home | authors | books | about

Home -> Charles Francis Bastable -> Public Finance -> Chapter VIII

Public Finance - Chapter VIII

1. Preface

2. Chapter I

3. Chapter I a

4. Chapter II

5. Chapter II a

6. Chapter III

7. Chapter IV

8. Chapter V

9. Chapter VI

10. Chapter VII

11. Chapter VII a

12. Chapter VIII

13. Chapter VIII a

14. Book II Chapter I

15. Chapter II

16. Chapter II a

17. Chapter III

18. Chapter III a

19. Chapter III b

20. Chapter IV

21. Chapter V

22. Book III Chapter I

23. Book III Chapter I a

24. Chapter II

25. Chapter III

26. Chapter III a

27. Chapter III b

28. Chapter IV

29. Chapter V

30. Chapter V a

31. Chapter VI

32. Book IV Chapter I

33. Chapter II

34. Chapter III

35. Chapter IV

36. Chapter V

37. Chapter VI

38. Chapter VI a

39. Book V Chapter I

40. Chapter II

41. Chapter III

42. Chapter IV

43. Chapter IV a

44. Chapter V

45. Chapter Va

46. Chapter VI

47. Chapter VIa

48. Chapter VII

49. Chapter VIIa

50. Chapter VIII

51. Chapter VIIIa

Some General Questions Of Expenditure.

1. THE outlay of the State, like that of the individual,
may be distinguished into normal or ' ordinary,' and ab-
normal or 'extraordinary.' These terms almost explain
themselves, but may be thus contrasted. Normal ex-
penditure is that which recurs at stated periods and in a
regular manner ; it is accordingly capable of being esti-
mated and provided for. Extraordinary expenditure has to
be made at indefinite times and for uncertain amounts, and
it cannot be reckoned for with any approach to accuracy.
The distinction is not always applied in the same way 1 , and
indeed the boundary line is not to be quite sharply drawn.
Most heads of outlay vary from time to time, and any in-
crease may so far be regarded as extraordinary, the
'ordinary' charges being those that, like the English Civil
List, are fixed for a long term. In practice, however, very
close estimates can be made of probable expenditure, small
increases in some directions being compensated by savings
in others 2 . To use the distinction to the best advantage,
we shall confine it to marking the difference between the
usual expenditure and unanticipated extra demands, arising
in most cases from fresh calls on the State. We should
describe the usual annual expenditure on military and naval
forces, the cost of justice and education as normal or
' ordinary.' The cost of a war, or expenditure for the
relief of distress in a sudden emergency, is on the other
hand plainly ' extraordinary ' or abnormal. No French
financier could have foreseen the burdens that the Franco-
German war of 1870-1 would impose on his country ; nor,
though the probability of disturbance was recognised in the
United States for some years before the Civil War, could
there be any calculation of its expense l . In like manner
it is not open to the English Government to provide before-
hand for Irish distress, or for Indian administrators to say
whether their Finances will be disturbed by famine. War
and in backward countries distress approaching to famine
are events that do recur, and though it is not possible
to forecast their effects on public expenditure for short
periods, they ought to be taken into account in the general
scheme of Finance. The famine fund of the Indian Govern-
ment is a recognition of the correctness of this principle,
and though the cost of war does not admit of the same
mode of treatment, it is sound policy to reduce liabilities
in time of peace, so as to secure some relief in the
extraordinary charge in the time of war 2 .

It thus appears that, by taking a sufficiently lengthy
period into consideration, the separation between normal
and abnormal outlay may be so attenuated as almost to
disappear. The conception is a vague one. ' It indicates,'
as Cohn remarks, ' an undeveloped stage of economic
thought ' s to be replaced by the more careful estimation of
the .future. State economy expands both in bulk and
duration. The expenditure of e.g. England under the
Tudors was likely to show ' extraordinary,' i. e. unusual
elements in matters that are at present well within the
prevision of the Chancellor of the Exchequer. When the
outlay is measured by thousands, a variation in hundreds is
serious, but when it reaches millions changes of thousands
are trifling, besides being balanced through savings in some
other parts of expenditure. There is also in modern States
a greater facility for foreseeing and, so to say, * discounting '
the future. The refined financial mechanism by which
public borrowing is carried out, enables ' extraordinary '
expenditure for a short period to be transformed into
' ordinary ' expenditure for a long one.

Still, the development just noted does not remove com-
pletely the dividing-line between the two classes of ex-
penditure. We shall find later on 1 that both on financial
and political grounds it is eminently desirable to have the
estimates and results of national Finance set forth fully and
in unity at short intervals, usually in practice annually. But
during such a period it must sometimes happen that the
amount to be paid out of the National Exchequer will be
much above the average, and it follows as a matter of
course that the expenditure is then 'abnormal.' What
modern Finance can accomplish is to secure a more even
distribution of the pressure.

Another point for consideration is found in the fact that
what is at first extraordinary, may soon become ordinary,
expenditure. At the outbreak of war the cost of the army
and fleet will be greatly increased, giving rise to abnormal
outlay, but after a time, say after the first year, a probable
estimate of the expenses to be incurred in the prosecution
of the war will not be so difficult. The financial history of
England affords several illustrations. During the century
and a quarter from 1688 to 1815 there were the following
war periods, 1688-1697, 1702-1713, 1718-1721, 1739-1748,
1756-1763, 1776-1783, 1793-1802, 1803-1815. At the
commencement of each period expenditure was greatly
increased, but when the state of hostility became a settled
one, it was possible for, and therefore incumbent on, the
Minister in charge of the Finances to present the outlay on
war as part of the ordinary expenditure. Under such con-
ditions the charge for war became the normal charge of
an abnormal period.

Abnormal expenditure also frequently occurs in a some-
what different way, as in the case of durable public works
or other improvements. It may be a part of state policy
to erect extensive public buildings ; to carry dut a system
of fortifications, of railroads, or canals ; to drain and plant
waste lands ; to promote colonization, or to develope an
industry that requires the aid of fixed capital. Innumerable
examples of such forms of expenditure are found in con-
nexion with local government : the acquisition of the in-
dustries engaged in supplying large towns with water and
light, will at once occur. Outlay of this kind is in mercantile
phraseology c chargeable to capital, not to revenue,' and is
clearly abnormal. The method almost invariably adopted
is to meet the abnormal outlay by an abnormal receipt, viz.
borrowing ; or, to put the point in another way, to turn the
extraordinary expense of a given year into the ordinary
one of interest on debt l .

Much ingenious argument has been advanced in favour
of borrowing for all such extraordinary expenditure, on the
ground that it is in substance a creation or investment of
capital, which is an asset to be placed against the new
liability 2 . The plausibility of this doctrine in its extreme
form arises from failing to notice the different effects that
may follow from different forms of State expenditure.

2. For understanding the point it is necessary to
separate State outlay into ' productive ' and ' unproductive,'
using these terms in the sense given to them by Adam
Smith 1 . The former does in fact secure a return in the
shape of material goods possessing value, and it may be
said that expenditure of this kind is admissible even by
the aid of loans. The general category of productive
expenditure will however be found to need further analysis.
It is not at all difficult for the central and local govern-
ments to expend a great deal in obtaining articles that
possess value but yet will not yield revenue. For instance,
the many buildings existing in the United Kingdom for
the meetings of legislative bodies, sovereign and subordinate,
from the houses of Parliament down to the smallest town-
hall, are certainly embodiments of value, but do not, except
in very rare cases, bring in a return. They are * consumers'
capital,' and their cost must be supplied from other sources.
In contrast to the foregoing are those forms of wealth that
return a revenue by their use as 'producers' capital.'
Municipal gas and water works belong to this class ; so do
the continental State railways. The policy of expenditure
on such works is plainly to be judged, partly at least; as a
question of investment. Public bodies may succeed in realiz-
ing good value for their outlay. It is perhaps on the whole
best to divide expenditure into 'economic' and 'non-econo-
mic' rather than into productive and non-productive ; outlay
for the purpose of securing future revenue being ' economic,'
while that which will not have this result is 'non-economic.'
The expediency of economic outlay is really a question
closely connected with the formation of State property and
the (so-called) ' private revenue/ and has to be treated under
that head 2 . Non-economic outlay includes the procuring
of material goods that are not productive capital as well as
the cost of those public services that take no tangible
form. It may be, and often is, more necessary than pure
economic expenditure, but it cannot be regarded as a
creation of capital. National security and honour, the
promotion of culture and education may be better than
wealth, but they are not wealth, and their cost is so far a
deduction from the stock or accumulated wealth of the
society. They belong to consumption not to production,
and the outlay on them has to be limited by economic
considerations. Thus this case is closely parallel to that
of the individual whose expenses for enjoyment, general
education, &c. reduce his economic resources and have to
be limited by the amount of his income.

Some expenditure, both of individuals and of public
bodies, may prove to be indirectly productive. What a
person spends on recreation may so improve his health,
both physical and mental, as to make his labour more
efficient. The State may likewise by its maintenance of a
powerful army and navy or an active police increase the
production of wealth, and in practice all public expenditure
has this amongst other aims in view l .

3. Though public and private expenditure have so many
points of resemblance, there is one very important difference.
The individual's income is formed by the returns on his
property and the reward of his exertions. Public income
or revenue is to some extent composed of similar con-
stituents, but in modern times it is mainly derived from
contributions levied compulsorily on the members of the
society ; that is to say, state income or revenue is derivative,
and is dependent on national income ; local public revenue
is in like manner derived from the revenue of the com-
munity in its locality.

This connexion of public and national revenue has been
recognised from the earliest days of Finance : it is to it that
we owe in great measure the commercial policy of Europe
in the sixteenth and seventeenth centuries. The Physio-
crats also accepted it, as Quesnay's famous makim 'pauvres
pay sans, pauvre royatime; pauvre royaume^pauvre roi 'shows.
It is an essential doctrine of modern theory, though there
is hot perfect agreement on the question whether it is
on 'net' or 'gross' national revenue that State income
depends 1 . There can be no doubt that a small nation
with little accumulated wealth cannot adopt the same scale
of outlay as a larger and wealthier one, and one of the
rules of good Finance is to observe moderation in the
demands of the State on its citizens. Beyond this general
precept no definite result has been reached. Some writers
have suggested a percentage limit for State outlay. Justi
regards i6per cent, as the average, 25 per cent, as excessive.
Hock states 15 per cent, as the upper limit. Leroy-Beau-
lieu, who confines his discussion to the amount of taxation,
arranges the charge on national income for State ends
in grades : 5 per cent, he thinks light, between 5 and 10 per
cent, moderate, over the latter figure heavy, and when 15 or
1 6 per cent, is reached it is almost impossible to increase it -.
Any attempt to settle once for all the proper proportion
of public expenditure to national income is necessarily
vitiated by the different elements to be taken into account ;
such as (i) the object of the outlay; if it has an economic
end a larger amount may be taken, since it is expected to
yield a direct return, and even if not for economic ends, no
decision can be made until the urgency of the want is
known. A nation engaged in a conflict perhaps involving
its national existence is justified in expenditure that would
in ordinary times be imprudent. (2) The amount of the
national income is also a factor to be considered. Ex-
penditure requiring 10 per cent, of the annual income of
India would be much more burdensome than if 30 per cent,
were to be required in England or the United States. (3)
The distribution and the forms of wealth, though less in
importance, have some effect on spending power. The
bounds of outlay in any given case can only be ascertained
by trial, though it is plain that the agreement of the writers
referred to above supports the belief that 15 per cent, of
the national income is too large an amount to appropriate
for State objects, unless in very exceptional cases.

4. Other methods of measuring the proper amount of
State expenditure are still more doubtful. We might take
the proportion to area as a guide, were it not for the fact
that the extreme differences in the value of land in different
countries, as also the varying proportions that other forms
of wealth bear to land, make this test fallacious. The
amount of accumulated wealth as estimated in modern
statistical inquiries l might be used, but we shall find that
income (not property) is the fund out of which in ordinary
cases expenditure has to be met, and the relation of income
to property varies. A very commonly-used index is the
charge per head of population, though for this purpose it is
far inferior even to the amount of property. An attempt
to measure the comparative pressure caused by expenditure
in India and in the Australasian Colonies based on taking
the charge per head, would give the astonishing result
that it was about nineteen-fold heavier in the latter 2 .

Such considerations lead to the belief which indeed
ought to be obvious that there is no mechanical mode of
judging the sufficiency or the legitimacy of public ex-
penditure, a belief that is strengthened by remembering
that local expenditures must be added to that of the central
government before the full pressure can be known, and that
a series of complicated calculations is needed to apportion
the combined charges over the several districts.

Fortunately the question of expenditure in all its forms
does not present itself as a single problem. It would be
quite hopeless to attempt to prepare a budget of outlay for
any country without the aid of the material collected during
previous experience. The great mass of expenditure is
taken as settled, and it is only the particular changes that
have to be anxiously weighed in order to estimate their
probable advantage. This method of treatment simplifies
the issues very much. In the language of modern economists
it is 'final ' rather than 'total' expenditure that needs the
financier's attention. Though the increments dealt in are
not of inconsiderable magnitude, a further reduction can
be made by taking increments of those increments into

5. The usual form that deliberation has to take is that
of considering the advisability of increased expenditure.
Theoretically it is of course equally possible to debate the
benefits of retrenchment, but in nearly all modern States
outlay is steadily increasing. The older doctrines of
economy and frugality have disappeared, and in nearly
every direction proposals for new exertions on the part of
the State are put forward l .

First as to the facts : we may take a few typical examples.
English expenditure in 1833 was 48^ millions, in 1889-90
it was over 86 millions, or an increase of over 37 millions.
As 1833 marks the lowest point of English general ex-
penditure, it will be fairer to take another set of examples
given by Mr. Gladstone.

'The gross expenditure of the State was in 1842-43
55,223,000, and the local expenditure in the three king-
doms was 13,224.000, making a total in round numbers of
68,500,000. In 1853-4 the total State expenditure was
55,769,000, or very nearly the same amount as in 1842-3,
and the local expenditure 15,819,000 ; making together
in round numbers 71,500,000, instead of the 68,500,000
which was the amount in 1842-3. In the year 1859-60
the gross State expenditure had grown from 55)7^95
which it was in 1853 to 70,123,000. The local expenditure, no doubt actuated by a spirit of honourable rivalry,
had increased in the same period from 15,8 19,000 which
it was in/ 1 853 to at least .17,458,000, and probably some-
thing rrfore; the total expenditure for the year 1859-60
thus reached 87,697,000 [?]. Accordingly it appears that
in the, eleven years from 1842-3 to 1853-4 the expenditure
of the country under the two comprehensive heads which
I have mentioned increased at the rate of 4! per cent.,
nearly the whole of the increase being local, while in the
six years which have elapsed between 1853 and 1859 it
became much more mercurial and increased at the rate of
22j per cent., by far the larger part and greater rate of
increase being now imperial.

© Art Branch Inc. | English Dictionary