The Age of George III

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Pitt the Younger's economic policies

Pitt the Younger became PM in December 1783 at the age of 22. The war against the American colonies had finished only in 1782 during Rockingham's second ministry and the wars against most of the rest of Europe had been concluded by Shelburne's ministry in 1783. The Fox-North Coalition had done very little and when Pitt took office, Britain's economic condition in 1784 apparently bordered on catastrophe.

• the National Debt stood at £250 million. That was twenty times the annual revenue of £12.5 million from taxes
• the annual interest on government borrowing, which stood at about £8.3 million, automatically produced a deficit which was funded by further borrowing resulting in increased interest and an even greater deficit.
• national bankruptcy was a strong possibility.

Pitt had to stop, then reverse the trend. He had three possible ways of doing this. He could stimulate trade, increase taxation and/or cut government spending. Pitt chose to implement all three options as one policy. He also needed to avoid involvement in any war since wars were the major cause of the debt. It has been said that Pitt was the most ingenious tax-gatherer over to rule Britain.

Smuggling became his first target. It was estimated that smuggling exceeded 20% of imports and accounted for half all tea in Britain, creating an obvious loss of revenue. High duties made smuggling profitable, so Pitt decided to reduce duties to make the temptation no longer adequate to the risk. Tea duties, averaging 119%, were reduced to 25%. Duties also were reduced on wines, spirits and tobacco. By 1789, quantity of tea passing through Customs had doubled and in one year (1784-5) the Exchequer got an extra £200,000. By 1792, government revenue had increased by £3 m as a result of legal increased consumption. The 1787 Hovering Act also attacked smuggling by extending the duties of Customs officials to 12 miles off-shore. Again, revenue rose.

The Window Tax was subject to a graduated rise. This tax had been levied since 1697; it was repealed in 1851 although it was withdrawn from houses with fewer than seven windows in 1792. The Window Tax was easy to administer, difficult to evade and was a form of direct tax paid by those best able to afford it, therefore it was equitable. These increases in taxes offset the losses in customs revenues.

New forms of direct taxation spread a number of taxes thinly over a wide variety of goods and services. This allowed Pitt to increase revenue without arousing great opposition. The new taxes mainly affected possessions and/or pleasures of the rich: they were levied on bricks and tiles, gold and silver plate, men's hats, ladies' ribbons, perfumes, hair powder, horses and carriages, sporting licences and bachelors (according to number of servants they had).

Pitt also embarked on a reduction of government spending. The reforms were founded on Pitt's belief that government administration should be carried out by trained and salaried professionals, not by amateurs rewarded by fees. He aimed at a fundamental re-organisation through

• the amalgamation of offices with a consequent reduction in staff
• the gradual abolition of profitable sinecures which had been used to buy political allegiance. Compensation was paid to those who lost sinecures, but was a once and for all payment and savings were long- term. Pitt even waited for sinecurists to die.

In 1784 Pitt supported John Palmer's proposal to establish a fast, efficient and safe Mail service because charges could be increased. Pitt also established loans by tender obtain cheap money. The old system of government borrowing was to use family, friends and contacts and pay exorbitant interest rates: fortunes had been made by this method. He introduced professional auditing of government accounts to stop officials 'borrowing' to invest privately.

Pitt set up a Sinking Fund in 1786: he set aside £1 million p.a. which accumulated at compound interest. This fund needed a constant surplus of revenue but despite deficits in 1785 and 1787, the system appeared secure by 1793 when Britain became involved in the French Wars.

The effects of Pitt's economic policies were

• a substantial increase in Britain's trade and an upturn in the economy. Confidence was restored in the £.
• worries, especially over the National Debt, ended and more people were prepared and able to lend to Government at guaranteed rates of interest.
• Anglo-American trade quadrupled, providing an example of the effectiveness of free trade
• Pitt rebuilt the financial foundations of Britain, which later enabled him to subsidise European armies to fight France in the French wars.