The Gladstone Box, Japanese Highways, and the Yankee Tea Parties

23 06 2010

Yesterday, George Osborne, Britain’s Chancellor of the Exchequer (in Canadian parlance, finance minister), presented his budget. The media have, quite rightly, focused on the substance of this budget, which involves spending cuts and tax increases to deal with the deficit.  However, they have also mentioned some of the rituals surrounding the presentation of the budget to parliament. See here.

George Osborne With Budget in Box

British Chancellors have traditionally brought a copy of the budget to parliament in an iconic red budget box, first used by William Gladstone in the early 1860s. This box, which is supervised by the British National Archives in Kew, will be officially retired after this week’s budget because it is in a state of disrepair. Made for William Gladstone around 1860, it has been used by every chancellor since, with the exception of James Callaghan and Gordon Brown. The box will now be kept on display at the Cabinet War Rooms in Whitehall, which you can visit.

The retirement of this box is a good time to think about financial history and differences in national political culture.

For more about the Gladstone box, see here. You can also see a cool video on the history of British public finance here.  I’ve included a video about the history of the box.

The story of the box is interesting to me because of what it represents. First, in the course of researching my PhD thesis, which dealt with an attempt by Canadian politicians to get money out of the British government in the 1860s, I had to do a fair bit of reading on Gladstone and his financial policies. There is a sizeable literature on Gladstonian finance and the reforms he implemented as Chancellor in the 1860s and later as Prime Minister. These reforms included placing all government funds in a single consolidated fund, which was a step towards transparency. Previously, the British government’s annual expenditure had been divided among a vast array of special envelopes, with revenue from a particular source being hypothecated to a particular class of expenditure. This system was complex, made oversight more difficult, and resulted in “feast or famine” budgets in particular government departments.

Gladstone

After the achievement of Responsible Government, Canadians adopted the British practice of preparing the budget in secret and then announcing the entire budget in parliament. This practice was designed to cut down on last-minute lobbying by rent-seekers, which was once common in Westminster-style democracies and is still a prominent feature of the preparation of the budget in the U.S. Congress. In the U.S. Congress and in state legislatures, representatives will agree to vote for the budget in return for goodies for their home districts, the result being the misdirection of trillions of dollars into “bridges to nowhere”, obsolete military subsidies, and subsidies to farmers.

The existing literature shows that the British financial reforms of mid-19th century reduced the role of special-interest politics in the making of British government budgets and thus helped to increase the average taxpayers’ trust in the state. These reforms reduced anti-statist or anti-government sentiment in Britain, which had been rampant in the days of Old Corruption, and paved the way for the rise of the welfare state. If people in Britain, Canada, and other Commonwealth countries have  a more positive view of “Big Government” than their American cousions, it is likely a result of the reforms undertaken by Gladstone. Of course, this is highly ironic, since Gladstone was a small-government classical liberal. The US never enacted these reforms, which helps to explain why there is a deep suspicion of Big Government in that country, as is evident in the Tea Party movement.

I’m not saying I agree with the Tea Party movement. All of the energies the Americans are putting into the Tea Party movement should be devoted to Transparency International. However, I understand where they are coming from. If I had to live under corrupt U.S. politicians (let’s face it, pretty much every US President from Nixon on would be in jail in a Commonwealth country), I would probably want to reduce the amount of money at their disposal. After all, the US government budget seems to be chiefly devoted to obscene subsidies for farmers and paying for wars the US people don’t believe in rather than paying for service the public might actually value. In fact, if I were a pacifist living in the United States, I might even support the Tea Party movement, since that movement is probably the most effective means of bringing the US war machine to its knees.  Personally, I kinda hope that the Tea Party Revolt and the tax evasion it is encouraging forces the US to pull out of Afghanistan sooner than expected.

Tea Party in Philadelphia

Similarly, if I lived in Japan, I might also become an anti-tax crusader, since so much of that country’s budget is devoted to propping up the construction industry through useless infrastructure spending (e.g., multilane highways in remote parts of Japan). The corrupt gerontocracy that runs that country has spent billions on laughable infrastructure projects that aren’t needed when they should be putting money into encouraging Japanese women to have babies.  At the current rate, there will soon be more bullet trains than children in the land of the rising setting sun.

Half Completed Highway in Japan, Doubtless Built to Please Some Liberal Democrat Crony

Anyway, I digress. You can find an excellent survey of the scholarly debate on Gladstonian finance in historian Martin Daunton’s financial history of 19th century Britain, Trusting Leviathan. see excerpt here.

I’m particularly interested in the ways in which Canadian politicians in the 1860s and 1870s selectively copied some of the reforms that had been undertaken by Britain in the mid-19th century. Luther Holton, who has Canada’s Finance Minister in 1862-4, was an admirer of Gladstone, as were other Canadian politicians of the Liberal stamp.

Luther Holton, Canadian Classical Liberal

Canadians were rather selective in the ways they embrace Gladstonian finance. Like Britain, Canada decided to create a single consolidated fund and begin preparing budgets in secret. Canada also created the office of Auditor-General, to make sure that taxpayer funds were being spent wisely. However, Canada did not imitate Britain in the crucial matter of the tariffs. In the 1840s, the British government of Robert Peel shifted from indirect to direct taxes, cutting customs duties but making up for the shortfall by imposing an income tax on the top 2% of the population. This was a bold and selfless act on the part of the parliament that voted for this shift, since it was a parliament elected by the properties classes.  For better or worse, Canada did not follow suit until the 20th century, although some Canadian classical liberals proposed the introduction of income tax in 1860s. In fact, the failure of Canadian politicians to introduce income tax in the 1860s is one of the reasons I have so little respect for the Fathers of Confederation.  For decades after Confederation, Canada’s government got most of its revenue for the tariff, a rather regressive form of taxation. Needless to say, the tariff-protected industries that had grown up under this form of taxation were among the most vigorous opponents of the introduction of income tax into Canada. Canadians only began paying for income tax during the First World War.

You can read more about Luther Holton here.

There are some great images from recent Canadian budget history here.


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4 responses

23 06 2010
Rich Becker

Andrew,

Solid piece. Transparency is one of the few ways to put an end to politicking and misappropriation. I’m not sure Americans share the “why” perspective you’ve framed up here, but the “what needs to be done” solution is on target.

Americans don’t trust politicians with the money because they frequently demonstrate over and over again that they cannot be trusted. Most “pork” spending as we call it, is the result of too many leaders buying into the notion that pork is bad, but I might as well get some for my state while it’s on the table. We also suffer from feast and famine budgets, especially on the state level because every surplus during good times is spent, but government cannot support the excessive spending when times are lean.

I do think our country underplays how much is invested toward social programs. We invest a fair amount of money into programs for the public good. However, I am sad to say that not all of those programs spend the money properly, given our current grant system. Taxpayers almost never get what they pay for or want to pay for.

As for military spending, some of it makes sense but not for the wars we have found ourselves wrapped up in. You are right that most Americans would prefer to see us out of the Middle East sooner than later. The problem right now is that we’re stuck, especially since our present administration set a pull out date. As soon as he did, insurgents decided to wait out the troops and the future leadership started cutting deals with whomever it could. Those consequences have destabilized the region, which makes it less likely you’ll see a pull out any time soon. It’s a mess.

All the best,
Rich

24 06 2010
Christopher Moore

Fascinating post. But the makers of the Canadian constitution in the 1860s were open to the possibility of direct (read income) tax. They did give the federal government full powers to implement direct taxation. George Brown, for one, strongly favoured direct taxation over tariff income. But George Brown wasn’t in power post-confederation. Surely it was the post-confederation governments, principally John A. Macdonald’s, your disapproval should be aimed at. There was nothing in the constitutional structures created by the “fathers of confederation” that impeded direct taxation in Canada. That was a political choice.

25 06 2010
andrewdsmith

Hi Christopher,

It`s true that George Brown favoured direct taxation, but the political class as a whole was opposed to direct taxation. My disapproval is aimed at the pre-Confederation and post-Confederation government that failed to introduce income tax. Of course, one could argue that these politicians were simply behaving as one would expect by implementing fiscal policies that were congruent with the interests of their social class (the elite of Canadian society) and the various special interests that had put them in power (e.g., the Canadian Manufacturers`Association with Macdonald in the 1870s).

The truly remarkable phenomenon, in my opinion, is the decision of the British government of Robert Peel in the 1840s to shift the government`s revenue source from the tariff, which was higly regressive, to an income tax that fell on the top 2% of the population. This action is so remarkable because it the British parliament at that time represented the top 2% of the British population– at least that`s who sat in it. The fiscal reforms of Peel and later Gladstone were truly remarkable– a case of the turkeys voting for Christmas. The upper-class Canadian politicians who decided not to shift the tax burden up the social scale towards their own families are easier to explain– that`s a case of the turkies voting against Christmas.

Why Canadian legislators opted against income tax in the 1860s is a complex question. Gladstone, who wanted Canada to shift to income tax, said that the refusal of Canadians to do so was a sign of a juvenile political culture. That explanation doesn`t really hold water. Special interest groups such the manufacturers who supported the mildly protectionist tariff in 1859 played a role, but I think that the real reason is the weak national identity of Canadians. The British legislators voted for income tax during the Napoleonic Wars and then again in the 1840s because they felt it was they and their upper-class friends had a patriotic duty to shoulder more of the tax burden. By this point, the British national identity was rather strong, as Linda Colley shows in her book, Britons`Forging the Nation. Canada had a much weaker national identity: Canada was ethnically diverse and a large proportion of its population was composed of immigrants, transients, and other people with shallow roots in the country. It`s not surprising that the Canadian political class were unwilling to make major sacrifices for the common good.

PEI did introduce income tax in the 19th century, but it was a relatively old and settled community. Moreover, most of the people who paid income tax in PEI lived in the capital city which, had a small population, so it would be have been hard for them to lie on their income tax forms. There were the right social preconditions for income tax.

25 06 2010
andrewdsmith

Hi Rich. Thanks for reading the blog.

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