Sunday, 9 November 2008

Politics and fiscal policy 1837-1846: Peel's problems

Peel had now to grapple with the problem of the recession that had faced his predecessors and which, after three years remained intense and especially the persistent budgetary deficit. He calculated that total expenditure stood at around £50 million. Around £30 million was spent servicing the national debt and a further £15 million paid for the armed forces. He estimated that the aggregated budgetary deficit for the six year period 1837-43 was likely to exceed £10 million, or roughly a fifth of total spending. Peel did not introduce emergency measures in the autumn of 1841. He and his cabinet spent the autumn and winter of 1841-1842 taking stock and then brought forward proposals designed to resolve the problem of the budgetary deficit.

The deficits were symptomatic of the depressed state of the British economy in the late 1830s and early 1840s. With over 80 per cent of government revenue coming from customs and excise duties, the sharp decline in commercial activity inevitably affected the tax receipts to the Exchequer. Though it is difficult to estimate the level of unemployment, conditions in manufacturing towns were certainly at their worst since the post-war depression in the 1810s and 1842 may well have been the worst year in the century for industrial workers. The downturn in the industrial economy was not helped by a series of poor harvests that kept bread prices high. For Peel, the problem was not simply fiscal because of the social and political unrest it stimulated. This was the ‘condition of England’ question that he faced, together with the working and middle class radicalism that rode upon them: Chartism and the agitation to repeal the Corn Laws. Popular discontent clearly influenced Peel’s financial planning.

Chartist activity reached its peak in the summer of 1842 during the ‘Plug Plot’. Peel and Graham forcefully suppressed these disturbances and were generally less hesitant than their Whig predecessors in using the full rigour of the law to stifle popular agitation. But perhaps the greater threat to the government came from the Anti-Corn Law League that articulated a middle class sense of grievance against a political establishment committed to protecting the sectional interests of the aristocratic, landed elite. The ability of the League and its supporters to wield influence through the electoral system represented a long-term challenge to the political establishment that could not easily be ignored. While the Chartists failed to get anyone elected in 1841, Anti-Corn Law League candidates won seats in Manchester, Stockport and Walsall and there was an obvious potential for further gains in the future. Peel recognised that tariff reform was one way of reducing this threat.

Peel’s economic liberalism had its origins in the 1820s. At its heart were the notions of ‘sound money’, low taxes and a freeing of trade. Without monetary control and stability there would be inflation and this, Peel maintained, would inhibit economy growth. It was necessary to restrict the Bank of England’s power to issue money ‘to inspire just confidence in the medium of exchange’. The Gold Standard became the dominant financial orthodoxy linking sound money to cheap government and low rates of direct and indirect taxation. If businessmen and industrialists were given freedom to exploit the market, Peel suggested this would increase profitability, improve employment and result in economic growth for everyone’s benefit.

Peel’s budgetary policy 1842

By the end of 1841, Peel had a fairly clear idea how he was going to tackle the growing budgetary deficit and the economic problems that had brought it about. Raising further the level of indirect taxation, as the Whigs had done in 1840, was simply not an option. Unless the trade depression ended, this would not result in an increase in government revenue and there was little indication in 1841 that this would occur in the short-term. A better approach, the one tentatively adopted by the Whigs in 1841, was to reduce the level of indirect taxation[1] and so cut the costs of raw materials for industry and foodstuffs and other items for the consumer.

Peel concluded that freeing up trade was the only real alternative open to him. This did not represent a particularly radical departure since he was reverting to ideas he and Huskisson had advocated while in government in the 1820s. What was new, however, was the introduction of income tax[2] in peacetime. This remained politically controversial and was something that the Whigs had not proposed. The strongest argument for adopting income tax was that it would signal to the masses that the propertied not only abstained from exploiting their political power for the maintenance of economic privileges but that the elite was willing to shift the tax burden from the masses to itself and to lower food prices in the process. Fiscal responsibility not certainly an ethical good but it was also a practical means of upholding the social hierarchy, both because it facilitated public credit and because it redressed one of the principal grievances of the under-privileged.

In 1842, then, Peel was addressing himself through the fiscal system to the health of the economy and to the morale of the nation as a whole. He resolved to redistribute the tax burden by reducing duties upon articles of mass consumption and reintroducing the income tax which had been abolished after a back-bench revolt in 1815. Reducing duties would help to get the nation back to work and take the momentum out of the Chartist movement. Peel did not recognise the political aspirations of the Chartists, and (unlike his father) he would never himself propose statutory restrictions upon the hours of labour. But he understood hunger and he wanted thoughts of ‘sedition’ to be forgotten ‘in consequence of greater command over the necessaries and minor luxuries of life’[3]. Imposing a peacetime income tax would demonstrate that the British state was an equitable one, in which burdens were placed (despite the warnings of political economists who identified income as the source of savings and the route to capital formation) upon those best able to bear them.

These measures had to be sold to a party which was still solidly protectionist. Accordingly, in 1842, grain was singled out for separate treatment and dealt with first, and on 9th February Peel announced a thorough revision of the Corn Law sliding scale of 1828 to make it more defensible. The sliding scale had failed in its object of providing greater price stability and by the autumn of 1841 Peel was convinced that the sliding scale provided excessive protection for farming. The result was a new sliding scale where duty would be 16s when the domestic price of wheat stood at 56s per quarter. Peel erred on the side of generosity since 11s would have sufficed to protect British farmers from being undercut by foreign imports. Even so, the adjustment to the sliding scale did represent a significant reduction in the amount of protection afforded home producers. Changes were made to the scale of duties on corn reducing the level of tax paid. These proposals were controversial and reportedly greeted with cold indifference by many Conservative back-benchers and Buckingham resigned from the Cabinet as a result. They were, however, generally well regarded and certainly politically astute.

Land, as Peel’s supporters reminded him, was the historic basis of the constitution. It was a ‘permanent’ interest which appreciated in value with cultivation. Commercial capital, by contrast, put down no roots and might be taken to another country, while manufacturing capital depreciated with use. But commerce and manufactures had borne Britain to its pre-eminence in the world. Writing to J. W. Croker on 27th July 1842, Peel agreed that one might, if one ‘had to constitute new Societies’, ‘prefer Corn fields to Cotton factories’, but ‘our lot’ was cast. The decision had already been taken in Peel’s father’s or in his grandfather’s day, and there could be no turning back now. What was wrong with the economy was not that population had outrun capital, but that the power of production had overtaken the capacity to consume. The way to ‘remove the burden which presses upon the springs of manufactures and commerce’ was to make Britain a cheap country to live in[4].

Then, on 11th March, when he introduced the budget, which he did himself (the complaisant Goulburn stepping aside), he began by making much of the deficit. Having worked up a sense of urgency he explored and rejected alternative remedies (lower expenditure, increased duties, and the ‘wretched expedient’ of borrowing). Finally he came to his own plan.[5]. Income tax was reintroduced at 7d in the pound on incomes of more than £150. This, sensibly, excluded most of the working classes. It was designed to last three years and raise £3.7 million. With that surplus Peel proposed to undertake ‘a complete review, on general principles, of all the articles of the tariff’. No duty should ever again be prohibitive. Customs duties were reduced on about 750 of about 1,200 durable items at a loss of £270,000 in revenue. Maximum duties on imported raw materials, partly manufactured and manufactured items were set at 5 per cent, 12 per cent and 20 per cent respectively. In addition, duty on coffee was reduced at a loss of £171,000 to the Exchequer and, most importantly, £600,000 was sacrificed by cutting the duty on timber.

Peel was convinced that the package of free trade reform was necessary for the sake of social stability. Throughout the 1840s, Peel’s policies were informed by the belief that the survival of the ruling elite depended on his ability to cultivate public confidence in the fairness and impartiality of the nation’s system of government. In that respect, the 1842 budget can be seen as ‘anti-revolutionary’, a means of deflecting attacks by radicals that government was extravagant and that the elite that controlled it was corrupt and parasitical. ‘Cheap government’ and ‘fair government’ commended itself to all sections of society.

Peel’s budget paid off in political as well as financial terms. Parliament passed it by large majorities. The Chartist press hailed in as a measure of enlightened government. The Northern Star on 26th March 1842 saw the replacement of a broad range of indirect taxes with a direct tax on property as a heavy blow against Old Corruption on behalf of social justice. There was hardly a murmur of protest from the middle classes who would now have to pay more to the Treasury. The broad acquiescence and support for an income tax represented an important shift in public attitudes towards direct taxation that was fiscally progressive and socially fair[6]. Only the Anti-Corn Law League opposed the tax and then only because it was dissatisfied by Peel’s minor Corn Law revision of February 1842.

It was Peel’s finest hour; the crisis of the century was met by his fiscal reform although he recalled that ‘these changes…were not effected without great murmuring and some open opposition to the Government on the part of many of its supporters’. But in fact it was a wonderfully ambiguous measure. He had rationalised tariffs but had also taken a step towards free trade. He could still move in either direction.

[1] In many respects, Peel was ‘stealing the Whigs’ clothes’ and he was clearly influenced by the outcome of Joseph Hume’s 1840 commission of inquiry into tariffs which concluded that freer trade would stimulate consumption and production and lead to a recovery of government revenues even if, in the short-term cuts in tariffs would cause the budget deficit to broaden even further.

[2] William Pitt had introduced income tax in 1799 in part to fund the French Wars as a ‘temporary expedient’. However, when Lord Liverpool attempted to make income tax more permanent in 1816 he was defeated in the Commons.

[3] Hansard 3rd series, volume 87, column 1048

[4] Hansard 3rd series, volume 61, column 460

[5] Hansard 3rd series, volume 61, columns 422–76

[6] In 1816, the propertied classes damned direct taxation as an invasion of privacy and a catalyst of big government.

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