It seems to me that this policy of raising so large a proportion of the war's cost by borrowing is one that commends itself to short-sighted politicians, but is by no means in the interests of the country as a whole, or of the taxpayers who now and hereafter have to find the money for paying for the war. In so far as the war's needs have to be met abroad, borrowing abroad is to some extent inevitable if the borrowing nation has not the necessary resources and labour available to turn out goods for export to exchange against those which have to be purchased abroad, but in so far as the war's needs are financed at home, the policy of borrowing is one that should only be used within the narrowest possible limits. By its means the Government, instead of making the citizens pay by taxation for the war as it goes on, hires a certain number of them to pay for it by promising them a rate of interest, and their money back some day. The interest and the sinking fund for redemption have to be found by taxation, and so the borrowing process merely postpones taxation from the war period to the peace period. During the war period taxation can be raised comparatively easily owing to the patriotic stimulus and the simplification of the industrial problem which is provided by the Government's insatiable demand for commodities. When the days of peace return, however, there will be very grave disturbance and dislocation in industry, and it will have once more to face the problem of providing goods, not for a Government which will take all that it can get, but for a public, the demands of which will be uncertain, and whose buying power will be unevenly distributed, and difficult to calculate. The process, therefore, which postpones taxation during the war period to the peace period seems to be extraordinarily short-sighted from the point of view of the nation's economic progress. Recovery after the war may be astonishingly rapid if all goes well, but this can only happen if every opportunity is given to industry to get back to peace work with the least possible friction, and a heavy burden of after-war taxation, such as we shall inevitably have to face if our Chancellors of the Exchequer continue to pile up the debt charge as they have done in the past, will be anything but helpful to those whose business it will be to set the machinery of industry going under peace conditions.
As things are, if we continue to add anything like £2000 millions a year to the National Debt, it will not be possible to balance the after-war Budget without taxation on a heavier scale than is now imposed, or without retaining the Excess Profit Duty, and so stifling industry at a time when it will need all the fresh air that it can get. Apart from this expedient, which would seem to be disastrous from the point of view of its effect upon fresh industry, the most widely advertised alternative is the capital levy, the objections to which are patent to all business men. It would involve an enormously costly and tedious process of valuation, its yield would be problematical, and it might easily deal a blow at the incentive to save on which the supply of capital after the war entirely depends. A much higher rate of income tax, especially on large incomes, is another solution of the problem, and it also might obviously have most unfortunate effects upon the elasticity of industry. A tax on retail purchases has much to be said in its favour, but against it is the inequity inseparable from the impossibility of graduating it according to the ability of the taxpayer to bear the burden; and a general tariff on imported goods, though it would be welcomed by the many Protectionists in our midst, can hardly be considered as a practical fiscal weapon at a time when the need for food, raw material, and all the equipment of industry will make it necessary to import as rapidly and as cheaply as possible in order to promote our after-war recovery.
Apart from these purely economic arguments against the high proportion of the war's costs that we are meeting by borrowing, there is the much more important fact of its bad effect on the minds of our soldiers, and of those members of the civilian population who draw mistaken inferences from its effects. From the point of view of our soldiers, who have to go and fight for their country at a time when those who are left at home are earning high wages and making big profits, it is evidently highly unfair that the war should be financed by a method which postpones taxation. The civilian population left at home, earning high profits and high wages, should clearly pay as much as possible during the war by immediate taxation, so that the burden of taxation may be relieved for our soldiers when they return to civil life. In view of the hardships and dangers which our soldiers have to face, and the heroism with which they are facing them, this argument should be of overwhelming strength in the eyes of every citizen who has imagination enough to conceive what our fighting men are doing for us and how supreme is our duty to do everything to relieve them from any other burden except those which the war compels them to face. There is also the fact that many members of our uninstructed industrial population believe that the richer classes are growing richer owing to the war, and battening on the proceeds of the loans. I do not think that this is true; on the contrary, I believe that the war has brought a considerable shifting of buying power from the well-to-do classes to the manual workers. Nevertheless, in these times misconceptions are awkwardly active for evil. The well-to-do classes as a whole are not really benefited by having their future incomes pledged in order to meet the future debt charge, and if, at the same time, they are believed to be acquiring the right to wealth, which wealth they will have themselves to provide, the fatuity of the borrowing policy becomes more manifest. For these reasons it is sincerely to be hoped that our next fiscal year will be marked by a much higher revenue from taxation, a considerable decrease in expenditure, and a consequently great improvement in the proportion of war's cost met out of revenue, on what has been done in the past year. At our present rate of taxation we are not nearly meeting, out of permanent taxes, the sum which will be needed when the war is over for peace expenditure on the inevitably higher scale, pensions, and interest and sinking fund on war debt.
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."