Squash is soft drink in the UK, right? Fizzy drinks?
I wouldn't blink if there were none at a party, but if there was only water, then I would think the parents were cheap, rather than trying to be healthy. Water with fruit in it, some fruit juice, even a good old punch (minus the alcohol) would all be fine. There just should be more than water.
And you can have sweet and tasty without it being packets of mixed lollies. For DS's christening, I made a trifle (even made the sponge and custard myself) without alcohol in it, and loaded it up with fruit. There were heaps of kids at the party and they actually went nuts for the trifle rather than the sweets and chocolates I had supplied, it was quite interesting to watch. I do know that there has been a bit of a swing towards more healthy eating, even among children. When we're on school camps and put down trays of carrot sticks, celery sticks, raw brocolli, etc with some hommus or other dips, the kids go
One of the mothers at my school does party bags which include things like cheap matchbox cars, bubble blowers, stickers, little colouring books, mini puzzles, little magical tricks, that sort of thing, depending on the ages. She said that she shops online and at the cheapo shops to buy it all, and it costs her less than a bag of sweets does. She's not against sweets, just thinks it is a waste of money, so would rather give something the kids can at least play with for a while. They are well received, and I doubt anyone complains about the lack of sweets.
You can provide (reasonably) healthy party fare and party bags without appearing cheap and uptight. It just takes a bit of imagination.