STATE EXPENDITURE AND INCOME
Political economy, as a branch of the science of a statesman or legislator, proposes two distinct objects, first, to provide plentiful revenue or subsistence for the people or, more properly, to enable them to provide such a revenue or subsistence for themselves, and, secondly, to supply the slate or commonwealth with a revenue sufficient for the public services.—ADAM SMITH.
Taking first the second of the two objects mentioned by Adam Smith, it will be convenient under the heading of "Retrenchment" to treat not only the question of economy in the expenditure of the State, but also the other side of the account, and consider what general lines of action should be adopted to make revenue balance expenditure, in the first place by reducing expenditure, and, in the second, by increasing revenue, in view of the fact that the absolutely necessary expenditure will be enormously enhanced to meet the interest on the National Debt. Assuming that the War were to end in the spring of 1919, the debt will probably amount to about seven thousand millions after allowing for loans due from the Allies and Dominions so far as they are likely to be then recoverable. Taking interest at 5 per cent. with a sinking fund of only half per cent., it is estimated that the permanent annual charge in respect of the Debt will then be about 380 millions. No doubt part of the Debt bears interest at a lower rate than 5 per cent., but a portion has been borrowed at a higher. This is on the assumption that the War will end within this financial year. Even if the War does end within the financial year, much of the expenditure occasioned by it must go on during the period of demobilisation, and during part of that period the Debt will probably go
on growing, as it can hardly be expected that sufficient revenue can be raised by taxation to meet this continued expenditure directly due to the War. There will also be for many years to come a very heavy expenditure on pensions, and, whatever other savings may be effected, the duty of providing pensions for injured and disabled sailors and soldiers is paramount, and the provision must be made generously.
It seems highly probable, therefore, that the annual Debt service will ultimately amount to nearly 400 millions, and may be much more if the War goes on over 1919. It is a gigantic burden to bear. Mr. Bonar Law has stated in the House of Commons that a loan of one thousand millions represents the labour of ten million men for a whole year, so we may take it that the annual charge for the National Debt will require the whole labour of four million men to meet it, and that this charge will be continuous for many years. The normal expenditure after the War, apart from Debt service, has been reckoned to be 270 millions. It will certainly be more unless rigid economy is practised and all the new schemes which are being proposed involving expenditure of money are carefully scrutinised to see whether the expenditure is such as the country ought to undertake in view of its financial obligations. As the Debt service will be practically constant and irreducible unless revenue largely exceeds the total annual expenditure, which is very improbable, it is clear that a strong effort must be made to reduce this expenditure and also, so far as possible, to increase the State revenue. Unless this is done there will be a deficit even after the War, and the Debt will have to be increased to meet it. There is no question of greater urgency, and it must be resolutely faced. We shall probably find a disposition, both in the Government and in Parliament, to shirk it. The influence of the extension of the electorate will, in all likelihood, be against rather than in favour of economy. There is a common assumption that people can get the State to pay for things instead of paying for them themselves;
that there is no need to practise personal economy or to save because the State will provide. Wage-earners who began by practising some self-denial in order to save have said, "What is the use of troubling? The man who saves is really no better off than the man who spends all his earnings, as the State will provide what is required to meet the needs of the latter."
What, then, can be done to reduce expenditure? It is impossible to do more than indicate in outline the machinery by which this expenditure is or might be controlled. During the War, for various reasons, the regular and ordinary checks on extravagance and waste have almost ceased to operate. The situation seems to have been getting worse until the appointment of a Special Committee of the House of Commons on National Expenditure in July, 1917. The Committee consisted of men with business knowledge, and its reports have furnished valuable suggestions. On such a subject anybody who has not direct access to documents and definite personal knowledge of the work and expenditure of various departments, and also some personal experience in State finance, may well hesitate to express an opinion, and will prefer to quote the views of those who have fuller information and better means of judging. There has been much waste; what has gone on has even been described as a "wild orgy of extravagance." The phrase has been used not only by irresponsible critics, but by business men whose words carry weight. Let us call two witnesses out of many available.
Mr. H. Samuel, in speaking of the work of the Select Committee, as late as June 19, 1918, said, in the House of Commons, "that the Committee had formed the opinion that in some cases the staffs of Government departments had been swollen beyond all estimation; that they were frequently ill-organised; that there was much waste of labour and consequently of money in their establishments; that the Treasury had not risen to the occasion during the War, and the Committee had regretfully come to the conclusion that the War Office
had been adopting a deliberately obstructive attitude." Mr. Runciman on the same occasion stated that "lax expenditure and loose control over distribution of public money went far beyond the immediate departments concerned. It went down into every factory, and the general effect was a scale of national extravagance from which we should recover after the War only with the greatest difficulty."
We shall not recover at all except by immediate, determined and, above all, methodical action. Small economies, as Mr. Gladstone long ago pointed out, are not to be despised. It is no doubt right to put up notices in Government offices not to put coal on the fire after three o'clock, but these savings will not go far when half a million can be thrown away on the bogs and rocks round Loch Doon with no useful result of any kind, and yet nobody seems to be made responsible for this waste, nor can anyone say why it was allowed. We hear again and again of improvident contracts and extravagant purchases, and also of absurd cost incurred in supervising minute details. Why cannot clear general authority to act on the spot in certain matters be given to some responsible person, instead of instituting a system of checks which often cause great delay as well as expense? A water pipe at a camp wants some slight repair, costing less than half a sovereign. No one there has authority to give an order, a well-paid official must be sent a day's journey to inspect, and incurs expenses far exceeding the cost of the work to be done. Why is good agricultural land taken for a site when there is plenty of land near which is waste or of little value? Why does a well-known firm which has a telephone and a post-bag think it worth while to pay £15,000 for an introduction to a Government Department? Why have we heard again and again of prices paid for goods greatly in excess of the price for which they could be obtained from well-established firms in the trade? Such instances could be multiplied, but enough has come to light publicly, and been proved, to show how essential it is to have
some authority to deal with such matters and stop the leakage which becomes a torrent. Apparently there has been an improvement lately in many respects, but we are yet a long way from perfection.
There will be an immense dead weight of influence against economy owing to the fact that so many persons are interested in keeping up and increasing expenditure. As was said in the debate above referred to, "It looks as if London were becoming a huge bureaucratic town where everyone will be working in some Government department or other." One might say everyone of all ages, remembering a remark made by someone entering a building near Whitehall, and seeing the crowd of girls and boys in the corridor, "I thought I was coming to a Government office, but it seems to be a crêche."
For efficiency as well as for economy a thorough revision of the executive departments of the Government is necessary. There is no doubt that the present system has grown up at haphazard. It would be difficult for anyone to form a clear idea of the duties assigned to or powers conferred on the various departments, to say who in each department has authority to do certain acts, or is responsible for seeing that they are done properly.
To get the best account of the executive departments in England as they existed before the War we must go to America. Professor A.L. Lowell's book may be taken as the standard work on that subject. The chapters on the Executive Departments, the Treasury, and the Civil Service give a clear and interesting account of the administrative arrangements of the British Government. He shows how new departments have grown up from time to time to meet some new want as it arose, but their powers are often ill defined. Various Boards were created, but in some cases it became an established practice that the Board should not meet, or a Committee of Council was set up and the work carried on under the supposed direction of "my Lords." It was a mere fiction. There has been no clear and consistent scheme for distributing the
work of Government between the various departments on any intelligible principles.
All are spending money, some of them enormous sums. Staffs are growing inordinately, much of the work is duplicated, much consists in communications with other departments which would be unnecessary if the work of each were better defined.
It should be clear in each department who has authority to decide any particular question, to incur expenditure, to enter into binding agreements. The executive government of the country is in a chaotic state, relieved to some extent by the good sense and good feeling of the members of the great army of officials who carry it on. No one can deny that the Civil Service is not only pure, but, taken as a whole, its members individually are both able and industrious. It is better organisation that is required. Some of the new Ministries ought to be scrapped directly the War is over, and the business of others continued only so far as necessary for winding up. But these new departments will die hard.
Since the War new departments have grown up like mushrooms, sometimes without any clear statement of their functions or powers being made, and there has not been time to settle them at leisure by a course of practice. The result is overlapping, friction which would be intolerable but for the good-natured forbearance which English people have for a state of confusion, waste of time and money in sending minutes, and in correspondence between different departments, and often delays which have had most unfortunate results. Does anyone know exactly what are the respective functions and powers of the Ministry of Reconstruction, the Ministry of Labour, the Board of Trade, the Ministry of Pensions, the Ministry of National Service, the Board of Works, the Ministry of Food Control, the Board of Agriculture and Fisheries, the War Trade Department, the Home Office, the Local Government Board, the Committee on Food Production, the Restriction of Enemy Supply Committee, the Priorities Com
mittees, the Ministry of Munitions, etc., etc. The list might easily be extended.
A thorough revision of the executive departments is necessary if government is to be both efficient and economical. There is plenty of good material in the Civil Service, and it will always be easy to obtain more. It is the system or want of system that is wrong.
The next question is to provide or restore a more effective general control over expenditure and impose checks on the growing expenditure which has been so marked in recent years, even before the War.
The ordinary machinery for dealing with and controlling expenditure is or should be fourfold.
(1) The spending departments make definite estimates or are supposed to do so. Since the War, this has not been the rule. Of course, there are many cases in which it would have been absolutely impossible to let the items of proposed expenditure be published or discussed in the House of Commons; but, as soon as War requirements permit it, proper estimates should again be prepared and pressure put upon the departments to reduce them. At present the pressure is all the other way; the heads of the departments apparently like to have a large establishment as well as to extend their jurisdiction. It is not merely to give their department more importance and a claim therefore to higher salaries; sometimes it is the natural tendency of the vigorous man to enlarge the scope of his influence. Boni judicis, says the old maxim, ampliare jurisdictionem. ("It is characteristic of the good judge to extend his jurisdiction.") It would be a good thing if instead of estimates being laid directly before a Committee of the whole House of Commons, where some small item is often the subject of long and acrimonious debate and millions are passed without comment or consideration in a few minutes, the estimates of each department were fully considered as a whole by some small competent Committee of the House, uninfluenced by party feeling, and representatives of departments could be asked questions on their estimates.
To compare small things with great, a committee of this kind has been found of the highest value in institutions where there are various departments requiring large expenditure. It is usually then felt by each person who sends in an estimate that it is to the credit of his department not to make claims for expenditure which cannot be justified. When the scale and character of the expenditure have been scrutinised and the estimate has been passed, it is much better to leave a very free hand as to the exact mode of expenditure. Outside control then becomes irritating, and is itself a cause of extravagance; it means more accounts, more correspondence, more consideration of papers.
(2) The Treasury is supposed to have the function of control, but a change appears to have taken place, and it has now to a great extent lost its control, and has even itself become a spending body. Professor A.L. Lowell, in the work above referred to, after speaking of the Treasury as the department which exhibits in the highest degree the merits of the British Government, points out that even ten years ago, "with the waning desire for economy and the growth of other interests, the Treasury has to some extent lost its predominant position; although it will no doubt maintain its control over the details of expenditure, one cannot feel certain that its head will regain the powerful influence upon general or financial policy exerted thirty years ago." A very guarded statement, as was becoming in an author writing in another country at a time when the tendencies to which he alludes were only beginning to show themselves. Things have advanced during the last ten years in the direction Professor Lowell indicated as probable, and it is high time that this advance should be stopped.
We might venture to ask, indeed, the following questions: (i) Has not the Treasury during the last ten years lost a large portion of its control, and since the War almost its whole control over expenditure on a large scale? (ii) Is the Treasury not more concerned
with paltry details than in imposing any real check on the extravagance of spending departments? (iii) Has not the policy sometimes been actually to encourage expenditure, and has not there been one case at least, even of introducing vexatious taxation where the amount collected is far less than the cost of collection? (iv) What has the Treasury done to prevent or control "the orgy of extravagance" since the War began? The department of State which has to do with revenue, with getting as much as possible and spending only what is necessary, which has the duty of "making both ends meet," ought to resume its functions and regain its influence so that the Government may be conducted "on strict business principles," to use Professor Lowell's phrase, "as it was throughout a great part of the nineteenth century."
(3) The Cabinet should exercise more controlling power, and recognise its collective responsibility for keeping down expenditure. As Professor Lowell points out, the position of the Chancellor of the Exchequer in the Cabinet was one of almost commanding influence. In Mr. Gladstone's time his powerful personality, regularly exercised in favour of national economy, did certainly have a great effect in preventing extravagance, and some other Chancellors of the Exchequer no doubt used an influence in that direction, but can it be safely asserted that there is in the Cabinet as a whole sufficient attention given to retrenchment?
(4) Lastly, the House of Commons is supposed to control expenditure. That control has generally been used, and quite rightly, as a means of calling attention to grievances, and as giving an opportunity for criticism of the executive; but the House of Commons should also put pressure on the executive to curtail expenditure, not so much by discussing small details which would be far better dealt with by such a small Estimates Examination Committee as suggested, but by using its influence generally against an increase of expenditure unless a clear case for it is made out. During the War, Parliamentary control, at least until the
appointment of the Committee above mentioned, seems almost to have gone. The House of Commons does not now exercise its influence as it ought, to check extravagance, and probably the more widely the electorate is extended, as already said, the less will the House of Commons care to exercise rigid control in favour of economy. It is always an easy way of getting popularity to be what is called "generous" when dealing with other people's money. Everyone who looks after the public interest by trying to prevent expenditure, whether national or local, which is not imperatively called for, is styled mean and narrow-minded, and his task is a thankless one. Everyone who wants money spent will be able to make out a plausible case, either that the amount is so small or the object is so important that what he asks must be granted, and he will have some eager constituents to back him up. The best chance for economy is to have a body of men whose decisions the House will respect and not overrule, except for really good cause, who have both the knowledge and the strength of character to go through the estimates and call attention to the cases in which substantial reductions could be effected, or proposals for increased expenditure refused. It will not be an agreeable task, and now probably less popular than ever. The masses admire lavish expenditure whether by public bodies or by the private person who spends his money "like a gentleman," and it is to be feared there will not be much help from the women electors, as women, although they may practise economy occasionally themselves, usually regard it as a most objectionable virtue in a man. How often in families do we find the mother and sisters will admire the self-indulgent idle youth who spends money freely even if he borrows from them, rather than the steady, plodding son who, by rigid economy and personal self-denial, helps to provide them with the means of livelihood!
Turning to the other side of the account, what can be done to increase the revenue of the State? It has
been estimated that for the year 1919-20 it will amount to £900,000,000, but of this £300,000,000 is excess profits duty, which can hardly continue—in its present form at least—beyond the period during which additional expenditure above the permanent normal requirements is needed, in order to carry out demobilisation. Putting the permanent charge to meet interest on debt and the cost of the public services at £670,000,000, there may be a deficit even if the present rate of taxation is maintained, and the normal expenditure remains at its existing level. There will be no surplus for the reduction of debt, or to meet new demands. Some new sources of revenue must, if possible, be found, and the old ones require readjustment.
Income tax, if levied on the present system, has touched the extreme limit. A rate of taxation willingly borne to meet the cost of war while danger threatened will be felt more and more burdensome as time goes on. To meet a higher income tax there will be pressure to increase salaries paid by the Government and all public authorities. An official salary fixed at £5,000 a year when income tax was one shilling and sixpence, may be thought insufficient when it is nearly ten shillings including super-tax. Persons have incurred liabilities for rent and other fixed payments which they are not able to reduce. All along the line there will be claims for higher payments for services rendered or goods supplied. On the other hand, industrial undertakings will have to pay more for the capital they must borrow to carry on and develop their work, and 6 per cent. instead of 4 per cent. will have to be paid for debenture capital now raised by the best industrial companies. For those who have money to lend, the burden of tax may thus be practically met by an increased income, but for those whose money is locked up in permanent investments there will be no indirect relief in higher rates of interest. Income tax, house duty, and rates will absorb so much that the margin for voluntary expenditure will be small even out of incomes that are nominally high.
The death duties, especially where a deceased person leaves a large family, already cause much hardship. A general increase in the existing rates of estate duty cannot be made without discouraging thrift. It is a hardship if it is made impossible for parents to make reasonable provision for children some of whom may from various causes be unable to earn for themselves. On the contrary, where there are no children and no widow to be provided for, death duties might be much increased without causing hardship. A very much higher legacy duty might be charged in the case of large sums passing on death to persons other than the widow, direct descendants, or other near relatives of a deceased person. On small legacies the present rates should suffice, but there is no moral claim for distant relatives to be allowed to take large sums. Would there be any real hardship in imposing a heavy duty of, say, 25 per cent. on gifts over, say, £1,000 to collateral relations not dependent on the testator or to strangers? Or there might be a graded scale according to the remoteness of the relationship. In case of intestacy it would be often a real advantage to take the whole property for the State, if there were no relations within the third or fourth degree, i.e., uncles and aunts, and nephews and nieces being in the third degree, first cousins in the fourth. Economists for the last hundred years—Bentham, Mill, and others—have advocated such a change. Nearly every judge or officer of the Courts who has to do with the administration of estates would support a change which would do away with much wasteful litigation and disappoint no reasonable expectations. No source of revenue should be neglected if it can truly be said that by imposing the additional taxation proposed there will be (i) no dislocation of trade or hampering of industry or commerce; (ii) no discouragement of thrift; (iii) no real hardship; (iv) no great expense incurred in collection in proportion to the amount raised. It is only sheer stupidity that refuses to adopt a means of raising even a small amount when
the method proposed for doing so would have positively beneficial results in other ways.
The land increment duty should be a warning as regards cost of collection. That cost relatively to the amount produced has been enormous. But actual cost of collection as returned, represents only a small part of the expenditure really caused by the tax. The time taken up in making returns and filling up forms and obtaining the necessary advice in doing so is a burden on those who own even the smallest landed property and causes real hardship and injury. It discourages people from acquiring small properties.
The only other source of additional revenue in immediate contemplation appears to be the luxury tax. If this can be levied so as to fall on articles which are really luxuries, i.e., things not required for full and healthy life, the effect of such a tax should be wholly beneficial. If, notwithstanding the tax, people go on buying such luxuries the State will gain. If, on the other hand, the effect of the tax is to check expenditure on luxuries it will be a gain to the country, because its productive power and its purchasing power will be used to obtain articles which are really valuable and do promote national welfare. The idea that those who spend money on luxuries are helping trade, and so benefiting others, ought to have been exploded long ago. If the industry which has been devoted to producing articles which are really useless were diverted to producing things of utility, the aggregate of human happiness would be greatly increased. A difficulty in applying the tax is that the price of an article is little criterion as to whether it is a luxury or not.
There are two other sources from which additional revenue might be obtained.
First, to impose again an export duty on coal. Such a duty would help rather than hinder British industry. That industry is dependent absolutely on the supply of coal. British Coal Measures are an asset which enables the country to keep industries going, but it is a wasting asset. Deeper and better mining
may have upset calculations made by Professor Jevons many years ago when he warned the country of the disastrous consequences of using up our coal supplies, but sooner or later the pinch will come. An export duty ought to be imposed on coal directly the present war restrictions can be removed. Our stores of coal cannot be indefinitely increased by increased industry. If the duty operated to reduce export of coal British manufacturers would gain, and be able to produce commodities at less cost. If the demand from abroad were so strong that export did not diminish, the country would gain to the whole extent of the duty paid by foreign purchasers. The ordinary arguments in favour of free trade do not support objection to such an export duty as this. There will be ample demand for all the coal that can be produced. Even if there were not, it would be well not to use it up so quickly. There are some kinds of coal, of which the amount available is very limited, yet until the War broke out quantities of such coal were freely sent to other countries, some of it to those who are now at war with us, and so used to help our enemies, who got the precious mineral cheap because we refused to allow the imposition of an export duty. Probably the duty when it was tried was not imposed in the best way, being charged at a fixed rate per ton instead of on an ad valorem scale, but this fault could easily be corrected. Special exceptions in favour of Colonies or Allies, or for the supply of certain places, might be made by arrangement in consideration of some equivalent favour, or to meet some particular need.
The other suggestion involves more difficulties, and is of a more far-reaching character. Would it not be possible to replace to some extent the excess profits duty, which cannot be permanent, by a duty on "excess dividends," that is, on the amounts paid out of the profits of a business for the use of capital above a certain percentage? The excess profits duty, in spite of all its anomalies and the difficulties of assessment, has saved the financial situation during the War; a
tax on excess dividends might "save the situation" afterwards. When a business is successful, paying, as many businesses have recently done, dividends of 30 to 50 per cent., and sometimes even more, the return made to those who have invested money in them is clearly excessive. From such profitable businesses those who have the responsible management no doubt may generally get better remuneration, possibly the workmen may get a small bonus or share in such profits, but those who by a mere stroke of good luck have embarked their money in these businesses, shareholders who very likely know nothing whatever about the conduct of them, benefit enormously. Such a tax would not discourage thrift or prevent a person from getting a reasonable return on his savings. Take the case, say, of two professional men. Both, by hard work and using up their lives in the effort, manage to make a fair income and bring up their families. One of them, to make provision for the future, invests £2,000 in safe securities with fixed rate of interest, and £2,000 in some company whose business is of a more or less speculative character, but by good fortune becomes able to pay a dividend of 30 per cent. The other invests a like sum in firm securities, and £2,000 in another company which turns out a failure. Neither of them has anything to do with the conduct of the business of the company in which he invests, but one has got a tip from some friend or other who thinks he knows of a good thing. The work of the two men is exactly the same; it is a mere fluke that one gets a huge return and the other puts his money into a company which, without any fault on his part, brings in nothing.
The tax suggested would be levied on the excessive profits distributed in respect of the capital embarked in businesses of every kind. It was pointed out long ago that a tax thus levied on all alike would be paid wholly by the capitalist and "would neither affect the prices of the commodities produced nor the distribution of capital." The duty might be graded according to
the percentage to be received on the capital of each investor. It might be reasonable for the first 10 per cent. to pay only the ordinary rate of income tax. Money in fixed permanent securities may now produce 5 per cent. or 6 per cent., and the additional 4 per cent. free from the excess duty would be a fair return for risk and an inducement to enterprise. The rate of excess duty might be increased according to the excess of profits above 10 per cent. until when the profits reached, say, 30 per cent. the duty on the amount in excess of 20 per cent. might be very high. The effect of the tax would not be to reduce the spending power of the community; it would only be that the State instead of the individual would to the extent of the duty obtain the power of purchasing what it required, and discharging its liabilities with the money it took from excessive profits. The amount of the tax, the method of grading and mode of levying it, would require careful consideration; but if the difficulties and inequalities introduced by the War excess profits duty could be met, there seems no reason why the difficulties of the tax thus proposed should not be also solved; at all events, an attempt should be made to see how it would work out.
Where money is rapidly acquired by some stroke of fortune and is not the result of steady industry the result is constantly unwise and often harmful expenditure either by those who have acquired it or their immediate successors. There is an old Lancashire saying as to fortunes rapidly made, that there are only three generations from clogs to clogs: "What is unreasonably gathered is also unreasonably spent by the persons into whose hands it finally falls." It may be spent "in a stupefying luxury twice harmful both in being indulged in by the rich and witnessed by the poor."
There is a great danger to the State at the present time from large amounts of money rapidly acquired being accumulated in few hands. There are many
signs that we are likely to enter a period which may be described as the reign of the "nouveaux riches." The great financiers, the persons with enormous interests in huge combines, will exercise more and more an undue and dangerous influence on fiscal policy and political life. The old nobility and the class of country gentlemen will have less power. Their resources will be seriously crippled, and their families perhaps extinguished through losses in the War. The middle class, which, in the last century, exercised the strongest influence on political life, and from which most of our men of letters and science have sprung, may now be crushed. On the more highly educated part of the middle classes whose means are limited the burden of the War has fallen most heavily. Taxation seems deliberately arranged to place as heavy a burden as possible on those of the middle classes who have children to bring up and to educate in the way they think best, and who endeavour to provide means by which their families can occupy the same position in life which their parents have done. The rate of income tax paid by a bachelor and a spinster is increased if they marry, although their necessary expenses will be enormously increased if they have a family to support. A bachelor with £500 a year may be living in ease and luxury; if he marries and has four or five children to educate he may find difficulty in meeting the needs of his family with £1,500. In the same way the death duties are absurdly small on the estate of the bachelor who leaves no family, but are a real hardship on the family of the man who dies leaving a number of children.
The tendency is towards a rapid accumulation of huge fortunes. In considering the incidence of taxation Bacon's advice might well be remembered: "Above all things, good policy is to be used that the treasure and moneys in a State be not gathered into few hands, for otherwise the State may have great stock and yet starve, for money is like muck, not good except it be spread."