War-Time Financial Problems

by Hartley Withers

IX

COMPARATIVE WAR FINANCE

May, 1918

The New Budget—Our own and Germany's Balance-sheets—The Enemy's Difficulties—Mr Bonar Law's Optimism—Special Advantages which Peace will bring to Germany—A Comparison with American Finance—How much have we raised from Revenue?—The Value of the Pound To-day—The 1918 Budget an Improvement on its Predecessors—But Direct Taxation still too Low—Deductions from the Chancellor's Estimates.

One of the most interesting passages in a Budget speech of unusual interest was that in which the Chancellor of the Exchequer compared the financial methods of Germany and of this country, as shown by their systems of war finance. He began by admitting that it is difficult to make any accurate calculation on this subject, owing to the very thick mist of obscurity which envelops Germany's actual performance in the matter of finance since the war began. As the Chancellor says, our figures throughout have been presented with the object of showing quite clearly what is our financial position. Most of the people who are obliged to study the figures of Government finance would feel inclined to reply that, if this is really so, the Chancellor and the Treasury seem to have curiously narrow limitations in their capacity for clearness. Very few accountants, I imagine, consider the official figures, as periodically published, as models of lucidity. Nevertheless, we can at least claim that in this respect the figures furnished to us by the Government during the war have been quite as lucid as those which used to be presented in time of peace, and it is greatly to the credit of the Treasury that, in spite of the enormous figures now involved by Government expenditure, the financial statements have been published week by week, quarter by quarter, and year by year, with the same promptitude and punctuality that marked their appearance in peace-time. In Germany, the Chancellor says, it has not been the object of German financial statements to show the financial position quite clearly. It is, therefore, difficult to make an exact statement, but he was able to provide the House with a series of very interesting figures, taken from the statements of the German Finance Ministers themselves.

His first point is with regard to the increase of expenditure. The alarming rate with which our expenditure has so steadily grown appears to be paralleled also in Germany. Up to June, 1916, Germany's monthly expenditure was £100 millions. It has now risen to over £187 millions. That means to say that their expenditure per diem is £6-1/4 millions, almost the same as ours, although our expenditure includes items such as separation allowances and other matters of that kind, borne by the States and municipalities in Germany, and so not appearing in the German imperial figures.

As to the precise extent of the German war debt, there is no certainty, but the Chancellor was able to tell the House that the last German Vote of Credit, which was estimated to carry them on to June or July, brings the total amount of all their Votes of Credit to £6200 millions, and that it is at least certain that that amount has been added to their War Debt, because their taxation during the war has not covered peace expenditure plus debt charge. Up to 1916 they imposed no new taxation. In 1916 they imposed a war increment tax, something in the nature of a capital levy, which is stated to have brought in £275 millions. They added also that year £25 millions nominally to their permanent revenue. In 1917 they added in addition £40 millions to their permanent revenue, "Assuming, therefore, that their estimates were realised, the total amount of new taxation levied by them since the beginning of the war comes to £365 millions, as against our £1044 millions. This £365 millions is not enough to pay the interest upon the War Debt which had been accumulated up to the end of the year."

Mr Bonar Law then proceeded to give an estimate of what the German balance-sheet will be a year hence on the same basis on which he had calculated ours. With regard to our position, he had calculated that on the present basis of taxation we shall have a margin of four millions at the end of the present year if peace should then break out. As will be shown later, this estimate of his is somewhat optimistic, but at any rate our position, compared with that of Germany, may be described as on velvet. A year hence the German War Debt will be not less than £8000 millions. The interest on that will be at least £400 millions, a sinking fund at 1/2 per cent. will be £40 millions. Their pension engagements, which will be much higher than ours owing to their far heavier casualties, have been estimated at amounts ranging as high as £200 millions. The Chancellor was sure that he was within the mark in saying that it will be at least £150 millions. Their normal pre-war expenditure was £130 millions, so that they will have to face a total expenditure at the end of the war of £720 millions. On the other side of the account their pre-war revenue was £150 millions. They have announced their intention of this year raising additional permanent Imperial revenue amounting to £120 millions. From the nature of the taxes the Chancellor considers it very difficult to believe that this amount will be realised, but, assuming that it is, it will make their total additional revenue £185 millions. That, added to the pre-war revenue, gives a total of £335 millions, showing "a deficit at the end of this year, comparing the revenue with the expenditure, of £385 millions at least." The Chancellor added that if that were our position he would certainly think that bankruptcy was not far from the British Government.

Another point that the Chancellor was able to make effectively, in comparing our war revenue with Germany's, was the fact that, with the exception of the war increment tax, scarcely any of the additional revenue has been obtained from the wealthier classes in Germany. Taxation has been indirect and on commodities which are paid for by the masses of the people. "The lesson to be drawn from these facts is not difficult to see. The rulers of Germany, in spite of their hopes of indemnity, must realise that financial stability is one of the elements of national strength. They have not added to their financial stability." The reason for this failure the Chancellor considers to be largely psychological. It is, in the first place, because they do not care to add to discontent by increased taxation all over the country, but "it is still more due to this, that in Germany the classes which have any influence on or control of the Government are the wealthier classes, and the Government have been absolutely afraid to force taxation upon them."

It is certainly very pleasant to be able to contemplate the financial blunders by which Germany is so greatly increasing the difficulties that it will have to face before the war is over. On the other hand, we have to recognise that the Chancellor, with that incorrigible optimism of his, has committed the common but serious error of over-stating his case by leaving out factors which are in Germany's favour, as, for instance, that Germany's debt is to a larger extent than ours held at home. Since the war began we have raised over £1000 millions by borrowing abroad. Our public accounts show that the item of "Other Debt," which is generally believed to refer to debt raised abroad, now amounts to £958 millions, while one of our loans in America, which is separately stated in the account because it was raised under a special Act, amounted to £51-1/2 millions. It is also quite possible that fair amounts of our Treasury bills, perhaps also of our Temporary Advances and of our other war securities, have been taken up by foreigners; but quite apart from that the two items already referred to now amount to more than £1000 millions, though at the end of March last their amount was only £988 millions. It is also well known that we have during the course of the war realised abroad the cream of our foreign investments, American Railroad Bonds, Municipal and Government holdings in Scandinavia, Argentina, and elsewhere, to an amount concerning which no accurate estimate can be made, except by those who have access to the Arcana of the Treasury. It may, however, be taken as roughly true that so far the extent of our total borrowings and realisation of securities abroad has been balanced by our loans to our Allies and Dominions, which amounted at the end of March last to £1526 millions. We have thus entered into an enormous liability on foreign debts and sold a batch of very excellent securities on which we used to receive interest from abroad in the shape of goods and services, against which we now hold claims upon our Allies and Dominions, in respect to the greater part of which it would be absurd to pretend that we can rely on receiving interest for some years after the war, in view of the much greater economic strain imposed by the war upon our Allies.

Germany, of course, has been doing these things also. Germany has parted with her foreign securities. She was selling them in blocks for some weeks before the war, and Germany, of course, has done everything that she could in order to induce neutrals, during the course of the war, to buy securities from her and to subscribe to her War Loans. Nevertheless, it cannot have been possible for Germany to carry out these operations to anything like the extent that we have, partly because her credit has not been nearly so good, partly because her ruthless and brutal conduct of the war has turned the sentiment of the world against her, and partly because the measures that we have taken to check remittances and transfers of money have not been altogether ineffective. On this side of the problem Germany has therefore an advantage over us, that her war finance, pitiful a$ it has been, has, not owing to any virtue of hers, but owing to force of circumstances, raised her a problem which is to a great extent internal, and will not have altered her relation to the finance of other countries so much as has been the case with regard to ourselves. We also have to remember that the process of demobilisation will be far simpler, quicker, and cheaper for Germany than for us. Even if the war ended to-morrow the German Army would not have far to go in order to get home, and we hope that by the time the war ends the German Army will all have been driven back into its own country and so will be on its own soil, only requiring to be redistributed to its peace occupations. Our Army will have to be fetched home, firstly, over Continental railways, probably battered into a condition of much inefficiency, and then in ships, of which the supply will be very short. The process will be very slow and very costly. Our Overseas Army will have to be sent back to distant Dominions, and the Army of our American Allies will have to be ferried back over the Atlantic. Consequently if Germany is able to obtain anything like the supply of raw material that she requires she will be able to get back to peace business much more quickly than any of her Anglo-Saxon enemies, and this is an advantage on her side which it would be unwise to ignore in considering the bad effects on her after-war activities of the very questionable methods by which she has financed and is financing the war.

Since we are indulging in these comparisons, it may be interesting to consider how our American Allies are showing in this matter of war finance. The Times, in its "City Notes" of April 15th, observed, in connection with the unexpectedly small amount of the third Liberty Loan, that the reason why the smaller figure was adopted for the issue was that it seems quite certain now that the original estimate for the expenditure in the fiscal year ending June 30th next was much too high. This estimate was 18,775 million dollars. The Times stated that the realised amount is likely to be hardly more than 12,000 million dollars, of which about 4500 million dollars will represent loans to Allies, and that the estimate for the year's largely increased tax revenue was 3886 million dollars, which now seems likely to be exceeded by the receipts. If this be so, out of a total expenditure of £2400 millions, of which £900 millions will be lent to the Allies, the Americans are apparently raising nearly £800 millions out of revenue. Therefore if we deduct from both sides of the account the pre-war expenditure of about £215 millions and deduct also the loans to Allies from the expenditure, it leaves the cost of the war to America £1285 millions for this year and the war revenue £562 millions. If these figures are correct it would thus appear that America is raising nearly half its actual war cost out of revenue as the war goes on.

On the other hand, in the New York Commercial Chronicle of April 6th the total estimated disbursements for the year are still stated at over 16,000 million dollars, that is to say, £3200 millions roughly, so that there seems to be considerable uncertainty as to what the actual amount of the expenditure of the United States will be during the year ending on June 30th. In any case, there can be no question that if the very high proportion of war cost paid out of revenue shown by the Times figures proves to be correct, it will be largely owing to accident or misfortune; if America's war expenditure has not proceeded nearly as fast as was expected, it will be, no doubt, owing not to economies but to shortcomings in the matter of delivery of war goods which the Government had expected to pay for in the course of the fiscal year. It certainly would have been expected that the Americans would in this matter of war finance be in a position to set a very much higher standard than any of the European belligerents owing to the enormous wealth that the country has acquired during the two and a half years in which it, in the position of a neutral, was able to sell its produce at highly satisfactory prices to the warring Powers without itself having to incur any of the expenses of war. On the other hand, its great distance from the actual seat of operations will naturally make it difficult for the American Government to impose taxation as freely as might have been done in the case of peoples which are actually on the scene of warfare; so that it is hardly safe to count on American example to improve the standard of war finance which has been so lamentably low in Europe in the course of the present war. According to their original estimates the proportion of war cost borne out of taxation seems to have been on very much the same level as ours, and this has all through the war been very much lower than the results achieved by our ancestors at the time of the Napoleonic and Crimean wars.

On this point the proportion of our expenditure, which has been borne out of revenue, the Chancellor stated that up to the end of last financial year, March 31, 1918, the proportion of total expenditure borne out of revenue was 26.3 per cent. On the estimates which he submitted to the House in his Budget speech on April 22nd, the proportion of total expenditure met out of revenue during the current financial year will be 28.3 per cent., and the proportion calculated over the whole period to the end of the current year will be 26.9 per cent. These proportions, however, are between total revenue and total expenditure during the war period. The proportion, of course, is not so high when we try to calculate actual war revenue and war expenditure by deducting on each side at a rate of £200 millions a year as representing normal expenditure and revenue and leaving out advances to Allies and Dominions. On this basis the proportion of war expenditure met out of war revenue up to March 31, 1918, was, the Chancellor stated, 21.7 per cent. For the year 1917-18 it was 25.3 per cent., for the current year it will be 26.5 per cent., and for the whole period up to the end of the current year 23.3 per cent. The corresponding figures for the Napoleonic and Crimean wars are given by Sir Bernard Mallet in his book on British Budgets as 47 per cent. and 47.4 per cent. So that it will be seen that, judged by this test, our war finance, though very much better than Germany's, is not on so high a standard as that set by previous wars. It is true, of course, that the rate of expenditure during the present war has been on a scale which altogether dwarfs the outgoing in any previous struggle. The Napoleonic War is calculated to have cost some £800 millions, having lasted some twenty-three years. Last year we spent £2696 millions, of which near £2000 millions may be taken as war cost, after deducting normal expenditure and loans to Allies.

Nevertheless, this argument of the enormous cost of the present war does not seem to me to be a good reason why the war should be financed badly, but rather a reason for making every possible effort to finance it well Are we doing so? At first sight it is a great achievement to have increased our total revenue from £200 millions before the war to £842 millions, the amount which we are expected to receive during the current year on the basis of the proposed additions to taxation, without taking into account any revenue from the suggested luxury tax. But, as I have already pointed out, the comparison of war pounds with pre-war pounds is in itself deceptive. The pounds that we are paying to-day in taxation are by no means the pounds that we paid before the war; their value in effective buying power has been diminished by something like one half. So that even with the proposed additions to taxation we shall not have much more than doubled the revenue of the country from taxation and State services as calculated in effective buying power. When we consider how much is at stake, that the very existence, not only of the country but of civilisation, is endangered by German aggression, it cannot be said that in the matter of taxation the country is doing anything like what it ought to have done or anything like what it would have done, willingly and readily, if a proper example had been set by the leading men among us, and if the right kind of financial lead had been given to the country by its rulers.

When we look at the details of the Budget, it will be seen that the Chancellor has made a considerable advance upon his achievement of a year ago, when he imposed fresh taxation amounting to £26 millions, twenty of which came from excess profits duty, and could therefore not be counted upon as permanent, in his Budget for a year which was expected to add over £1600 millions to the country's debt, and actually added nearly £2000 millions. For the present year he anticipates an expenditure of £2972 millions, and he is imposing fresh taxation which will realise £68 millions in the current year and £114-1/2 millions in a full year. On the basis of taxation at which it stood last year he estimates for an increase of £67 millions, income tax and super-tax on the old basis being expected to bring in £28 millions more, and excess profits duty £80 millions more, against which decreases were estimated at £3-1/2 millions in Excise and £37 millions in miscellaneous. He thus expects to get a total increase on the last year's figures of £135 millions, making for the current year a total revenue of £842 millions, and leaving a total deficit of £2130 millions to be provided by borrowing. Increases in taxation on spirits, beer, tobacco, and sugar bring in a total of nearly £41 millions. An increase of a penny in the stamp duty on cheques is estimated to bring in £750,000 this year and a million in a full year, and the increases in the income tax and the super-tax will bring in £23 millions in the present year and £61 millions in a full year. Increases in postal charges will bring in £3-1/2 millions this year and £4 millions in a full year.

There has been little serious criticism of these changes in taxation except that many people, who seem to regard the penny post as a kind of fetish, have expressed regret that the postal rate of the letter should be raised to 1-1/2 d. This addition seems to me to be merely an inadequate recognition of the depreciation of the buying power of the penny and to be fully warranted by the country's circumstances. Either it will bring in revenue or it will save the Post Office labour, and whichever of these objects is achieved will increase the country's power to continue the war. The extra penny stamp on cheques has been rather absurdly objected to as being likely to increase inflation. Since the effect of it is likely to be that people will draw a smaller number of small cheques, and will make a larger number of their purchases by means of Treasury notes, the tax will merely result in the substitution of one form of currency for another, and it is difficult to see how this process will in any way increase inflation. Other arguments might be adduced, which make it undesirable to increase the outstanding amounts of Treasury notes, but in the matter of inflation through addition to paper currency, it seems to me that the proposed tax is entirely blameless. The increase of a shilling in income tax and super-tax produced a feeling of relief in the City, being considerably lower than had been anticipated. It is hardly the business of the Chancellor of the Exchequer in this most serious crisis to produce feelings of relief among the taxpayers, and it seems to me a great pity that he did not make much freer use of these most equitable forms of taxation, having first made arrangements (which could easily have been done) by which their very severe pressure would have been relieved upon those who have families to bring up. Death duties, again, he altogether omitted as a source of extra revenue. His proposed luxury tax he has left to be evolved by the wisdom of a House of Commons Committee, and has thereby given plenty of time to extravagantly minded people to lay in a store of stuff before the tax is brought into being.

Space will not allow me to deal fully with the Chancellor's very interesting analysis of our position as he expects it to be at the end of the financial year on the supposition that the war was then over. He expects a revenue then of £540 millions on the present basis, making, with the yield of the new taxes in a full year, £654 millions in all, without including the excess profits duty, and he expects an after-war expenditure of £650 millions, including £50 millions for pensions and £380 millions for debt charge. It seems to me that his expectation of after-war revenue is too high, and of after-war expenditure is too low. He says that the estimates have been carefully made, but that they include "a recovery from the absence of war conditions," but surely the absence of war conditions is much more likely to produce a diminution than a recovery in taxation. Under the present circumstances, with prices continually rising, the profits of those who grow or hold stocks of goods of any kind automatically swell The rise in prices has only to cease, to say nothing of its being turned into a fall, to produce at once a big check in those profits, and when we consider the enormous dislocation likely to be produced by the beginning of the peace period expectations of an elastic revenue when the war is over seem to be almost criminally optimistic.

The Chancellor arrived at his after-war debt charge of £380 millions by estimating for a gross debt on March 31, 1919, of £7980 millions, which he reduces to a net debt of £6856 millions by deducting half the expected face value of loans to Allies, £816 millions, and £308 millions for loans to Dominions and India's obligation. But is he, in fact, entitled to count on receiving any interest at all from our Allies for some years to come after the war? If not, then on that portion of our debt which is represented by loans to Allies we shall have to meet interest for ourselves. He also gave an imposing list of assets in the shape of balances in hand, foodstuffs, land, securities, building ships, stores in munitions department, and arrears of taxation, amounting in all to nearly £1200 millions. It is certainly very pleasant to consider that we shall have all these valuable assets in hand; but against them we have to allow, which the Chancellor altogether omitted to do, for the big arrears of expenditure and the huge cost of demobilisation, which is at least likely to absorb the whole of them. On the whole, therefore, although we can claim that our war finance is very much better than that of our enemies, it is difficult to avoid the conclusion that it might have been very much better than it is, and that it is not nearly as good as it is represented to be by the optimistic fancy of the Chancellor of the Exchequer.