From revolution to recession: 300 years of public finances

In 1688, William III and Mary II ascended the throne of England as joint monarchs, having overthrown James II. Among the many new things brought about by this revolution were the detailed financial records the government of the day began to keep.

We have published a new briefing paper using these records, along with data from the Bank of England, to give an overview of the public finances over the past 300 or so years. Here we pull out some of the briefing’s findings on government spending, revenues and debt. We also look at some of the quirkier things addressed in the historical records.

Government income and spending

For most of the 18th and 19th centuries, the level of both public income and public spending remained pretty constant in peacetime. Temporary increases, particularly in public spending, were seen during times of war. Once peace arrived both spending and income drifted back to the normal levels. The 23 years of war with France and Spain (a period that included the Napoleonic Wars) saw public spending more than double as a share of the economy. Once the war was over spending soon returned to its pre-war level.

The 20th century was a different story. Both World Wars required significant increases in public spending and (smaller) increases in public income. Once the conflicts were over spending fell from its wartime peak, but did not return to its pre-war level. The subsequent birth of the welfare state resulted in a sustained increase in spending. Both spending and income have remained at around 30-40% of GDP ever since.

Debts and deficits

Whenever the government doesn’t bring in enough income through taxes or other revenues to fund its spending, it has to borrow. This has often happened during wars, which are very expensive to carry out. A series of wars throughout the 18th century left the country with a debt of almost 200% of its GDP in 1822.

The country had the chance to pay this debt down again in the century of comparative peace that followed. However, it had barely made it below 30% of GDP before the First and Second World Wars sent it shooting up to record levels.

In 2016, the debt stood at 85% of GDP (around £1.7 trillion), having been pushed up from around 35% by the financial crisis of the late 2000s. This is high by the standards of the past 50 years, but similar levels had been seen around 1860 and 1770.

The cost of wars

Wars are extremely expensive – the UK spent in the region of £1 trillion in modern terms fighting World War II. Prior to the 20th century, the UK’s most expensive war was with France and Spain between 1793 and 1815, costing an estimated £83 billion in modern terms. The War of American Independence comes in second, at around £11 billion, followed by the Seven Years’ War (around £10.5 billion).

The changing face of tax

Until the 20th century, most taxes were levied on consumption and wealth rather than on income. These taxes often took the form of excises (taxes levied on basic products such as salt, bricks and cloth), or land and assessed taxes, most famously based on the number of windows in a house.

Income tax was first levied in 1798 in order to fund the highly expensive war then being fought against France. It was subsequently repealed and re-imposed several times until its permanent reintroduction in 1842. Since then, income tax has become the UK’s most significant tax. During the 20th century similar taxes, such as National Insurance contributions (NICs), were introduced to support the government’s new increased spending, and these days income tax and other direct taxes on income (including  NICs) and wealth make up the majority of all tax income.

Lotteries and robberies

Over the years the government has resorted to unusual methods to raise money. Tontines are one such method. People who bought into the scheme received an annual payment from the government. However, the total amount paid out by the government in each year remained the same, so as people died the amount the survivors received slowly increased. Tontines were made illegal in 1774.

Government lotteries were also run to raise money. Some were more successful than others; the Malt Lottery Loan of 1697 had so few people buying tickets that the spares were eventually issued by the Treasury as cash, and were still in circulation until 1711.

The Treasury has also been robbed – twice. In 1303 a group of monks broke through the wall of the Chapter House in Westminster Abbey, making off with the modern equivalent of nearly £200 million worth of treasure. They buried much of it in the Abbey grounds, but were found out when local goldsmiths reported a suspiciously large amount of gold and precious stones being sold. 27 people ended up in the Tower of London. The second robbery in 1729 was much more successful, with the modern equivalent of nearly £400,000 being stolen from a chest in the office of one of the Tellers of the Exchequer – the culprits were never found.

Much of the information presented here comes from two sources: Public Income and Expenditure 1688-1869 (The Chisholm Report), 29 July 1869; and, the Bank of England’s, A millenium of macroeconomic data, V3.1, 2 March 2017.

Image credit: Westminster Abbey and Hall from the bridge, October 16th 1808 by George F. Robson, Open Parliament Licence