Annual EBHS Conference, 39th Annual Economic and Business History Society Conference

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Does Welfare Spending Crowd Out Charitable Activity? Evidence from Historical England under the Poor Laws
Paul Sharp

Last modified: 2014-03-10


This paper tests the hypothesis that government spending crowds out charitable activity, using data from two years before and after 1800 at the time of the early system of welfare provision in England known as the Poor Laws. A number of papers have found evidence for the ‘crowding out hypothesis’, although the size of the impact varies (see for example Roberts, 1984; Payne, 1998; Gruber and Hungerman, 2007; Andreoni and Payne, 2011). Others have, however, suggested that if similar preferences drive the desire to provide through taxes or directly through charity, then the crowding out effect might be insignificant or even reversed.

The idea of crowding out is quite popular, particularly on the conservative side of the policy debate. In the United Kingdom, a comparison with the far higher levels of charitable giving in the United States seems to have been a large part of the inspiration for the Conservative Party leader David Cameron’s concept of a ‘Big Society’ from 2009, when he claimed that ‘the once natural bonds that existed between people – of duty and responsibility – have been replaced with the synthetic bonds of the state – regulation and bureaucracy’.

We present a novel way of testing the ‘crowding out hypothesis’, making use of the fact that welfare provision under the Poor Laws in England was decided on the parish level, thus giving the heterogeneity we need to test for the impact of different levels of welfare support within a single country. Our data on Poor Law spending per capita is from 1785 and 1815 and is taken from Marshall (1834). Combined with information on per capita income of charities by county for 1787 and 1815 published by the British Parliament (BPP 1810 and 1820), we use this to test for the impact of public spending on welfare on the income of charities.

The causality could conceivably run either way, so we instrument for public welfare provision with the suitability of the county for arable agriculture, as given by the Food and Agriculture Organization of the United Nations[1]. As is argued by Boyer (1990), welfare provision was more generous in areas with arable rather than pastoral agriculture. The seasonal nature of arable farming meant that the politically powerful labor hiring farmers would have an interest in mitigating low season costs of labor by diversifying them onto other rate payers through the Poor Law system.

We fail to find evidence of a crowding out effect - in fact we find a positive relationship. A one percent increase in Poor Law spending per capita results in a 1.5 percent increase in charitable income per capita. Our results provide, we believe, considerable backing to those who argue that a ‘big society’ does not necessarily require ‘small government’.

[1] ‘Crop suitability index (class) for low input level rain-fed cereals’, i.e. using traditional methods of agriculture, from GAEZ, Global Agro-Ecological Zones, at the Food and Agriculture Organization of the United Nations.