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Home -> E. Hilton Young -> The System Of National Finance -> V

The System Of National Finance - V

1. Preface

2. I

3. Ia

4. II

5. IIa

6. III

7. IIIa

8. IIIb

9. IV

10. IVa

11. V

12. Va

13. VI

14. VIa

15. VIb

16. VII

17. VIII

18. VIIIa

19. VIIIb

20. IX

21. IXa

22. X

23. Xa

24. Xb

25. XI

26. XIa

27. XII



WE have seen the revenue safely into the Bank of
England. There it stays, credited to the Govern-
ment as a balance on the Exchequer Account,
and no man can take it out again save under the
authority of Parliament. Parliament provides that
authority in the form of a Consolidated Fund Act
or an Appropriation Act, as described in the third
chapter. Armed with it, the Executive can pro-
ceed to draw upon the Exchequer Account to pay
its debts.

The process is no simple one. Parliament has
hedged it with elaborate formalities. Two chief
stages have to be passed through by the state's
payments before they come to the hands of its
creditors. In the first, they pass from the Exchequer
Account to the departments that spend them ; and
and in the second from the departments to the final
payees. Let us take them in order.


By the Exchequer and Audit Act of 1866 the old
laws and customs governing issues from the
Exchequer were consolidated and modernised, and
it is that Act which still rules the matter. The new


system which it established, like that which
preceded it, has for its object to secure that no
issues shall be made from the Exchequer by the
Executive for purposes other than, or for amounts
greater than, have been authorised by Parliament.
In the whole of the elaborate procedure now to be
described can be seen the influence of the old
historic rivalry between the Commons and the
Executive. It is as a check upon the Executive
that the machinery was invented; and its value,
now that the rule of Parliament is so complete,
is about ninety-nine parts historical to one part
practical. Not checks on the power of an irrespon-
sible Executive are what we need, now that the
Executive is responsible to Parliament, but checks
on extravagance in legislation and wastefulness in

Parliament, in order to ensure that the money
which it votes is properly spent, makes use in the
Exchequer and Audit Act of the system of parallel
control which we have met several times already.
To the Treasury is given power to make issues out
of the Consolidated Fund (an alias, it will be
remembered, for the Exchequer Account), and an
independent officer of the House of Commons is
appointed to watch it. That is the Comptroller and
Auditor General, the high and permanent civil
servant who presides over the Exchequer and Audit
Department and is independent of the control of
the Treasury and of everybody else except
Parliament. We are here concerned with him as
Comptroller General alone: an account of his
functions as Auditor General, which are quite
distinct and far more onerous, can be kept till later.


Suppose then that the Treasury and the Comp-
troller General between them are setting to work
to get money out of the Consolidated Fund with
which to carry on the business of government. No
final payments of public money to the state's
creditors are made by drafts drawn upon the
Exchequer Account at the Bank of England, or in
any other way directly out of that Account. Money
is issued from the Account in round sums by the
Treasury to the credit of the spending departments,
and they it is who see to its final disbursement.
The issue of a lump sum to a department or other
agent of the Government, who spends it and
accounts for it, is called an imprest (prefer). An
imprest is a payment which is not a final payment
but an advance. The procedure of issuing the round
sum differs in the case of a sum for a Consolidated
Fund service from that in the case of a sum for a
Supply service. It will be remembered that a
Consolidated Fund service is one paid for out of the
Consolidated Fund under authority of a continuing
Act of Parliament; a Supply service is one for
which money is voted afresh annually in Committee
of Supply. Consolidated Fund services include
the service of the National Debt, principal and
interest, payments to Local Taxation accounts, the
King's Civil List, and various pensions and salaries,
including the salary of the Comptroller General.
Supply services are all the others.

The process of issue on account of a Supply
service voted by Parliament is a pompous affair.
Grants are made, technically speaking, to the
Crown ; so the first step in the process of re-
leasing the money granted for use is a Royal Order


delivered by the Crown to the Treasury which sets
the total grant in a Consolidated Fund Act or
Appropriation Act at the disposal of the Treasury. 1
The order recites the grant and desires the
Treasury to " authorise the Bank of England to
issue from the Exchequer Account, to the accounts
of persons charged with the payments, such sums
as may be required." Issued under the sign-
manual and countersigned by two Lords of the
Treasury, it_js in fact issued by the Treasury to
itself and is a mere formality, adding no useful
check on the process of expenditure. Having
provided itself with a Royal Order, the Treasury
sends it to the independent Comptroller General,
and follows it with a letter "authorising and re-
quiring him to grant to the Treasury, on account

of Ways and Means for the year , credits on

the Exchequer Account at the Bank of England for

the following sums ." It is the duty of the

Comptroller General to see that the Treasury's
request for credit is in accordance with the grants
of Parliament. Having satisfied himself that it is,
he sends to the Bank of England a grant of credit
on Supply services for the amount required.
Referring to the Treasury's requisition, he writes :
"I hereby grant a credit to the Treasury on the
Account of the Exchequer at the Bank of England

1 Other Orders of the sort are sometimes needed, and made,
between the Order in respect of the Consolidated Fund Act, and
that in respect of the Appropriation Act. That is the case when
the sum taken on account of a particular Vote by the Consolidated
Fund Act is exhausted, but the balance of the Vote has since been
taken in Committee of Supply and reported to the House. A
Royal Order may then be issued setting that balance at the disposal
of the Treasury.


or on the growing balance thereof to the amount

of , on account of Ways and Means granted

for the year ." He communicates this grant of

credit to the Bank. This is the critical measure
that releases the credit. Having had its power to
make the issue verified by the independent control,
the Treasury can now get the money. From time
to time as the money is required it directs the
Bank to issue credits from the Exchequer Account
to the Paymaster General on account of the
department which is to have the spending of it.
When the Bank has done so, it notifies the
Comptroller General of the amount and of the
destination of the sums so transferred. That
enables him to follow the issues of the sums
granted, and to see that no issues are made by the
Treasury and the Bank for any Vote in excess of
the amount granted for it. The Departments also
are informed that the sums have been placed to
their credit. Thus each issue out of the Exchequer
for Supply services requires the authority of a grant
of Parliament, a Royal Order, a requisition from
the Treasury to the Comptroller General, a grant
of credit by the Comptroller General, and a
Treasury order to the Bank of England. The
part of the Bank is purely ministerial ; but without
a grant of credit from the Comptroller General to
the Treasury, and a Treasury Order for the issue
of credit, it would certainly make no issue from the
Exchequer Account. It would have no legal
authority to do so, and would run the risk of
having to refund the amount to the Exchequer
Account out of its own pocket.

The process of issue out of the Exchequer


Account for Consolidated Fund services is sub-
stantially the same as that for Supply services just
described. No Royal Order indeed is needed to
put the credit at the disposal of the Treasury;
because money for Consolidated Fund services is
not granted expressly to the Crown ; but, as
already observed, that makes no practical
difference. Every quarter the Treasury makes
a calculation of the amount to be required for the
service of the Debt and for other Consolidated
Fund services during the next quarter. It requests
the Comptroller General for credit to that amount.
The Comptroller General verifies the Parliamentary
authority and grants the credit to the Treasury.
Finally the Treasury orders the Bank to issue the
credit to the account of the department which
is to make the actual disbursements, and the Bank
does so.

Our system for the control of issues out of the
Exchequer Account is thus elaborate in its for-
malities. It is undoubtedly well adapted to serve
its purpose, which is to secure that no money
shall leave that Account save under the authority
of Parliament. It secures that in the best way,
by providing that every issue shall be checked by
an officer independent of the authority that makes
the issue and responsible to Parliament only. That
issues out of the Account should thus be checked
and guarded is undoubtedly still of some moment.
In the Account the money is under the control
of the House of Commons. Once out of it, the
House has lost control ; the money can be spent as
the Executive pleases, and, if it is wrongly spent,
the House can take retributive and retrospective


action only. But now that the responsibility of
the Executive to Parliament is established beyond
question, the importance of this particular form of
control is far less than it was, and our respect for
an interesting relic of great historic controversies
should not be allowed to mislead us into supposing
that the system of checks on Exchequer issues is of
the smallest value in enforcing economy and pre-
venting waste. It prevents the spenders from
getting possession of more money than Parliament
has granted them, or for purposes other than those
for which it was granted. But for preventing them
from making wasteful use of the money once they
have got it, it neither pretends to be, nor is, of any use
at all. It prevents money from being used outside
the law in a way in which there is nowadays little
temptation to use it. It does not prevent money
from being wasted within the law, and with the
enormous estimates and the ever-growing financial
activities of the modern state, it is that sort of
preventative that is the urgent need of the hour.


Before we follow the process of disbursement
through its second stage, we must pause for a
moment to take notice of a cardinal rule of good
financial administration, whether it be that of a
private business or of the state. It is the rule that
cash balances outstanding in the hands of spending
officials should be as small in size and as few in
number as possible. Some free cash balances there
must be, ready to be drawn upon by the proper
officers for the daily needs of the public service.


But they should be as small as possible, no greater
when they are renewed daily, for instance, than is
needed for the service of the day ; and they should
be as much concentrated as possible. There are
several good reasons for that. The first is that
money has a value when it is in use ; borrowers
are willing to pay interest for it. But when it is
lying idle as a balance it is valueless, so that a
balance is an expensive luxury and the bigger the
balance the bigger the expense. That is a good
reason for keeping the public balances as small as
possible. For keeping them as much concentrated
as possible there are good reasons also. The time
during which public money is lying free in the
form of a balance at the disposal of a spender is
the riskiest period of its career. Misappropriations,
defalcations, and all sorts of improper uses of it
can then most easily be made. Actually in former
times, when very large balances were left for long
periods in the hands of a number of spending pay-
masters, it was the regular thing that those who
held them should put them out to interest or
speculate with them for their own benefit. Enor-
mous fortunes could be made in that way alone,
and the office of a pay-master was the noblest prey
of the place-seeker's hunt. The elder Fox followed
the bad practice, and founded a fortune ; the elder
Pitt refused to follow it, and earned a reputation
for honesty which was the foundation of his power.
Close watch and careful control of free balances are
needed, and the fewer separate balances there are,
and the smaller, the closer and more careful can
the watch and control be made, and the fewer
inspectors and auditors are needed to do the work.


Finally it is a practical rule that the bigger the
balance the smaller the relative margin that need
be kept on it above the ^probable requirements of
the day, or of whatever period it is for which it
remains unrefreshed. The wider the area, the less
the divergence from the average. If money issued
daily as an imprest for disbursement be split up
for instance into ten balances in the hands of ten
spenders, each must keep, it may be, a ten per
cent, margin above the needs of the day ; but if it
be concentrated into one balance, it is found that a
five per cent, margin is all that is needed, and so it
is a smaller amount that need be left lying about.

In the interests of economy and of the efficient
supervision which makes for economy free balances
should be as small and as few as possible. For
that reason the issues made out of the Exchequer
for the public service by the Treasury as imprests
to the departments are not split up into different
balances, one for each department. They are all
kept concentrated in one balance set to the account
of a single official whose chief business it is to look
after that balance and to spend it for the depart-
ments and under their directions ; and that is the
Paymaster General. 1 There is statutory authority
for this excellent practice : it is Section 1 1 of the
Exchequer and Audit Act, which says that the sums
issued may be considered as constituting part of a
general drawing balance applicable to the payment
of all services for which the officer to whom they
are issued may be accountable. When the Treasury
requests the Bank to make an issue from the

1 Who is a figure head, and has his work done for him by an
Assistant Pay-Master General.


Exchequer Account, it directs that the sums
mentioned shall be transferred, not to the spending
department, but to the Paymaster General, "on
account of the Supply Service following," and it
specifies the service and the amount, following in
its specification the classification of Votes in
Supply (which themselves follow the Votes in the
estimates). The Paymaster General banks with
the Bank of England, so the issue is made by a
mere cross entry in the books of the Bank, from
the Exchequer Account to the Paymaster General's
account. But it needs special emphasis that
although the purpose for which the issue is made
is specified by the order for the issue, there is no
earmarking for that purpose of the credit issued.
As soon as it is issued it falls into the Paymaster
General's general cash balance, which is a single
balance and not many balances, and it becomes
available for any purpose whatsoever for which
he is authorised to make payments.

Between the Paymaster General and a depart-
ment on whose account he receives issues from the
Exchequer the relationship is that of agent and
principal and in some aspects that of banker and
customer. He pays its debts for it. For this
purpose he keeps several banking accounts of
his own at the Bank of England. One, the
Exchequer Credit Account, also called his Supply
Account, is a mere record of receipts ; to it are
paid all issues which he receives from the Ex-
chequer, but no drafts are drawn upon it. Other
two, his Drawing Account and his Bill Account,
are the accounts from which the actual disburse-
ments are made. There is another important



banking account of his, the Cash Account, but
for simplicity's sake we will pass it over for the
present. Drawing Account and Bill Account are
fed daily by writing credits on to them in the books
at the Bank off the Exchequer Credit Account.
No more is set free daily from the Exchequer
Credit Account than is needed for the payments of
the day. With the day's supply of credit written
off from this Account on to his Drawing and Bill
Accounts, the Paymaster General is prepared to
make the departments' disbursements for them.
Out of the Drawing Account cash payments are
made, and payments by cheque, by "writes-off"
according to a system to be explained, and by sight
drafts on the Paymaster General. Out of the Bill
Account are met bills of exchange which the Pay-
master General has accepted.

When the liability of a department to pay
money to somebody is fully matured, it makes out
a draft upon the Paymaster-General for the amount
and gives it to its creditor. Such drafts are signed
in the department by a special officer called the
Accounting Officer, of whom more hereafter, or his
deputy, and countersigned by some other officer
of the department designated for the purpose.
Daily the departments transmit to the Pay Office
a statement of the drafts so made out, which is
their authority to the Paymaster-General to make
payments for them. Their authorities cover either
single payments or series of successive payments.
The recipient of the draft takes it to the Pay
Office. Payments there are made on the personal
application of the payee or of an agent of his, for
example his banker, only; the Office will not remit


money or cheques by post. At the Pay Office the
drafts presented are compared by a large staff of
examiners with the authorities received from the
departments. If all is well, the payee may get
payment in one of several ways. If a small
amount only is involved, not more than a hundred
pounds, the Office will pay him if he pleases in
cash. For that purpose it keeps a small balance
of cash on the premises. Every day enough cash
is obtained to bring the amount in hand up to a
few thousand pounds. The cash is drawn by
means of a cheque on the Drawing Account at the
Bank. But that covers a tiny portion only of the
total payments. For bigger sums, if the payee of
the draft has no account with a bank that banks
with the Bank of England, he is paid by a crossed
cheque drawn on the Drawing Account. To get
payment for that he has only to present it at the
Bank of England through his own bank. If the
payee has an account with a bank that banks with
the Bank of England (as all the big banks do), the
Pay Office follows another and a preferable course
which avoids the risks involved in drawing and
presenting a cheque. The payee sends his draft
on the Paymaster General to his bank. Next day
a clerk from the bank attends at the Pay Office
with all the drafts of the sort received that morning
from its customers. At the Pay Office the depart-
mental authorities for the payments are verified,
and on the same day an authority is sent thence to
the Bank of England to write off the total amount
of the drafts from the Drawing Account to the
account of the bank in question. Finally the
payees' bank splits up the total credit thus received


amongst the accounts of its customers. In any
case together with his order for payment the
payee presents to the Pay Office a receipt, signed
on a form appended to the order, which is retained
and sent by the Pay Office to the authorising
department as a voucher for the payment, to be
used subsequently for purposes of audit. That
rounds off the system of checks as between the
Pay Office and the departments. As between the
Pay Office and the Bank, accounts are checked by
a pass-book sent daily from the Bank to the Pay
Office, which is compared with the counterfoils
of cheques, bills, and authorities for writes-off.

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