“Your Majesty, Rebuild that Fiscal Buffer” – Some Fiscal Policy Advice from the Eighteenth Century

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Posted by Renaud Duplay

 In 1774, Anne-Robert-Jacques Turgot, Baron de Laune, was appointed Minister of Finance by Louis XVI, and immediately resolved to set out his principles of good financial governance in a letter to the king. This letter is still considered a hallowed text in the French Ministry of Finance and its continuing relevance to fiscal policy is striking.

 Turgot proposes a set of fiscal objectives and rules. “No bankruptcy, no tax increase, no new indebtedness. In peacetime, the Crown should only borrow for the purpose of amortizing existing debt, or buying back old debts at a more favorable rate.” Thus, the government should in normal times not run a deficit. This rule would, however, accommodate exceptional circumstances—such as war—. It was the closest thing to a structural balance rule an eighteenth-century gentleman could have thought of. In normal times, debt and the cost of indebtedness would decline.

 Turgot continues thus: “To meet these three targets, there is only one means, and it is to reduce spending below revenue with a margin of 20 million a year to reimburse old debts. Without this, the first cannon-shot would force the State into bankruptcy.” Today, Turgot would urge his government to restore fiscal buffers considering the vulnerabilities underscored by debt-sustainability analysis and in light of the magnitude of fiscal risks.

 How to achieve all of this? Turgot believes there is a need for public financial management reforms to ensure his macrofiscal objectives are translated into effective cuts in specific spending programs. “It is imperative that your Majesty commands each department to agree with the Minister for Finance… that no new spending can be incurred without a prior discussion with the Minister for Finance. If not, each department would accrue new debt, which would be your Majesty’s debt, and the Minister for Finance could not ensure the balance between revenue and expenditure.” Budget unity, the setting up of centralized budget discussions, ceilings that cap line ministries’ expenditure, and a centralization of debt issuance and management in the hands of the Ministry of Finance are all on Turgot’s agenda.

 Turgot understands what will happen if these principles are enforced and expenditure is limited. “There are graces that were thought to be easier to grant because they did not bear an immediate burden on the royal Treasury.” Here Turgot is clearly on to something: the sustainability of the crown’s finances is not just about the cash receipts and outlays of next year but also about the future costs of today’s commitments. In the modern context, Turgot would certainly recommend developing a medium-term approach to budgeting, accounting for accrued liabilities, and controlling tax expenditure and granting of guarantees.

 Finally, Turgot is fully aware of the crucial role of the political economy if he wants his plan to succeed: “I am not asking your Majesty to accept my principles without first considering them yourself or discussing them in the presence of trusted advisors; but when your Majesty has acknowledged their merits and necessity, I beg that those principles be enforced with fortitude.” Today Turgot would ask for a cabinet consensus, and, if possible, the inscription into a fiscal responsibility law of all the aforementioned rules and principles.

 History tells us that all those good principles would not get thoroughly implemented, and Turgot, who had an even broader agenda of abolishing the privileges that were harming the French kingdom’s economy, was vanquished by the “plotters and malicious ones” who were “interested in defending waste, because there is none that does not benefit someone.”

[1] Technical Assistance Advisor, PFM2 Division, Fiscal Affairs Department, IMF.

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