The budgetary origins of fiscal-military prowess

Abstract

This paper evaluates the budgetary origins of fiscal-military prowess, taking early modern Europe as a laboratory. We first review evidence that states adopting credible budgets accrued substantial advantages in raising taxes and loans. Since victory in war during the early modern period was largely a matter of outspending one’s opponent, credible budgets should also have conferred an advantage in winning wars. Exploiting new panel data on 10 major European powers over several centuries, we show that credible budgets led to significantly larger wartime expenditures and, thus, better chances of winning. To the best of our knowledge, this is the first systematic examination of its kind. Since credible budgets could be adopted by decidedly nondemocratic polities, ours is a theory of limited government—rather than participative de-mocracy—leading to military strength. That said, we discuss the implications of our analysis for the modern debate over the democratic victory thesis.