The proper role of government
Sovereign debt is government indebtedness that might be accumulated for a number of reasons. Assessment of the rationale for it, its deployment and servicing partly depends on a proper appreciation of the role of government. This is a theme in Catholic social teaching, biblical studies and the wider Christian tradition.
3.1 The role of government in Catholic social teaching
The Catechism of the Catholic Church states that ‘Every human community needs an authority to govern it’ and that the authority’s role is ‘to ensure as far a possible the common good of society’.[1] The common good is defined in Gaudium et spes, a document of the Second Vatican Council, as: ‘the sum of those conditions of the social life whereby men, families and associations more adequately and readily may attain their own perfection’.[2]
All organisations in society have their own responsibility in promoting the common good. It is not directly the role of the state to require people to live a life of fulfilment and perfection, rather it should create the conditions whereby it is possible for all to play their part in bringing this about. It is in this context that Catholic social teaching has outlined specific functions of the state, including promoting justice, ensuring internal and external peace, protecting property rights, ensuring stable money and appropriately regulating economic life. The state should also act in accordance with what has become known as the preferential option for the poor, paying particular attention to the well-being of the least well off because those who are richer have the means to look after their own interests.[3] Government, in the thought of St Thomas Aquinas, should promote the cultivation of virtue – certainly it should not impede it.[4]
The Catholic Church has supported democracy as the means of choosing governments,[5] which ensures they are accountable to the people and can be replaced peacefully. Democracy should also be a means of ensuring that society is not run by narrow interest groups.
The question arises, therefore, whether accumulation of sovereign debt impairs the crucial functioning of government or democracy. In response it can be said that there are many historical examples where it has led to problems serious enough to do just that, and the examples given below will suffice to make the point. Not every case of excessive debt leads to a catastrophic outcome, but that does not mean the problem should be dismissed.
3.2 Debt and the impairment of governance for the common good
The accumulation of too much debt and the subsequent need to pay interest and principal on it has seen governments constrained in the performance of their necessary functions. In several cases accumulation has led to or exacerbated breakdown in the functioning of government and society, even resulting in the sovereign ceasing to exist. For some nations it has led to a loss of control over domestic commodities and assets.
During the nineteenth century, as trade began to spread and the newly independent nations of the world in places such as South America and Africa sought to borrow for internal development, a wave of debt crises and defaults hit the globe. In the 1860s, Egypt borrowed extensively to build roads and factories, as well as public and private buildings in Cairo in imitation of Western capitals. It was forced to default in 1876, with the result that its public finances were put under the control of a Franco–British debt-administration council. Britain then invaded Egypt in 1887, ostensibly to force repayment though possibly also motivated by concern over control of the Suez Canal, the debt issue serving as casus belli.
During the same period, many nations, including Tunisia, Serbia and Greece, were forced to accept foreign debt-administration councils taking control of government revenue streams to ensure their obligations were paid. Haiti, Nicaragua and the Dominican Republic had to accept US troops on their soil in the early years of the twentieth century, and permitted US officials to take control of customs houses so that revenue could be directed to repayment of foreign debt.
Much earlier, the fall of the Bourbon dynasty in France had been accelerated by that regime’s financial woes. During the final days of his reign, Louis XVI was forced to call a meeting of the Estates General in an effort to convince lawmakers to raise taxes. Once assembled – for the first time in 150 years – it sought to wrest more power from the king, leading to the start of the French Revolution.
Debt has also been used by nations as a means to pressure a borrower to either pursue or cease national policies of which the lender approves or disapproves. The Suez Crisis of 1956 provides one such example. When General Gamal Abdel Nasser announced that Egypt would nationalise the Suez Canal, the UK and France, following Israel’s invasion of Egypt, sent troops to occupy the Canal Zone. The USA, fearful this display of military force could push Egypt into closer relationship with the Soviet Union, used political and economic pressure to persuade the invading nations to withdraw. It was in a position to make such demands due to the large amounts of UK and French debt it held, issued to pay for wartime expenditure and subsequent rebuilding.
In the most extreme cases, a nation dealing with the problem of too much debt can find itself in such dire straits that it will lose its independence and be subsumed. Here Scotland at the end of the seventeenth century serves as an example. A scheme to colonise the Isthmus of Panama, under the auspices of the Darien Company, ended in complete failure. The plan essentially bankrupted Scotland which, shortly after, entered into political union with England under the Treaty of Union of 1707. While the financial fallout from the Darien scheme was not the only cause of union (Scotland was also suffering from famine following a series of poor harvests), the subsequent collapse of the country’s ability to pay its debts or finance necessary functions resulted in loss of independence.
Similarly, in the 1930s the financial situation in Newfoundland, at the time an independent country, resulted in its ultimately becoming part of Canada. In the 1920s, Newfoundland had engaged in deficit spending and borrowing from abroad. When the world economy contracted after the stock-market collapse of 1929, its financial situation became perilous. In 1932 it was forced to seek a loan from the UK and Canada to service its debt, and it gutted its civil service, closed post offices and eliminated many social-assistance programmes. Collapse of the economy led to collapse of the political system, and Newfoundland eventually gave up its popular sovereignty, passing control of government to a commission appointed by and responsible to Westminster. After the end of the Second World War, still faced with a large debt burden, the people of Newfoundland voted to accept confederation with Canada.
The more recent history of Argentina is especially interesting because it illustrates many of the points made in this publication. As a country, it has defaulted on its debt on nine occasions. At the beginning of the 1930s, Argentina was one of the richest countries in the world. During the Peronist period of the 1950s, although state spending increased dramatically, this did not lead to the build-up of government debt, due partly to the exceptionally good fiscal position following the Second World War but also the printing of money to finance spending. However, government spending in excess of revenues eventually lifted inflation to over 1,000 per cent in 1976. After that, a huge excess of government spending over tax revenues began to be financed by external debt, which rose from 13.8 per cent of GDP in 1976 to 55.8 per cent in 1986.[6] This compounded, and was compounded by, other macroeconomic difficulties, and inflation rose again to around 1,500 per cent in the mid-1980s. Inflation at these levels is deeply damaging to the social and economic fabric, leads to arbitrary redistribution of income and wealth, and encourages financial speculation. During this period, private investment and real incomes slumped.
The following 20 years saw a series of events that can be linked to economic and social dislocation. There were debt defaults, high levels of inflation, reductions in government spending on social programmes, a near tripling of extreme poverty in 18 months from May 2001, riots and a general election in which 20 per cent of the population spoilt their ballot papers. In addition, policy autonomy – and thus the accountability of the government to the people – was lost as the IMF and creditors took a much greater say in political and economic decisions. Almost every legitimate function of government was seriously impaired.
The euro crisis of 2009 saw similar problems in many southern European countries. This crisis came, to some extent, out of the blue. However, the already high levels of government debt in countries such as Italy and Greece meant they were unable to deal with the consequences of a shock that, had earlier policy been more prudent, would have caused much less harm. Both countries went into the euro crisis with government debt in excess of 100 per cent of national income. In Italy a government entirely composed of non-elected professionals was appointed, while Greece’s response involved a range of debt-support packages from other countries and institutions. These packages have a real cost to creditors, and so conditions are imposed and democratic accountability is effectively replaced by accountability to institutions representing creditors such as the EU and the IMF. In the five years following the crisis, extreme poverty in Greece doubled to some of the highest levels in the Union.
An extreme case of social dislocation caused by government debt arose in the case of interwar Germany. It is important to note that this debt did not arise as a result of German taxpayers being unwilling to fund government spending through taxes, rather it was imposed by the allies following the First World War. Nevertheless, it is the effects of indebtedness that are of interest, not the cause, and the immediate effect of the high levels of debt was default, followed by French and Belgian occupation of the Ruhr valley. The subsequent printing of money to pay debts and finance transfers to those affected by the occupation then led to hyperinflation, immense poverty and economic and social damage.
The overall picture is that excessive government indebtedness distorts political, economic and social relationships and is very often to the detriment of the indebted nation.
In the above cases a number of factors were at work, and there is disagreement about the ultimate causes of the various crises. However, there is no doubt that the growth of government debt has been an important factor in undermining the key functions of government outlined in Catholic social teaching. The accountability of government to the people through democracy has been weakened. In addition, the various examples have shown hyperinflation, a huge growth in poverty, an increase in social tensions, military takeovers and riots. The basic functions of government in promoting the common good are seriously impaired. There are also important concerns related to government’s role in promoting distributive justice. Each case of default, inflation and extreme austerity led to arbitrary redistribution of wealth and incomes between different groups in society. Some might be able to manage loss; others on fixed incomes or receiving pensions invested in government bonds might lose everything they own or much of their income. The same may happen to the very poorest, who rely on state assistance. All citizens may face significant increases in taxes and therefore a reduced ability to play their part in promoting the common good through thriving business or family life.
3.3 Perspectives from the wider Christian tradition
The classic view within the Protestant tradition for the existence of government is essentially negative: government is instituted by God to prevent sin and evil through the maintenance of defence and good order. The state wields the power of the sword to contain and constrain the exercise of evil. This perception of the limited role of the state is drawn from the Scriptures, primarily Romans 13, which calls on Christians to submit themselves to the governing authorities, described as ‘agents of wrath to bring punishment on the wrongdoer’ (Rom. 13.4). But although holding to the classic formulation, Christian writers such as John Calvin and Abraham Kuyper have recognised more positive elements of the state – while Scripture itself notes that ‘the one in authority is God’s servant for your good’ (Rom. 13.4).
The role of the state can certainly extend to the regulation of corrupt or fraudulent practices. This is simply a reflection of the explicit teaching of the Bible. For example, Deuteronomy 24.14–15 deals with timely and unjust wages, and 25.13–16 with honest weights and measures, an injunction returned to in Amos 8.5–6. In his 1891 speech ‘The Social Question and the Christian Religion’, Kuyper set out the challenge of the biblical texts on wages and oppression, adding that the ‘worker, too, must be able to live as a person created in the image of God’, and that to ‘treat the workingman simply as a “factor of production” is to violate his human dignity’.[7]
Calvin recognised that we are not simply individuals but part of a wider society, and that society needs social rules or laws:
Since man is by nature a social animal, he is disposed, from natural instinct, to cherish and preserve society; and accordingly we see that the minds of all men have impressions of civil order and honesty. Hence it is that every individual understands how human societies must be regulated by laws, and also is able to comprehend the principles of those laws.[8]
Calvin understands our essential social nature, that society is not just to be preserved (a negative reason for civil government) but also to be cherished (a positive reason). This same double purpose is seen in his commentary on Romans, where the role of civil government is ‘to provide for tranquillity of the good, and to restrain the waywardness of the wicked’,[9] and in his Institutes of the Christian Religion, where it is ‘to adapt our conduct to human society, to form our manners to civil justice, to conciliate us to each other, to cherish common peace and tranquillity’.[10]
In listing the roles and responsibilities of government, Calvin includes the maintenance of civil defence, military action and capital punishment, but adds the protection of private property, the encouragement of commerce as well as honesty and modesty. However, government remains an aid or help – it cannot produce utopia or even effectively reshape or remould the world. Its role is limited.
He writes in his commentary on Romans 12.8 that the role of those in government is to ‘provide for the safety of all’ and to ‘watch day and night for the well-being of the whole community’.[11] Indeed, in his Old Testament commentaries Calvin notes the link of ‘right government’ with ‘strangers, orphans and widows’ – a reminder of the responsibility of civil government to care for the most vulnerable.[12] The role of government was to ‘give aid and protection to the oppressed’ as well as to protect the good against evil and curb the criminal.[13]
The levying of tax was a legitimate duty of government, and although it was permissible for revenue to be used to maintain their dignity of office, those in authority ‘must remember, in their turn, that their revenues are not so much private chests as treasuries of the whole people’.[14] Taxes are ‘subsidies of the public necessity’ and should not be a burden to the poor.[15] Calvin also argued that money should be lent at interest, as this was for the good of the whole community, but in particular for purposes of investment and social needs (rather than excess consumption). The city council in Geneva maintained rates from 5 to 6.67 per cent between 1541 and 1557 (though Calvin himself pressed for them to be kept low). Usury – traditionally lending at interest – was now defined as lending at exorbitant rates. So the market was also to play its role in the common good, even if there were pressures and tensions. Alongside the government with its real but limited role, Calvin also adopted the voluntary principle, the idea of the Church overseeing the provision of social welfare.
The introduction of interest in Calvin’s Geneva, and its regulation, together with the positive and negative reasons for civil government but its limited nature, all imply the importance in the Christian tradition of a careful management of budgets, spending and debt. Simply to borrow to fund current consumption sat ill with Calvin, be the borrower the individual or the state.
Kuyper is similar to Calvin in his formulation. He regards the state as a consequence of the fall and hence its prime reason for existence is the negative one given by Calvin – the restraint of sin. So, Kuyper argues, ‘God has instituted the magistrates, by reason of sin.’[16] He understands society as composed of many different elements, from the arts to business to the family. Each of these has ‘sovereignty in the individual social spheres’ and ‘these different developments of social life have nothing above themselves but God, and … the state cannot intrude here’.[17] Essentially, Kuyper sees the state as one of the spheres existing under the sovereignty of God, with its own rights, prerogatives and responsibilities – and it should not intrude on those of the other spheres. The danger is that the state grows and crowds the latter out. According to Kuyper, society is organic, government is mechanistic. The state’s role is to avoid social conflict (by each sphere maintaining its own sovereignty), to defend the weak and maintain the overall unity of society.
The consequence of this is the priority given within the Protestant and Catholic traditions to the voluntary principle. To be precise, it is recognising the proper though limited role of the state, but also seeing the vitality and centrality of family, voluntary associations and societies in the achievement of social good.
Thomas Chalmers (1780–1847) is the evangelical through whom the economics of Adam Smith most obviously travelled. The paradox in the classical model between the pursuit of self-interest on the part of individuals and the overall achievement of the public good could only be explained by the providential design of the laws of economics. Chalmers, too, viewed the role of the state as limited.
In the second volume of his Natural Theology, Chalmers considered how the natural order affected both the economic and the political well-being of society. There was, he asserted, a natural law of property. In addition he appealed to the law of self-preservation (that is, individuals acting in their own interests), which led to both industry and what he termed the ‘law of relative affection’. This comes back to the paradox of self-interest leading to the common good. The law of relative affection followed Smith’s theory of moral sentiments in maintaining that a natural seed was implanted in humanity that gave the individual compassion for the distress and destitution of others. Chalmers argued that ‘The philosophy of free trade is grounded on the principle, that society is most enriched or best served, when commerce is left to its own spontaneous evolutions’, and that:
The greatest economic good is rendered to the community, by each man being left to consult and to labour for his own particular good – or, in other words, a more prosperous result is obtained by the spontaneous play and busy competition of a thousand wills, each bent on the prosecution of its own selfishness.
‘It is’, he said, ‘when each man is left to seek, with concentrated and exclusive aim, his own individual benefit – it is then, that markets are best supplied.’[18] So the ‘invisible hand’, in his view, was clearly that of the Almighty himself. As Chalmers said, this ‘strongly bespeaks a higher agent, by whose transcendental wisdom it is, that all is made to conspire so harmoniously and to terminate so beneficially’.[19] He invests Smith’s model with divinity.
Chalmers argued that ‘We cannot translate beneficence into the statute-book of law, without expunging it from the statute-book of the heart.’[20] He was relatively negative towards the role of the state and saw the central importance of locality and personal relationships, which are characteristics of the voluntary principle. Lord Shaftesbury is, of course, an example par excellence of a public leader who sought a balanced path between the state as a restrainer of evil (legislation against child labour, for example) and the voluntary principle (in education, welfare, training and employment).[21]
Chalmers’ appeal to property, industry and compassion represents a common historical framework for economics within the Christian tradition. The intervention of the state had led to duties being replaced by rights, to dependency rather than freedom. Consequently, the impact either of high levels of sovereign debt or of taxation necessary to service it would be seen in this wider tradition as inimical to basic principles of the dignity of the individual created in the divine image, to responsibilities to the poor and needy, and to the proper yet limited role of government. The argument in the present context is not that either Scripture or the Christian tradition sets out explicit principles for the management of government debt in contemporary society. Nonetheless, those central sources of Christian belief and practice do give grounds for significant scepticism concerning the efficacy and impact of such debt.
3.4 Virtue and prudence in government
Following the financial crash there has been much discussion of the importance of business ethics. The application of the virtues in government is also essential if government is to promote the common good and distributive justice. In concluding this chapter, it is helpful to relate the problem of debt to the practice of the virtues in government. The Pontifical Council for Justice and Peace explains the moral challenges facing governments and their electorates,[22] and these questions have been raised in a number of papal encyclicals, including, most recently, Fratelli tutti.
The practice of the virtue of justice can become difficult in situations where there is significant government debt, the accumulation of which could be regarded as an injustice in itself. Decisions might have to be taken to increase the tax burden beyond reasonable levels, inflate away debt or impose arbitrary costs on vulnerable groups. Alternatively, governments might choose to default on debt or reduce vital social support programmes. All of these could undermine principles of distributive justice, but governments might find themselves in positions where some or all of these actions become necessary.
Prudent judgement, whereby those who are governing soberly make difficult decisions using the information available, trying to avoid the costs of government debt, also become harder when there are competing demands and interests regarding expenditure.
A lack of the virtue of temperance may well have been responsible for the building up of debt in the first place. Once the debt reaches high levels, temperance becomes more difficult to exercise, by government and electorate alike. There will be a temptation to pursue strategies that may be attractive in the short term but ultimately destructive, such as the creation of inflation, or support for authoritarian or nationalistic political parties that try to lay blame at the door of foreign creditors.
Finally, it should be noted that the virtue of courage becomes more necessary in highly indebted countries. Courage is needed to deal with the difficult situations that arise when a country has to move from spending more than it is willing to pay in taxes, to having taxation higher than government spending. This is true on the part of both the electorate, who might choose to postpone solving the problem, and politicians, who might be similarly tempted, not least in light of the electoral cycle.
Ultimately it could be said that government debt creates an occasion of sin in which virtuous behaviour becomes difficult. Indeed, it could be regarded as part of a structure of sin. As discussed by John Breen, it is the teaching of the Catholic Church, through John Paul II, that structures of sin are the result of personal choice.[23] Such structures of sin can then create conditions in political and economic life that cloud moral judgement and hinder virtuous behaviour. This is certainly the experience of highly indebted countries, even if many have come through without the breakdown of civil society or democratic politics. The current position of many such countries suggests they will face considerable challenges, requiring exercise of the virtues by both governments and electorates if there are not to be serious social dislocation and threats to the common good in future decades. In many cases, accumulation of debt and future social-insurance liabilities can be regarded as having undermined distributive justice, especially across the generations, and may render governments unable to fulfil their essential functions as demanded by Catholic social teaching.
Notes to Chapter 3
[1] Catholic Church, Catechism of the Catholic Church (London: Geoffrey Chapman, 1994), 2nd edn, para. 1898.
[2] Vatican II (1965), Gaudium et spes; https://www.vatican.va/archive/hist_councils/ii_vatican_council/documents/vat-ii_const_19651207_gaudium-et-spes_en.html, para. 74.
[3] See e.g. Pope Leo XIII (1891), Rerum novarum; https://www.vatican.va/content/leo-xiii/en/encyclicals/documents/hf_l-xiii_enc_15051891_rerum-novarum.html, para. 37.
[4] Mary L. Hirschfeld, Aquinas and the Market: Toward a Humane Economy (Cambridge, MA: Harvard University Press, 2018), p. 27.
[5] Pope John Paul II (1991), Centesimus annus; https://www.vatican.va/content/john-paul-ii/en/encyclicals/documents/hf_jp-ii_enc_01051991_centesimus-annus.html, para. 46.
[6] IMF, Global Debt Database, General Government Debt as percentage of GDP https://www.imf.org/external/datamapper/DEBT1@DEBT/USA/FRA/JPN/GBR/SWE/ESP/ITA/ZAF/IND/ARG.
[7] Abraham Kuyper, On Business and Economics, ed. Peter S. Heslam, Abraham Kuyper Collected Works in Public Theology (Bellingham, WA: Lexham Press and Acton Institute for the Study of Religion and Liberty), p. 222, quoting Kuyper, ‘The Social Question and the Christian Religion’.
[8] John Calvin, Institutes, II.12.13, Library of Christian Classics, ed. John T. McNeill, trans. Ford Lewis Battles (Louisville, KY: Westminster/John Knox Press, 1960).
[9] John Calvin, Commentary on Romans 13.3, quoted in William R. Stevenson, ‘Calvin and Political Issues’, in The Cambridge Companion to John Calvin, ed. Donald K. McKim (Cambridge: Cambridge University Press, 2004), p. 174.
[10] Calvin, Institutes, IV.20.2.
[11] Calvin, Commentary on Romans 12.8.
[12] Stevenson, ‘Calvin and Political Issues’, p. 176.
[13] Calvin, Institutes, IV.20.9.
[14] Calvin, Institutes, IV.20.13.
[15] Ibid.
[16] Abraham Kuyper, Calvinism: Six Stone-Lectures, Lecture 3 (Amsterdam: Höveker & Wormser, 1899), p. 81.
[17] Ibid., p. 91; emphasis original.
[18] Chalmers, Natural Theology, vol. 2.4.4.6, in The Works of Thomas Chalmers, Volume 2 (Glasgow: William Collins, 1836), pp. 136–7.
[19] Ibid., p. 137.
[20] Ibid., p. 128.
[21] Richard Turnbull, Shaftesbury: The Great Reformer (Oxford: Lion Hudson, 2010).
[22] Pontifical Council for Justice and Peace, Compendium of the Social Doctrine of the Church (London: Burns & Oates, 2005); https://www.vatican.va/roman_curia/pontifical_councils/justpeace/documents/rc_pc_justpeace_doc_20060526_compendio-dott-soc_en.html, paras 565–74.
[23] John M. Breen, ‘John Paul II, the Structures of Sin and the Limits of Law’, St. Louis University Law Review 52 (2008), pp. 333–5.