Walpole and the National Debt
One of the biggest financial problems faced by government in the early Hanoverian period was the escalating size of the national debt. Britain’s wars with France in the late seventeenth century had cost upwards of £130 million. In 1697 the debt stood at £16.7 million, but by the close of the War of the Spanish Succession it had soared to £40.3 million, and under the pressure of continuing military activity in the post-war period, it had reached £49.9 million by 1719.
Financing the cost of warfare had produced a system of ‘deficit financing’ whereby the government raised loans from financial institutions (such as the Bank of England or the East India Company) or private individuals. The repayment of these loans, plus interest, was pledged on the funds raised by specific taxes established and earmarked for these purposes by Parliament. Institutional or individual creditors – the ‘monied interest’ – thus gained returns on their loans in the form of interest paid from the revenue accruing from customs and excise duties on a wide array of commodities. This meant that much taxation was in fact structured around the repayment of debt. As far as possible, the services for each current year – chiefly expenditure on the army and navy – were met from the land and malt taxes which were voted annually. The malt tax raised approximately £700,000 a year, while each shilling of the land tax produced around £500,000 per annum. (The costs of government departments and offices were met from the civil list, a separate fund supplied by particular customs and excise taxes.)
The growth of the national debt was widely dreaded as something that the government was losing control of and which would soon engulf the nation in financial disaster and civil disorder. In 1717 the Stanhope-Sunderland ministry took steps to allay these fears by demonstrating the government’s commitment to reducing the debt. On the basis of proposals drawn up by Robert Walpole before leaving office that year as first lord of the treasury, a ‘sinking fund’ was established from the savings of revenue achieved through a negotiated reduction of interest on part of the debt – from 6 to 5 per cent – which was to be used to reduce the capital sum. Only gradually, however, did the national debt come to be regarded as a permanent feature of government finance, but it was a process in which Walpole played a crucial part.
By the time Walpole took charge of the government’s financial affairs again in April 1721, the catastrophe surrounding the South Sea Company had taken effect. During 1719-20 the Company’s scheme for taking over a large share of the national debt had led, through its misdirected implementation, to the disastrous ‘Bubble’ of 1720 in which many government creditors had lost considerable sums. However, from the government’s point of view the scheme achieved what was most needed: the promise of future reductions in the annual cost of servicing the debt.
Until 1726 Walpole was able to fund each year’s expenditure almost entirely from the produce of the annual land and malt taxes. In 1726, however, increased expenditure was required to meet the possibility of war with Spain, and he was forced to borrow £500,000 funded on a new duty on victuallers. In 1727 the continuing threat of war forced him to increase the land tax from its peacetime level of 2 shillings to 4 shillings in the pound. At this time, however, the reduction of interest rates to 4 per cent on large sections of the national debt, which had been negotiated earlier, now came into effect, quickly creating large ‘surpluses’ from the various revenues that were allocated to servicing the debt. The availability of these surplus sums encouraged Walpole to begin utilising them to help finance the current year’s supply, rather than channelling them towards the repayment of the debt.
During the early 1730s Walpole’s financial strategy began to acquire a distinctly political character. In order to court popularity in the face of growing political opposition he chose to give priority to keeping the burden of the land tax on the property-owning classes – those whom he regarded as his chief supporters – as low as possible. He began to regard the fiscal flexibility offered by the debt as an additional source for financing yearly expenditure, though he was frequently attacked for ignoring the primary purpose of the sinking fund and for endangering public credit. In 1732 he took the highly ambitious step of reducing the land tax to just 1s. for the first time in its history by borrowing £500,000 funded on the salt duties for a three-year period. Far more controversially, in 1733 he kept the land tax at 1s. by withdrawing £500,000 from the sinking fund itself, a move which provoked howls of opposition fury, but set a precedent for the future.
The main purpose behind Walpole’s unsuccessful excise scheme of 1733 had been to increase the revenue-raising capacity of indirect taxes in order to retain the land tax at an attractively low 1s. in the pound. Although forced to drop the scheme, Walpole adhered to his policy of keeping the land tax low – at 2s. from 1734 to 1739 – despite rising military expenditure during the mid and later 1730s. Additional spending was routinely met through annual withdrawals from the sinking fund. Not until the actual outbreak of war in 1740 was Walpole obliged to raise the land tax to its former wartime rate of 4s.
During his epic tenure as ‘king’s minister’ Walpole did not significantly reduce the national debt. Instead, by using the sinking fund both to repay ‘expensive’ debt and finance current service he kept it on an even keel, at between £48 and £52 million. Perhaps more immediately felt was the reduction he achieved in the annual amount of interest, from £2.57 million in 1721, to £1.89 million in 1741. But his real achievement lay in the more positive public attitudes to the debt which he fostered by skilfully integrating it into his annual budgeting. It was an important legacy which he passed on to his successors.