When the party’s over: The next fiscal squeeze

by Professor Christopher Hood, Professor David Heald and Dr Rozana Himaz

9 Oct 2014

The 2010s have seen plenty of ‘fiscal squeeze’ – that is, political effort to cut public spending, raise taxes, or both. We are told to expect more of the same in the coming years in many countries. So is there something especially challenging about fiscal squeeze for democratic leaders, such that elected governments never cut spending unless they face overwhelming external pressures? Does fiscal squeeze always lead to electoral disaster for parties presiding over such policies? Are such squeezes always highly consequential in their political effects, leaving a legacy shaping politics and government for years to come?

A new British Academy publication, When the Party’s Over, explores those questions by comparing nine critical cases of fiscal squeeze by democracies in different times and places (see table). It shows that

  • Democracies can initiate – and handle – fiscal squeeze: in most cases, the squeezes did not come from currency or financial market pressures alone. And those fiscal squeezes mostly did not prompt notable political violence or suspension of normal politics, such as government by technocrats or all-party coalitions.

  • Fiscal squeeze in democracies is often, but not always, a political ‘blame magnet’: these squeezes did not always presage electoral defeat for incumbent parties. Some parties even managed to gain political credit from fiscal squeeze.

  • Fiscal squeeze is not always a highconsequence affair for democracies: most of these squeezes had a short or medium term impact on party politics, but only in one or two cases did major long-term constitutional or institutional change follow.

So what can we say about the future of fiscal squeezes? What will the next fiscal squeeze be like, on the basis of this analysis?

Have we seen ‘the fiscal squeeze to end fiscal squeezes’?
Probably not, any more than World War 1 turned out to be the war to end wars – the record suggests fiscal squeeze will be back. There have been at least eight in the UK alone over the past century. The 2010s is not the first time that democracies have had to grapple with fiscal squeeze, and it is unlikely to be the last.

How will the next fiscal squeeze start?
Probably abruptly, at a point where fiscal stress suddenly turns into crisis. The crisis is likely to come either from currency or security market pressure or from domestic politics, for example, when tax-cutting becomes a political necessity. Or (as in several cases in the table) from some messy mixture of the two.

How will it work?
Future fiscal squeezes are likely to focus as much on spending cuts as on tax increases, because there are remarkably few instances of such squeezes based on tax rises alone. Decision-making in the next fiscal squeeze is likely to be telescoped and conditioned by feasibility and ‘fixability’ (for example in making cuts that do not require major legislative change). And the policy-makers presiding over the next fiscal squeeze will draw ‘lessons’ from those who will claim to have handled today’s fiscal squeezes successfully. But they won’t necessarily prove to be the right lessons if the context is different, as was discovered by those who tried to apply the 1990s Canadian or Swedish ‘recipe’ for fiscal squeeze to the different circumstances of the 2010s.

Who will benefit or lose?
What gets cut will depend on the political colour of the government of the day, but public servants are usually in the front line for cuts in pay or numbers. Electoral pledges to scrap unpopular new taxes may be laid aside and the axe will probably fall heavily on discretionary spending items, such as subsidies on food, transport or housing. Given the composition of state spending today, decision-makers in the next fiscal squeeze will not be able to exempt all ‘welfare state’ spending, such as social security, health and education, but will have to choose which items to spare and which to subject to spending cuts or higher user charges.

What long term consequences will it leave behind?
The rhetoric surrounding the squeeze will stress high consequentiality, for instance in creating a ‘lost generation’ or changing the state and society for ever. Such claims often prove hard to pin down, but in some cases big institutional or constitutional changes can follow from fiscal squeeze. And there can be more subtle consequences. Political parties can suffer long-term reputational damage, as happened to the Swedish Social Democrats after the 1990s. Political memories can influence later squeezes, as in the way memories of the ‘Celtic tiger’ spending cuts in 1980s Ireland affected the cuts twenty years later. Just as the next fiscal squeeze will be shaped by memories of the recent past, the same thing is likely to happen for the fiscal squeeze after that.

Christopher Hood is Gladstone Professor of Government at the University of Oxford. David Heald is Professor of Accountancy at the University of Aberdeen. Dr Rozana Himaz is Senior Lecturer in Economics at Oxford Brookes University.

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