(TAKAHASHI Yoichi, PPPC Chairman)
Although the Ministry of Finance has devoted to its tax-hike policy currently, the ministry was not necessarily so when I was working. Financial reconstruction was the main policy of the MoF, needless to say, but the means for that aim was economic growth.
Coincidentally I found Ms. Mariko Fujii’s article “transition of national bond control policy in U.K.: 1694-1970” through the internet (http://www.jsri.or.jp/publish/research/45/45_04.html ). This article originates from an internal document jointly drafted by Ms. Fujii, former MoF career bureaucrat, and myself 30 years ago. Although Ms. Fujiii is a pro-tax-hike critic now, the article was written in a slightly different tone, saying that the British experience of financial reconstruction was “fundamentally enabled by natural increase of tax revenue having the economic growth and increase of national wealth as its background.” At that time, we briefed the document in front of the MoF executive officials and concluded that economic growth is the way for financial reconstruction.
I happened to have the original document in my hand. Because the original document has as many as 150 pages, let me summarize the paper in the following.
History of Government Bonds in U.K.
1. This report outlines the history of public bonds in the U.K. by dividing it into 1) pre-1950s and 2) post-1950s periods in an effort to discuss factors and methods to decrease the public burden in the U.K. Although the history of U.K. government bonds can be traced back to as early as mid-17th century, it displays different aspects between pre-WWII period when the bonds were mainly issued for war expenditures and post-1972 period when the bonds were massively issued caused by financial deficits.
2. The government bonds until the WWII were issued mainly for the purpose of financing the war expenditures. In other words, financial balance or a little surplus was premised during the peacetime. While the budget was once expanded during the WWI, it shrunk back after the war and therefore avoided financial deficits. It could be said that there was a “night-watchman state” view in the background at that time.
Expenditure items started to diversify from the end-19th century and early-20th century as social service such as education and social security expanded, and it speeded up after WWI and WWII. The financial size did not shrink back to the pre-war standards, which Peacock and Wiseman called “displacement effect.” However, in both the periods, 1) high-burden structure was maintained in due to the wartime tax-hike in the revenue, and 2) there were decreases of defense expenses in the expenditure, hence it didn’t lead to financial deficits despite the expansion of such social services. Therefore, even in the 20th century until 1970s the budget was normally maintained in balance during the peacetime and reasons for issuing government bonds were limited to Boer war in the 19th century and the two world wars.
3. From the 18th to early-19th century, the government bonds showed increases during the several wartimes, and it amounted to as high as 844 million pounds (*2.9 to national income) in 1818 after Napoleon War (1795-1815). But the deficit gradually decreased toward end-19th century to 635 million pounds in 1898 (*0.39 to NI), and it again showed drastic increases due to the two world wars in the 20th century. The financial deficit in 1922 was 7.813 billion pounds (*2.03 to NI) and it amounted to 2.5771 billion pounds in 1946 (*2.55 to GNP).
In the history above, while the late-19th century (UK’s Golden Age) could be noted as the only period when the deficits showed persistent decreases, it was enabled by 1) natural increase of tax revenues backed by economic growth and expansion of national wealth, 2) economic contribution from colonies, 3) systematic redemption by partial-payment foundation and terminable pension and other factors. Note that other experiments of partial-payment foundation (1716-1788 Walpole, 1786-1828 Pitt) did not mark successful achievements.
The primary reason for the smooth reduction of financial deficits during the 19th century can be found in a high economic growth during the time.
4. After the WWII saw aggressive utilization of the financial resources in efforts to achieve firm establishment of social security or perfect employment, though, the speed of deficit-expansion stayed in a low speed as the high-burden structure since the wartime was basically maintained; the financial deficit increased in a low pace of 1.6%/year during 1946-1971. Also the ratio of financial deficits to GNP decreased largely from 2.55 to 0.62 because of the high rate of economic growth at the time.
5. The U.K. entered a new phase in its history of government bonds in the 1970s. The financial balance kept in the postwar period was finally broken after 1972 and the U.K got to have lots of financial deficits among other countries in the global economic recession. The candidate background behind the fact can be 1) tax reduction since 1971-1975 implemented as an economic stimulus, 2) increase in expenditures centered on social security under the Labor Cabinet in 1974-1975, 3) increased loans to nationally-owned industries, etc.
There were attempts to cutback expenditures in the late 1970s, and the Thatcher administration since 1979 tried to further reduce expenditures in the budget-making process to get rid of the financial deficits. However, they could not succeed in overcoming the deficits and the government has continued to issue massive government bonds thereafter. For that reason, the government debts skyrocketed from 35.8399 billion pounds in 1971 to 113.036 billion pounds in 1980 by 13.6% every year.
Meanwhile, the ratio to GNP has dropped from 0.62 (1971) to 0.50 (1980). This is probably because the nominal growth rate was higher because of inflation, rather than for economic growth.
6. With regard to refinance policy, because most of the debts were eternal bonds before the WWII, low-interest refinanced loan was given important weights as means to lower burdens. Also during the wartime, because most of the bonds were issued at short-term, they were often refinanced as long-term loans after the war. However, it seems that the main attitude of the postwar bonds control policy has shifted its weight from the conventional “refinance as low-interest, long-term” orientation to “maintaining the market that maximizes ambitions of domestic and foreign investors to invest in the government bonds.”