply extrapolate the trends we identified in Chapter Two, we could expect those future episodes to continue to bite harder on the spending than on the revenue side (albeit with a few hard revenue spikes associated with crisis years or sudden raids on politically unpopular industries or groups). We could expect the pain of spending restraint to be spread over longer periods with lower annual falls relative to growing GDP, rather than in sudden steep cuts in constant-price terms. We could expect to find further development of the 'budget airline' approach to increasing revenue (stealth taxes, windfall taxes, user charges) and the 'heresthetic' drawing of new dividing lines over welfare spending, for example, within groupings of welfare beneficiaries (such as pensioners). We could expect fiscal squeeze to be accompanied by loose monetary policy, and for the fiscal measures to be orchestrated and planned within the central administrative apparatus of executive government rather than by outside commissions.

Some of those developments (such as further division of voters over welfare spending) seem very likely. But there are well-known dangers in basing forecasts about the future on what we can see in the rear-view mirror. And as we have seen in this book, some fiscal squeezes have taken the form of conscious political rejection of what had been done (or not done) in a previous episode. In particular, for the Labour Party, the trauma and deep party split occasioned by the decision over whether to cut unemployment benefits in the middle of a deep recession in 1931 meant that cuts in social security benefits were avoided by Labour governments right up to the 1970s, as we saw in Chapter Seven. For the Conservatives, a squeeze that did not happen (the failure of Chancellor Peter Thorneycroft, together with his fellow Treasury ministers Enoch Powell and Nigel Birch, to secure the agreement of Prime Minister Harold Macmillan and their cabinet colleagues to significant spending cuts in 1958) has also been said to cast its shadow forward to the Thatcher Government some two decades later, as we noted in Chapter Six.

Similarly, as well as processes of political reaction against earlier choices that were perceived as politically erroneous, the circumstances that underlay some of those trends are not necessarily immutable either. Tax toleration can alter abruptly, as happened with the fuel tax revolt by road tanker drivers in 2000 that struck hard at the fuel tax accelerator that had hitherto been a standby of both Conservative and Labour governments in the 1990s. Sources of taxation can dry up as well. For example, the North Sea oil that came on stream as a taxable resource in the 1980s and to some extent acted as a substitute for rises in mainstream taxes that would have been more visible during the squeezes of the Thatcher, Major, and Blair Governments, was a finite resource that may or may not be replaced in the future by other revenue sources such as shale gasfields. The same goes for the supply of readily privatizable public-sector enterprises or assets that also served as a partial substitute for tax increases or spending cuts over the same era. It is far from clear that those assets remaining in public ownership will be capable of realizing the sums raised during the privatization booms of the 1980s and 1990s.

Other background factors that could be different for future fiscal squeezes include changes in debt levels, the value of money, and the rate of economic growth. The next fiscal squeeze could be very different from those of the past few decades if it starts with a debt wall more comparable to that of the 1920s and 1930s, when governments' room for fiscal manoeuvre was sharply limited by their predecessors' decision to fund the huge costs of World War I largely by borrowing rather than by taxes. As for the value of money, we noted in Chapters Seven and Eight on the 1970s and 1980s that high rates of inflation provide opportunities for fiscal squeeze tactics such as the use of 'fiscal drag' to increase revenue in constant-price terms by not fully indexing all tax thresholds and allowances, and also to restrain spending through similar expedients. But a rate of low or nil inflation undermines such strategies, and a background of falling prices means that squeeze has to be undertaken in more visible ways, by reducing tax thresholds or allowances, or absolute cuts in public service wages. As for economic growth, we noted in Chapters Eight, Nine, and Ten that that was what underpinned the recipe applied to reducing public spending relative to GDP over the past three episodes—namely of keeping overall public spending growing, but at a lower rate than the rate of growth in GDP over successive years. But if those who believe that an economic background of 'secular stagnation' is here to stay as some sort of 'new normal' are correct,[1] that spending-squeeze strategy may also be less easy to deploy in the future than in the past.

In short, it is far from impossible to identify possible future changes of circumstances that might undermine the foundations of the fiscal squeeze approaches of the past three decades, such that the economic and political future might turn out to be more like that of the 1920s and 1930s than that of more recent decades, and if that did indeed prove to be the case, some of those apparently discarded approaches to fiscal squeeze might turn out to make a reappearance.

As for the second type of extrapolation—from the UK to other states or political systems rather than from the past to the future—recent fiscal squeezes in the harder-hit eurozone countries have indeed more closely resembled the UK squeezes of the 1920s and 1930s than those of the more recent past, in the sense that they took place against a background of recession or slow growth, stable or falling prices, and sluggish tax revenues, and in many cases also in the context of multiparty political systems rather than the predominance of two alternating parties in government that was more typical of UK politics in the decades after World War II. By contrast, some of the much- lauded fiscal consolidations in other developed countries in the 1990s—such as Canada, Sweden, and New Zealand—were more like the most recent three UK episodes in that they took place against a background of economic growth with more buoyant tax revenue and to that extent shared something of the 'fiscal squeeze without tears' characteristics.

Whether the British record of three fiscal squeezes in a century at a high qualitative level of intensity (in terms of loss, political stress, and state effort) is typical or exceptional in international context would merit more investigation, and that would require more scholars to supplement readily accessible reports of financial outcomes with more hard-won qualitative comparative judgements of such intensity. The same goes for the time pattern of fiscal squeezes identified in Chapter Two: as we have seen, in the British case those episodes occurred often enough in the course of a century for some political and bureaucratic memory to shape the process in one way or another in most episodes, but not so often as to turn squeezing into a continuous routine for bureaucracies or a blame arena in which the next fiscal squeeze would regularly arrive before those who handled the last one had given way to a new set of incumbents. Those conditions did not always apply even in the British case (for example, they did not apply to the Conservatives in the 1990s), they are not guaranteed to continue in the future, and such a pattern cannot be expected to apply everywhere. But more generally, it could be argued that the development of modern capitalist democracy combined with maturing or ageing welfare states is likely to make non-trivial fiscal squeeze a recurring feature of democratic politics across the world.

  • [1] 'Secular stagnation' is the idea, normally attributed to Alvin Hansen (1939) who argued in the1930s that slowing population growth and technological progress would reduce opportunities forinvestment, causing savings to pile up unused and economic growth to fall unless governmentsborrowed and spent more to boost demand. More recently the idea has been taken up by theleading Harvard economist Larry Summers (2016).
 
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