September 18, 2011

Fiscal Constitutions and the Coming of Dark Times

Ira Katnelson's formidable book "Desolation and Enlightenment" studies the reaction to the second world war. Katznelson is interested in those thinkers who responded to the destruction wreaked by Europe's thirty years war and genocide, not by abandoning the enlightenment and its analysis of society (as did say Leo Strauss) but by seeking to buttress it and reconstruct it. Katznelson identifies in particular one diagnosis of the mid century crisis: he argues that Karl Polanyi in particular identified the institutional framework of 19th century liberalism as one of the safeguards for that period against crisis. When that institutional structure collapsed in the 1920s and 1930s, fascist and communist competitors rose to challenge not merely the structures of liberalism, but also its very essence- the idea of personal freedom. This aside in Katznelson's book prompts a reflection- what were those institutions of freedom in the 19th Century which supported and sustained liberal democracy. In this post I want to reflect on one such institution- the fiscal constitution drafted by the Earl of Liverpool (PM 1812-27), Sir Robert Peel (PM 1841-6) and William Gladstone (PM 1868, 1868-74, 1880-86, 1892-4).

At the end of the Napoloeonic war, the UK's public sector debt was over 250% of GDP, the UK's politicians were accused of massive corruption and the UK itself ceased in 1828 to be a confessional state. These three massive factors drove the creation of this fiscal constitution. The fiscal constitution depended on three innovations: the creation of the consolidated fund, the creation of the virement system and the introduction of annual expenditure targets. The creation of a central fund into which all revenues were paid and from which all expenditure came, took power from the Departments to the Treasury. This meant as well that Parliament had a simple view of what the government was spending and what it was not. Virement meant that Departments were voted money from that central fund to specific heads of expenditure- its still true within the UK that Departments have to stay within their allocated levels for each budget they are voted and have to apply to Treasury to vire money from one head to another. Lastly the idea that expenditure was always annual meant that a surplus could not be reallocated for a politician's pet project: instead a surplus went straight to the sinking fund. These three rules meant that the Treasury was in full control of public expenditure and through them so was Parliament. They created an environment in which debt was cut from 250% of GDP to 25% by the end of the century. They fortified a Gladstonian sense of how politicians should behave.

Polanyi said that institutions and institutional behaviours protected liberalism (at least that's what Katznelson argues he said). The institutions described here survived the nineteenth century. Daunton suggests that they assisted in the development of the welfare state- noone in British politics in the 1910s or 1940s criticised the expansion of government because it would create jobs for MPs and not go towards the purposes that it was voted. The Gladstonian system worked. More importantly towards Polanyi's point: it also worked in that British politicians were able to pay for both the First and Second World War. The Gladstonian financial state financed the wars which assisted in the protection of liberalism: in that sense they support an argument which says that the institutions created by the nineteenth century and their survivial were key to the survival of that characteristic ideology of the nineteenth century- liberalism.


James Higham said...

Mightily interesting. I'll run a post on this at OoL.