Fiscal capacity and the risk of sovereign debt after the Glorious Revolution: A reinterpretation of the North-Weingast hypothesis

- The Glorious Revolution led to a reduction in English interest rate.
- Before the G.R. parliament wanted the King to have only limited resources
- After the G.R. parliament promoted a marked increase in indirect taxes
- Indirect taxes did not burden interest groups represented in Parliament.
- Building a tax bureaucracy takes time, hence the delay in interest rate reduction.

Several explanations have been given to account for the fact that, in contrast to the claim made by North and Weingast (1989), the decline in interest rates on British sovereign debt did not occur until several years after the Glorious Revolution in 1688. This paper puts forward the hypothesis that the decline in the risk premium on Britain's sovereign debt was due to the significant increase in excise duties in the early part of the eighteenth century. This increase was possible for two reasons. On the one hand, with the Glorious Revolution, parliament no longer had reason to fear that the King would strengthen his political power due to the availability of more fiscal revenue. On the other hand, the new excise taxes were borne mostly by the poor, that is a social class not represented in parliament. The delay in reducing the interest rate on British sovereign debt, following the Glorious Revolution, was, therefore, due to the length of time needed to increase and improve the fiscal bureaucracy responsible for the collection of excise duties.