Debt Sustainability in Historical Perspective: the Role of Fiscal Repression

DEBT SUSTAINABILITY IN HISTORICAL

PERSPECTIVE: THE ROLE OF FISCAL

REPRESSION

Mauricio Drelichman

Hans-Joachim Voth

The University of British Columbia

and CIFAR

ICREA/Universitat Pompeu Fabra

Abstract

This article examines the debt history of two contenders for European hegemony: 16th-century

Spain and 18th-century Britain. We analyze their fiscal behavior using measures of overborrowing and fiscal policy functions. Our results suggest that stringency was not key for Britain’s

success in avoiding default. Instead, fiscal repression allowed the United Kingdom to borrow

at below-market rates, thereby outspending its continental rivals. (JEL: E4, F41, N23)

1. Introduction

Debt sustainability matters. Sovereign defaults are often cataclysmic events

involving widespread damage to the financial sector, the economy, and the political and social fabric of countries in trouble. Assessing what level of debt is

sustainable therefore carries special importance. Toward this end, the International

Monetary Fund (IMF) uses a range of methods (IMF 2003). These assessments

can lead to austerity programs involving wrenching fiscal adjustments (Stiglitz

2003) both before and after crises.

We analyze two historical cases using the existing metric for debt sustainability. We focus on hegemonic powers of their time, 18th-century Britain and

16th-century Spain. Both had access to advanced financial markets and networks,

and their finances were under severe pressure as a result of constant warfare. One

country became a synonym for fiscal disaster: Spain is a record-holder for default,

reneging 13 times on its debts between 1500 and 1900. Philip II started this tradition, going bankrupt four times during his reign (Braudel 1966). Britain, in

contrast, not only prevailed in early modern power struggles, but also emerged

without defaults and with a widely admired fiscal structure.

Acknowledgments: We thank Leandro Prados de la Escosura, Sergio Schmuckler, and Jaume...