Political economists often place the state at the centre of explanations of change in capitalism. The emergence of a ‘welfare’ or ‘nation building’ state during the twentieth century reflects the advance of democratic movements and Keynesian inspired macroeconomic management. More recently neoliberalism is associated with fiscal austerity enforced through the rise of corporate and financial power. Shifts in state finances, and how states finances are accounted for, were central to these broader political-economic shifts.
In a recent open access article published in the journal Critical Perspectives on Accounting, as part of a forthcoming special issue on ‘the future of the state’, we bring state theory into conversation with critical accounting literature to explore the relationship between fiscal accounting and capitalist change. Drawing on Joseph Schumpeter’s fiscal sociology and his concept of the ‘tax state’, we connect changes in fiscal practice to turning points in the reorganisation of the state’s role within capitalism.
Schumpeter’s ‘tax state’
Schumpeter is a potentially unlikely source of inspiration for political economists. He was a critic of socialism and remains a source of inspiration for the free market Austrian school of economics. Despite his politics, his analysis has much in common with historical political economy. As Joan Robinson put it, Schumpeter is ‘Marx with the adjectives changed’.
The history of state finances are key to Schumpeter’s ‘fiscal’ sociology, outlined in his 1918 essay ‘The crisis of the tax state’. He followed another Austrian sociologist, Rudolf Goldscheid, in arguing that budgets represented the ‘skeleton of the state stripped of all misleading ideologies’. In studying the transition from feudalism into capitalism, Schumpeter focused on how the state moved from the personalised power of the Prince to making ‘public’ claims on ‘private’ resources. Those claims asserted state power and reinforced the operations and interests of an independent sphere of ‘private’ bourgeois rationality. Over time, the state’s ‘common purpose’ increasingly became subject to forms of popular sovereignty and democratic legitimation.
Writing after WWI, when fiscal powers were stretched to their limits, Schumpeter sought to rescue the state and preserve private markets. His focus on ‘public’ claims over ‘private’ resources helps focus on the boundaries between these spheres and the importance of how those boundaries are managed.
In our article we analyse how changes in state accounting practice broadly align with the periodisations created by political economists. We follow Schumpeter’s crucial methodological point that public finances not only directly mediate social contests, but are symptomatic of much wider historical ‘turning points’. As the role of the state changes, so states exercise fiscal power in new ways. Thus, Schumpeter argued, political-economic shifts ‘always involve a crisis of the old fiscal methods…insofar as everything that happens has its fiscal reflection’.
Schumpeter’s theory of the tax state did not explicitly address accounting. While he viewed the rise of public (and private) finance as central to understanding capitalism, he also viewed public accounts as neutral documents: a ‘collection of hard, naked facts which yet remain to be drawn into the realm of sociology’. In our article, we draw on critical accounting scholarship to analyse the importance of the categories used to differentiate and govern public and private finance – categories operationalised through accounting practices. Public accounting, as statecraft, reveals the ‘fiscal reflection’ of changing social relations.
The Keynesian peace formula
Despite Schumpeter’s own pessimism about capitalism’s future, Keynesian welfare states developed what Claus Offe termed a ‘peace formula’ between capital and labour that ushered in a unique period of post-war capitalist growth and stability. Offe’s peace formula had its fiscal reflection, we argue, in new modes of macroeconomic management and public financing, which in turn required new accounting tools for both the national economy and government budgets. Keynesian inspired national and fiscal accounting facilitated democratic contestation by distinguishing public and private finance, clarifying the political choices states and citizens faced.
Over the twentieth century states developed accounting practices that were distinct from the private sector, formalised in different international accounting standards and separate international accounting bodies. Where private firms adopted forms of what Weber had called ‘capital accounting’, states generally adopted models focused on changes in annual revenues and expenditures, based on methods of cash accounting. These differing methods reflected different purposes. Capital accounting identifies profit and the accumulation of stocks of wealth within the firm, enabling private control of resources. In contrast, cash accounting techniques help trace finance across boundaries – public and private, or domestic and international – over a given time.
National accounting systems aligned to Keynesian macroeconomic categories were developed in the UK, US and other advanced capitalist countries from the 1930s, and were entrenched by the 1950s. Accounting played a critical role in constructing the very idea of the macroeconomy as an object of state management.
Likewise, Keynesian budgeting was needed to distinguish between the public and private sectors that make up the national economy, and assess the net addition or reduction in aggregate demand from flows between public and private spheres. From the 1940s there were a series of budgetary reforms in the UK and US designed to account for the impact of the budget on aggregate demand.
New fiscal techniques helped governments manage inflation and promote full employment, a goal enshrined in many countries through the successful and contentious politics of union movements. The welfare state grew alongside Keynesian public accounting tools, shifting focus from socialisation of ownership to public control of financial flows. Democracies could expand ‘public’ spending to protect workers and their families while ensuring ‘private’ accumulation dominated commodity production.
Neoliberalism challenged the Keynesian fiscal order by attempting to constrain democratic control over state finance. Neoliberalism blurred Keynesian distinctions between public and private to undermine public finance as a sphere of democratic politics, while nonetheless subsidising private accumulation. Accounting changes shifted the imaginary of the state from one grounded in Keynesian macroeconomic management to a conception of the state as pseudo corporation focused on (in)solvency.
Budget reforms proved just as crucial in attacking as in establishing Keynesian welfare states. Accounting reforms sought to apply capital accounting standards from the private sector to public sector activities, such as accrual accounting practices. These changes were influenced by public choice theories and were explicitly developed in opposition to Keynesian economics. Our argument is that the key ingredient in neoliberal fiscal reform was not simply the application of market conventions, but rather their asymmetric application to state finance, which worked to constrain overtly democratic, public fiscal tools, while at the same time facilitating less visible fiscal methods oriented towards private interests.
Two types of accounting changes reconfigured state activity along market lines. First, market advocates argued that public services should be forced to account for their capital costs and do so on market terms. In many countries, capital expenditures associated with public services were undertaken by public works departments, accounted for and organised separately from service delivery. Neoliberal reformers argued incorporating the costs of capital into public service provision on a market basis would facilitate a level playing field between public and private providers, but in doing so they also constrained the distinctive features of ‘public’ finance.
Because states can access lower cost finance, the changes inflated the apparent cost of public provision and obscured the macroeconomic role of public infrastructure spending. Reliance on private finance meant substantive reorganisation of budget control, allowing contracting out and facilitating corporatisation and privatisation of publicly run activities.
The same principles of capital accounting were implemented unevenly and asymetrically. Reformers sought to equate (recurrent) public costs to private costs, but there was no complementary attempt to measure public wealth. Instead, privatisation had the effect of reducing budget deficits despite running down government net worth. States had incentives to run surpluses (by reducing expenditure), but no incentive to accumulate public wealth.
Second, new accounting techniques reconceptualised expected public spending in the future (such as pensions and healthcare) as liabilities. ‘Liability budgeting’, as Baker and colleagues call it, focused attention on a future fiscal crisis. Again, the changes were asymmetric, constructing spending as a liability without constructing revenue as an asset.
For example, Generational Accounting (GA) calculates future spending based on demography, but makes no calculation of future revenue, instead assuming tax revenues are a fixed proportion of GDP. The assumption reflects an ideological commitment to fiscal constraint (protecting future tax payers), underestimating increases in tax revenues caused by the combination of rising real incomes and progressive tax rates, and obscuring the cost of fiscal welfare used to subsidise private provision.
Rather than shrinking the state, these asymmetric reforms shrank the democratic, ‘public’ state, while allowing fiscal power to advance in less egalitarian or accountable forms.
Fiscal politics beyond neoliberalism?
Our article documents how fiscal accounting practices, that is practices used to track, account for, or quantify the exercise of fiscal power, provide a ‘fiscal reflection’ of the political economy. Changes in fiscal accounting reflect changes in the statecraft used to manage the boundaries between public and private finance and thus mediate between pressures to maintain both democratic legitimacy and private accumulation. In part II of this post, to be published next week, we explore how democratic pressures are pushing back, giving rise to forms of ‘fiscal hybridity’ that reassert accounting symmetries between public and private wealth to potentially create ‘fiscal space’.