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The origins of modern finance ministries: an evolutionary account based on the history of Britain and Germany

Working papers

Written by Philipp Krause

This paper investigates the origins and drivers of fiscal institutions by studying the history of finance ministries. It studies the development of finance ministries as controllers of executive spending from their origins as medieval household treasuries – using the history of Britain and Germany in particular. The paper develops an evolutionary account and argues that, for most of their early history, external pressures drove the institutional form of finance ministries. It was the need for states to survive interstate competition and war that set up treasuries as collectors of funds and guardians of spending discipline.

Early finance ministries grew strong in parallel with legislative accountability, like in England/Britain, or driven by a powerful absolutist regime, like in Prussia/Germany. Many elements of 20th century spending control, like internal and external audit, predictive, balanced and reasonably comprehensive budgets, top-down control and ex-ante authorisation of spending, all originated in this era, and in many instances where already well established by the time a formal budget process in the modern sense came into being.

The dramatic transformation of public spending in the century before 1950 - a rise in the complexity of spending, a much larger budget as a proportion of the economy, as well as the relegation of military spending to one priority among many - did not initially challenge the mode of budgeting and the control regime run by finance ministries. During the first post-war generation, there was no need for change, because sustained growth enabled budget officials to focus on the equitable distribution of relatively plentiful increments that became available each year.

Only the oil crises of the 1970s and the following protracted period of austerity in the OECD provided a sustained and fundamental challenge to the way executive government handles public funds. In some ways, central budget institutions have been in perpetual crisis ever since.

Philipp Krause