Monday, 16 September 2013

1944 - The Chancellor of the Exchequer worries about Government Debt

On 28 June 1944, three weeks after D Day, the Chancellor wrote to Cabinet colleagues looking at the state of the nation’s finances after the war. His primary concern at this moment in time, however, lay not with the debt, but of a higher touted bill than even that – welfare reforms. Foremost amongst these changes were the Family Allowance, and especially the founding of the NHS.
"It is the case that the portion to be borne by the taxpayer will present itself to him as one important element in a tax burden which he may yet come to regard as almost intolerable, the part to be contributed by employers will present itself to the employers as an increased burden upon industry, and the part to be furnished as contribution by the beneficiaries will, in the case of people with small incomes, present itself as a very heavy dip into their valuable weekly funds and will constitute a burden which, though they may willingly bear it because of the benefits with which they will associate it, may yet render them much less willing than otherwise to bear their proper share of the general taxation which, must be collected to meet all the obligations and undertakings of the State in the post-war world."
The touted sums involved ran to one third of the total tax take of the country as it then stood.
Previous estimates on the rate of interest for the National Debt had meanwhile assumed the war would have been over by the end of March 1944, and assumptions now pushed this back to the end of that year in Europe, and the end of 1945 with Japan. But this was dwarfed by the increased costs the new social programme was going to have on the country’s finances. The Chancellor explained,
"During the past two and a half centuries Great Britain has emerged from each of her major wars with an annual debt charge which was extremely high in relation to the financial resources of the time. This usually gave rise to a budget problem of considerable difficulty, the debt service accounting for the greater part of the national expenditure as late as a hundred years ago. But in the course of time the debt burden was made less onerous partly by debt repayment and conversion, and partly by virtue of the fact that year by year taxes at a given rate yielded an increasing sum of money. It was mainly owing to the last fact that the huge burden of debt left behind by the Napoleonic Wars had become quite easy to carry by the end of the nineteenth century, and that there was no serious financial difficulty in the present century in opening the chapter of large-scale social expenditure."
This time round, the population was not going to explode and eat up debt by sheer numbers. All manner of packages would have to be dropped, including the idea of putting £100 million into the Sinking Fund. The Chancellor summarises his position in these terms;
"It is important to appreciate the long-term financial problem in its true perspective, since otherwise sub-conscious beliefs, based on a past experience that is no longer relevant, may create a misleading impression that time is bound to relieve our financial difficulties. It is especially important to scrutinise very carefully all proposed commitments that are likely to entail automatic increases of expenditure."

from "A Fate Worse Than Debt" by Dr Lee Rotherham

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