Fiscal Squeeze in Germany:

Decisive fiscal squeeze might surprise observers of the German political system, insofar as party political dynamics, welfare state complexity, and intergovernmental financial arrangements are commonly said to inhibit decisive reforms. This chapter traces the fiscal squeeze carried out in post-unification Germany in the 1990s and 2000s and highlights how the politics of fiscal squeeze had damaging political consequences for the Social Democratic Party. Squeeze at the federal government level was largely about ‘natural wastage’ in staff numbers and targeted cutbacks. The welfare state witnessed considerable reform as a result of cumulating pressures resulting from unification, triggering significant political consequences. Finally, squeezing at the level of the intergovernmental fiscal transfers reflected attempts to contain fiscal pressures on local governments, and wider pressures within the system of German federalism, leading to the creation of a constitutional ‘debt brake’ on public budgets.

Fiscal Squeeze in Dutch Municipalities in the 1980s:

This chapter analyses the fiscal problems of Dutch local government in the 1980s and the way that municipalities handled the fiscal squeeze of that time. It first explores the causes of the 1980s fiscal squeeze, that is, the decrease in municipal revenues (particularly in block-grant funding from central government through the ‘Municipal Fund’) and increase in expenditures, partly as a result of recession. It then describes the local government responses to the fiscal squeeze, that is, what cutback measures were taken and what strategies were employed, and explores the linked reform of the financial management system and adoption of ‘divisionalised business model’ structures. Thirdly, empirical evidence about the causes and effects of Dutch local public management reform is considered. Finally, the chapter discusses the longer-term effects that went beyond management reform, that is, developments in local democracy in the 1990s.

The Politics of Fiscal Squeeze

This chapter conceives ‘fiscal squeeze’ as political effort to correct the public finances by raising taxes or cutting spending (or both), distinguishing different types of squeeze. It poses three questions about such squeezes, namely whether there is something special about the politics of austerity or retrenchment, whether fiscal squeeze presents credit-claiming opportunities or severe blame-avoidance challenges to elected governments, and how consequential the effects of fiscal squeezes are. It argues that to put fiscal squeezes into perspective we need to observe what else is happening in the relevant country and in the outside world, to examine what happened afterwards, and to compare fiscal squeezes with one another to see what, if any, common patterns they display. It introduces nine different cases of fiscal squeeze in democracies ranging from the early 1800s to the early 2000s. Each of those cases can be seen as puzzling or contested in some way.

Managing Fiscal Squeeze after the United States’ Panic of 1837

In 1836–39, the United States suffered a financial sector collapse that plunged the nation into a severe economic depression. The revenues of state and federal governments evaporated, prompting legislators at both levels to undertake an extraordinary project of fiscal squeeze. By 1842, one-third of American states were in default on British loans. Meanwhile, the decline of federal revenues heightened partisanship and legislative gridlock in Washington. Strategies of managing fiscal squeeze shifted substantially during the crisis. By its end, many states had resumed payments on their debts, developed new methods of collecting taxes, and adopted constitutional changes restricting deficit financing. Meanwhile, federal politicians completed a painful renegotiation of federal tax policies and adopted a more pragmatic attitude about debt financing of federal expenditures. The effect of the crisis was to produce a transformation in the American constitutional order whose effects are still obvious today.

Politics In and After Fiscal Squeeze

This chapter examines what nine cases of fiscal squeeze in different democracies can reveal about the politics of austerity, combining overall quantitative comparisons with a set of qualitative accounts of those nine cases. It argues that fiscal squeeze in democracies is not invariably prompted by economic force majeure, contrary to the view that public spending growth in democracies can only be checked by exogenous forces or constitutional entrenchment. It further argues that there is no standard set of economic and financial preconditions for fiscal adjustment or consolidation, and that while fiscal squeeze often presents blame-avoidance challenges for incumbents, such squeezes do not necessarily produce deep political crisis or political violence. Nor are they invariably marked by major political turning-points or political cross-dressing in the form of ‘Nixon goes to China’ moments. The chapter concludes by reflecting on what policymakers in the next set of fiscal squeezes can and cannot learn from comparative experience.

Fiscal Squeeze in Sweden, 1990–1997:

This chapter describes how the Swedish fiscal squeeze of the 1990s was implemented and the effects it had. The economic effects of the fiscal squeeze were largely positive, in that the Swedish economy made a remarkable recovery. Moreover, the squeeze was achieved without changing the basic characteristics of the famous ‘Swedish model’ welfare state. However, unemployment did not return to the very low levels Sweden used to have before the 1990s. This partly explains increasing relative poverty. Short-run political effects of the fiscal squeeze were noticeable in 1998. After a temporary recovery in 2002, the relatively high unemployment hurt the incumbent party in the election of 2006 when the Social Democrats experienced historically bad electoral consequences. The fiscal squeeze cost the party a trump card: its status as the guardian of the Swedish welfare state is no longer unchallenged.

Carpe Diem! New Zealand’s Fiscal Squeeze, 1990–1993:

In 1990, New Zealand’s newly elected National Party government, led by prime minister Jim Bolger, faced what it portrayed as an unexpected fiscal crisis. In response, finance minister Ruth Richardson seized an opportunity to launch the most radical revamp of the country’s welfare state since the social security system’s development and consolidation under the first Labour government of 1935–49. This chapter outlines the immediate background to this case of ‘hard’ fiscal squeeze. It examines the main components of the economic and social policies adopted by the government from 1990 to 1993, assesses their short-term effects, and draws links between these policy initiatives and later political and social outcomes. Foremost among these outcomes were the reform of the electoral system in the 1990s (replacing the first-past-the-post system with proportional representation), world-leading legislation (notably the Fiscal Responsibility Act) making fiscal management more transparent and accountable, and substantial challenges to New Zealand’s egalitarian tradition.

Budget Politics in Really Hard Times:

This chapter examines the politics of fiscal squeeze during the Argentine Great Depression (1999–2002) and subsequent economic recovery (2003–07). Argentina’s dramatic transition from poster child to basket case has received much attention, but little systematic research has been conducted on the logic, determinants and implications of the key budget decisions taken before, during and after the financial collapse of 2001. This chapter fills the gap in two ways. First, it assesses fiscal policymaking during both the recession and economic crisis period and the subsequent recovery, focusing on the timing, size and composition of deficit-cutting measures (spending cuts and tax increases). Secondly, it analyses the politics of fiscal adjustment, including the strategies adopted by governments to legitimise the fiscal squeeze. The Argentine case provides insights into the political effort going into budget consolidation in really hard times and offers a counterpoint to received views about the possibilities and limits of austerity.

The UK Geddes Axe of the 1920s in Perspective

The UK ‘Geddes Axe’ initiated under the Lloyd George coalition government in the 1920s became a byword for spending cuts in a slump. It comprised the largest expenditure squeeze in the UK between 1900 and 2013 except for demobilisation periods after the two World Wars. This chapter shows that the immediate trigger for the fiscal squeeze was a tax revolt by middle-class voters which panicked the government into cutting public spending and income tax rates. The cuts were made all at once rather than being phased, and the biggest falls came in social security spending, defence and education rather than ‘equal misery’ across all policy areas. The chapter argues that the most obvious long-term effect of the Geddes Axe was economic (exacerbating the sluggish economic performance and unemployment it was intended to mitigate), but that it also contributed to electoral realignment as between the Liberal and Labour parties after 1922.

Comparing Fiscal Squeezes Across Nine Country Cases

This chapter offers a systematic quantitative comparison of the nine country cases examined in the book. It uses reported spending and tax data to compare the depth and duration of those squeezes, and to show how far depth and duration vary according to whether squeeze is measured by tax and spending in constant prices or relative to GDP, and whether squeeze is measured in terms of spending cuts or tax increases. It shows there is no common set of financial, economic or political preconditions for fiscal squeezes in the nine cases. It also looks at the aftermath of fiscal squeezes in electoral and other outcomes, showing that political incumbents often but not always experienced loss of vote share or loss of office. It also shows that (contrary to common claims about the impact of fiscal squeeze) constitutional or major institutional change only followed fiscal squeeze in two of the cases.