Fiscal consolidation in earlier British history

Martin Wolf writes:

In 1816, the net public debt of the UK reached 240 per cent of gross domestic product. This was the fiscal legacy of 125 years of war against France. What economic disaster followed this crushing burden of debt? The industrial revolution.

There is more here, gated by the FT.  This is an excellent point but I will ask whether this is an argument for or against fiscal consolidation (without meaning to suggest that the British should raise taxes further or borrow less right now).  The industrial revolution is a tough act to pull off again.  By the way Martin reports:

Between 1815 and 1855, for example, debt interest accounted for close to half of all UK public spending.

The broader numbers are interesting too.  During the 19th century British consols generally yielded three to four percent.  By Wolf’s account British growth was about two percent for the first half of the 19th century.  So there was in fact some fiscal consolidation, because at those differential numbers growing out of the debt will not work.  Note for instance that during the 19th century Britain introduced or expanded some fundamentally new methods of taxation, such as the income tax.  In this sense the scope for “do it on the path toward larger government” fiscal consolidation was unprecedented and could not be replicated today.

What actually pulled Britain out of its debt problem was the Victorian growth spurt in the third quarter of the 19th century, which I consider part of the most revolutionary period of technological progress in all of human history.  Again, that may be hard to replicate.

There is good evidence that the British experienced crowding out of capital investment during their period of peak debt (pdf) and in that sense the burden was paid all along.  That situation is different today.

Your mileage on this one may differ, but in the 19th century Britain ran a regular balance of payments surplus.

There is also this (pdf):

Britain managed its huge national debt by relying on debt instruments (“consols” and similar bonds) that were perpetual yet callable. That meant that sudden spikes in interest rates, associated with wars or financial crashes, had limited impact on government solvency. Compare this to the danger that Italy and other European countries are facing, with the need to refinance over the next few months large fractions of their (much smaller) national debts. There was certainly a cost in terms of higher interest rates to British financial policy. But in retrospect one can argue that British authorities were wise to take that course, and that in general they were smarter than ours not to be deluded by the promises of liquid and rational markets, and were prepared for upheavals. For all the sophistication of our economic theory, our ancestors may have been more sophisticated than we are in truly understanding how the world works.

Very long-term debt is perhaps not such a bad idea today.

I do very much oppose the tax increases which have been chosen recently by the United Kingdom, and the switch in the content of public expenditure away from investment, and in that sense I agree fully with Wolf.  And of course today’s British debt/gdp ratio is not near 250%.  Nonetheless, when it comes to drawing conclusions about fiscal policy over the next ten to twenty years, the historical example of the 19th century can cut either way.


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