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October 29, 2013

History of Fiscal Transparency and Fiscal Secrecy

Posted by Tim Irwin

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What encourages governments to publish information about their finances? A new IMF working paper, “Revealing the Mysteries of State: The Origins of Fiscal Transparency in Western Europe” aims to shed light on this question by examining the history of European fiscal transparency. It was inspired by the Fund’s work on promoting fiscal transparency (see this policy paper and the new draft Fiscal Transparency Code).

The working paper looks back as far as Athens in the fifth-century BC and notes a few of the developments of the last two decades, but it concentrates on the fiscal secrecy of the age of absolutism, in which governments used spies to uncover the accounts of other states, and on the efforts of eighteenth- and nineteenth-century reformers to get the accounts published.

One factor encouraging transparency identified by the paper is the strength of governments’ need to raise money from skeptical lenders and taxpayers. Its influence can be seen at work on many occasions, including medieval Spain and seventeenth-century England, but it was particularly evident during the French Revolution.

One of the Revolution’s causes was the dire state of the government’s finances. To avoid bankruptcy, the government needed to overhaul the tax system to generate much more revenue. And, though the king claimed the right to levy taxes without anyone else’s approval, he sought an endorsement from an assembly of “notables.”  

The problem was that the government’s budgets and accounts were state secrets, so the assembly was being asked to approve reforms without knowing how much money the government was collecting or spending. Rejecting the finance minister’s argument that the king had seen the accounts and should be trusted, one notable wrote, “it was our right not to advise unless we thought the measures were proper, and . . . we could not think of new taxes unless we knew the returns of expenditure and the plans for economy.”[1]

The king’s failure to win approval of his reforms took France once step closer to revolution and the claim in the Declaration of the Rights of Man and of the Citizen that “All citizens have the right to ascertain, personally or through their representatives, the necessity of the public tax, to consent to it freely, to know how it is spent, and to determine its amount, basis, and mode of collection, and duration.”

The Declaration established the principle, but of course the struggle for fiscal transparency continued. In France, routine publication of budgets and accounts appears to have begun only after the Napoleonic Wars. And arguments about the kinds of fiscal information governments need to produce have continued to this day.

[1]William Doyle, Oxford History of the French Revolution, second edition, 2003, p. 72.  

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