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

The System Of National Finance - VIIIa

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


As we have seen, when the year is drawing
towards its close at the end of March careful
calculations are made of the issues to be made
from the Exchequer on account of each Vote for
the year, in order that the actual net expenditure
chargeable against that Vote may be covered as
exactly as possible by Exchequer issues. For that
purpose information is obtained by the Treasury
from the departments responsible for expenditure
on the Votes of their probable requirements in
respect of each. Now, the grant of Parliament in
respect of each Vote is a maximum grant. As much
as Parliament grants to a department for the Vote
may be spent on the services of the Vote by the
department, but there is no reason why it should
spend or the Treasury should issue to it the whole
sum granted, if it can do with less. If the Treasury
hears from the department the glad news that it is
not likely to want for the service of the Vote the
whole of the sum granted, it makes a " short issue,"

leaving a part of the grant standing to the credit
of the Vote still unissued at the end of the year.


We have now to draw a distinction which it is
necessary clearly to grasp and constantly to bear
in mind in order to follow the system on which the
Government's accounts are kept. It is the distinc-
tion between the Account of the Exchequer for the
year and the yearly accounts of the departments.
The Exchequer Account, which shows approxi-
mately the Government's total revenue and expendi-
ture for the year, is, as we have seen, on the issue
side an account of the actual issues made as imprests
to the departments from April ist to March 3ist.
The date of an issue is the criterion of the year in
which it is to be brought into account. In drawing
up the accounts of their expenditure for the year,
which are the Appropriation Accounts, the depart-
ments have no such simple criterion as to what
expenditure is to be included. What has to be
included is the total expenditure, made by the
department, which is properly chargeable against
the grants for the year. To determine what
expenditure is so chargeable, the criterion to be
applied is the date of the order for payment, so
long as that order has actually come into the hands
of the payee and has not remained lying in the
office undelivered. An accounting officer, then,
must bring into account for a year all operative
payments the order or cheque for which was dated
within the year.

It can be seen in the proceedings of the Public

Accounts Committee and the minutes of the
Treasury that this is a rule which is liable to be
manipulated in a manner that calls for vigilance on
the part of the guardians of financial morality. If
a department's grants are running out and it is
pressed for money it is tempted to leave some of
the liabilities which it has incurred during the year
undischarged, and by refraining from making out
an order for payment until after the fateful 3ist of
March to throw the charge upon the Votes of the
following year. On the other hand, if it has a
surplus in hand at the end of the year it is tempted
to get the benefit of it, and to avoid having to
surrender it in the manner to be described later,
by spending it on services which could more
properly be performed in the following year. To
prevent these manipulations the Treasury and the
Committee have laid down several supplementary
rules. They have laid down a strict rule that
payment for a liability is always to be made in the
year in which it has matured and is due. Every
liability for a payment which has matured must,
when its discharge is postponed for lack of funds,
be shown upon the face of the Appropriation
Accounts. If there is no money to meet it, so much
the worse. The irregularity, as the Committee
tersely puts it, consists in incurring unauthorised
expenditure in excess of the grants, and it is only
increased by not defraying it. 1 Not even to avoid
an excess is the discharge of a matured liability to
be postponed. On the one hand, then, it is quite
right for the departments to call in and wipe off all
matured liabilities in the last days of March; but
1 Report of Public Accounts Committee, 1877.

on the other hand it is quite wrong for them to
extend that process to the inclusion of payments
in anticipation of the next year's services, and
the Treasury is concerned to see that no such
raids are made by the departments upon their

We are now in a position to understand a
circumstance which often puzzles one who is
examining the national accounts. It is that the
total of the net expenditure included in the Appro-
priation Accounts and audited is never exactly the
same as the total of issues from the Exchequer
Account. Since issues from the Exchequer
Account at the end of the year are made with
the express purpose of balancing and exactly
covering the actual expenditure of the departments
out of the grants of Parliament, it seems as if the
total net audited expenditure, which is the total net
expenditure for which credit is taken in the Appro-
priation Accounts, ought to be exactly equal to the
total issues from the Exchequer. So it would be but
for one difficulty, that a certain number of cheques
and orders for payment dated and sent to the
payees in the last days of the financial year are
not presented until after the end of that financial
year on March 3ist. When they are presented
they are met out of the balances, in the hands of
the Paymaster-General and sub-accountants, part
of which represents issues made in respect of the
services of the year which is over. But it is very
unlikely that the Treasury and the departments
will have been able to foresee exactly and to a
pound how much will be required for these out-
standing orders chargeable against the year. It

may be that a little more has been issued than is
ultimately needed, and in that case the Exchequer
issues for the year will slightly exceed its audited
expenditure. It may be that a little less has been
issued than is ultimately needed, and then the
audited expenditure for the year will slightly
exceed its Exchequer issues. In the latter case
the Treasury has to make fresh issues from the
Exchequer in the new year on account of the
services of the old, to cover the difference. They
appear, of course, as part of the issues from the
Exchequer brought into account in the new year.
At ordinary times the difference between audited
expenditure and Exchequer issues ought never to
be more than about five shillings in the hundred
pounds, and it is often not more than two shillings.
In times of war and of a disorganisation of the
spending services which leads to a slow com-
pletion of the actual process of payment the
difference may be greater.

It is now apparent why the departments'
accounts of their expenditure, which are the
Appropriation Accounts, cannot be made out at
the same time as the final Account of the Exchequer
for the year, as soon as the financial year is over.
Time has to be allowed for the outstanding orders
for payment chargeable against the grants of the
expired year to be presented, to be met out of the
outstanding balances issued on account of those
grants, and for the expenditure to be audited.
Payees are notoriously careless and dilatory,
neglecting and forgetting to present their drafts
for months and months. Some may never be
presented at all. In the case of Civil Service

Votes, three months' grace is allowed, and six
months in the case of naval and military Votes.
If by then an outstanding draft has not been pre-
sented and met, no credit can be taken for it by
the department which issued the draft. After
those periods have elapsed, but not until then, the
departments can set about the preparation of their
Appropriation Accounts.


In the last chapter we saw what is done when a
department finds that it is going to spend or has
spent more in gross upon a Vote than Parliament
has granted to it for the purpose ; but for sim-
plicity's sake we left the converse case for con-
sideration in the present chapter. It may be that
when an Accounting Officer has made out the final
account of expenditure on a Vote, he finds that less
has been spent in gross upon the services of the
Vote than Parliament granted for them. The sur-
plus may arise in several different ways ; it may be
the result of the actual gross expenditure being
less than the estimated gross expenditure, or of
the realised appropriations in aid being greater
than the estimated appropriations in aid. Or it
may be the balance left of an excess of realised
appropriations in aid after part of the excess, with
Parliamentary sanction, has been applied to making
good an excess of actual over estimated gross
expenditure ; or it may be the balance left of a
reduction in actual gross expenditure below
estimated gross expenditure, after making good

a deficit in realised appropriations in aid in com-
parison with those estimated. In all cases alike
the surplus which is the saving is equal to the
excess of the net Supply grant over the net actual

That is for Civil Service Votes. For Navy and
Army Votes, owing to the system of applying the
total savings on all the Votes to the total excesses
thereon, the balance to be surrendered is the surplus
of Supply grants over net actual expenditure for all
the Votes taken en bloc. In either case if the
whole of the grant or grants on which the surplus
arises has been issued, then the whole of the sur-
plus is in the hands of the department, and is
represented by balances in the hands of the Pay-
master General and sub-accountants. But if the
surplus has been foreseen and the whole of the
grant has not been issued, if there has been a
short issue, then part of the surplus is repre-
sented by an unissued balance in the Exchequer

A department which has effected a saving is not
left in happy possession of it, to be spent upon any-
thing it likes, as upon the services of the following
year (which by the time the surplus is ascertained
is of course the current year). What it has saved, it
has saved in the interests of the nation's common
purse, and to that it must be returned. As for the
surpluses outstanding in the hands of the depart-
ments, they might be returned by a transfer from
the balances in the hands of the Paymaster General
on account of the department to the Exchequer
Account. But that would have one ill effect : it
would increase the total receipts of the Exchequer

account and the total issues therefrom for the
year by artificial cross-entries, and it would thus
make both the nation's revenue and its expenditure
seem bigger than they really were. A more
convenient and a more scientific way of making the
surrender is to let the department keep the surplus,
but to reduce by an equal amount the grants to be
made to it from the Exchequer for the services of
the year following that to which the surplus
belongs, thus reducing its potential credit on
the Exchequer Account. The surpluses are then
said to be written off the grants. That part of the
surplus which is represented by grants still
unissued from the Exchequer is written off and
cancelled ; the other part which is represented by
balances outstanding in the hands of the Paymaster
General and of sub-accountants is written off the
unissued grants for the same services in the year
following that to which the surplus belongs. It is
only if a service has come to an end, no longer
appears in the estimates, and all its grants for the
past year have been issued, that a saving has
actually to be paid back into the Exchequer Account
as a receipt. One good effect of this system is that
the use of the balances in the hands of the Pay-
master General and sub-accountants which repre-
sent grants on account of the services of an expired
financial year is not confined to meeting pay-
ments to be charged against the grants of that
year. They are free to be used also for payments
to be charged against the grants of the current

In the case of Naval and Military services, a
balance-sheet is published with the Appropriation

Accounts which shows'the ledger balances and the
Vote Accounts on the 3Oth September, the day on
which the Appropriation Accounts are closed. A
consideration of it will serve to emphasise and
define the difference between the annual closing of
the Exchequer Account of the nation's revenue and
expenditure on March 3ist, and the closing of the
departments' Appropriation Accounts six months
later, and it will show more exactly the nature of
the surplus surrendered by the departments. Let us
see what these balance sheets tell us. For sim-
plicity's sake, we will consider an actual example,
that for the Navy Votes, drawn up to show the
balances on September 3Oth, 1912. It tells us in
the first place the assets of the Votes both of the
current and of the expired year : these are (a)
balances of grants for naval services in the current
year (1912-13), still unissued from the Exchequer;
and those for the preceding year (191 1-12), to which
the Appropriation Account belongs, if there are
any (in this particular year there were none); (b)
balances in the hands of the Paymaster General
on account of naval services; (c) balances as
imprests in the hands of local naval paymasters. In
the second place it tells us the outstanding liabilities
of the Votes on orders for payment issued but not
yet cashed. There are a number of other minor
assets and liabilities, but they do not affect the
main position, and we can neglect them. The outline
of the balance sheet is as follows (the figures have
been cooked a little in order to simplify the
position) :



SEPTEMBER 3oth, 1912

Unissued Balance of

Exchequer Grants

1912-13 ... 28,000,000

Balance in hands of

Paymaster General 1,000,000
Balance in hands of

local paymasters as

imprests ... 7,000,000



Orders for payment
outstanding ... 1,000,000

Net available

balance ... 35,000,000


Now the greater part of this available balance
consists of credit belonging to the account for the
current year (1912-13). It is easy to determine
what part : to do so it needs only to deduct the
expenditure actually passed to account before the
date of the Balance Sheet for the services of the
current year (1912-13) from the total grants for that
year. The difference, which is the net amount still
available for those grants, shows the part of the
available balance belonging to the account for the
current year, thus :

Total grants for naval services in 1912-13 ... 45,000,000.

Net expenditure to 30/9/13 for those services ... 12,000,000.

Net amount available for grants for those services ... 33,000,000.

Finally, the difference between the net amount
available for the grants for the current year (1912-13),
which is the part of the available balance belonging
to the account for that year, and the total available
balance, is the part of the balance belonging to the
account of the preceding year (1911-12). In other
words that is the amount unexpended in respect of
the grants for the preceding year (1911-12), thus :

Net available balance, 30/1/13 35,000,000

Net amount available for grants, 1912-13 33,000,000

Net amount unexpended on grants 1911-12 ,2,000,000

And that net amount of 2,000,000, unexpended
on the grants for the preceding year (1911-12), is
identical with and equal to the amount to be
surrendered for that year as shown by the Appro-
priation Accounts. Another way of arriving at
the same result would be to deduct the net out-
standing expenditure for the naval services of
1911-12 passed to account between March 3ist and
September 3Oth, 1913 in this case 9,000,000
from the net balance on March 3ist, 1913, available
in respect of the grants for the services of 1911-12
in this case 11,000,000. But the first way is
that which gives the most information as to the
state of affairs on September 3oth, when the
departments' accounts are closed. It is only the
Admiralty, it may be observed, that gives its
balance sheet in this full and informative way.
That of the War Office states the net available
balance on September 3Oth without analysing it
between the grants of the current and the preced-
ing year, and in respect of the Votes of the Civil
Departments no balance sheet is given at all.


By no well-managed business is the whole of
its net income spent every year. If it is wise, it
retain a part to provide for contingencies. In the
case of a business concern the sum accumulated

out of the net income to provide for contingencies
is called the sum "carried forward/' carried for-
ward, that is, from the accounts of one year into
those of the next. To that is sometimes added a
Reserve Fund, which is a Fund consisting of
savings out of income accumulated from year to
year. Is there any Carry Forward or Reserve
Fund in the accounts of the vast business carried
on by the State ? There are both.

Credit on the Exchequer Account is never
exhausted when the financial year ends on March
3 1 st. There is always a balance of unissued credit
on the accounts at that time, called the Exchequer
Balance, and that is the nation's Carry Forward.
As we shall see in a future chapter on Sinking
Funds, a part of that balance may, on March sist,
be automatically allocated to a certain specific
purpose the reduction of debt. It is the part which
consists of the excess of the revenue for the
year over the expenditure chargeable against that
revenue. But there may be no such excess, and
in any case it can only be a part of the Exchequer
Balance. Nor is such excess necessarily paid out
for the reduction of debt on March 3ist: it is
allocated to that purpose on that day as a matter of
account ; it is not issued as a matter of banking.
The gross Exchequer Balance remains on the
Exchequer Account, and is carried forward into the
accounts of the ensuing year. If there is any
deficiency in the year's revenue, if it is less than
the year's expenditure chargeable against that
revenue, then the Exchequer Balance carried for-
ward out of the year's accounts at its end is less
than that which was carried forward into them

at its beginning. To get a complete view of the
record of the year's finance we must always have a
look at Exchequer Balances at* the beginning and
end of the year. If that at the end of the year is
less than that at the beginning, if, that is, the govern-
ment has reduced its carry forward, then it has not
met the year's expenditure wholly out of the year's
revenue, but in part out of the nation's permanent
resources, of which its carry forward forms part.
That is so, however, only if the floating debt out-
standing is the same at the two periods. Exchequer
Balances may have been reduced by the paying off
of Treasury Bills or other floating debt, and we
must make allowance for that. In the issue and
repayment of Treasury Bills, indeed, the object
which the Treasury has before it is to keep the
Exchequer Balance constantly at a convenient level.
For the nation's Reserve Fund we must look
further into more obscure places. So far we have
seen no sign of any in the national accounts. In all
the accounts which we have considered hitherto,
with the exception of the carry forward, every-
thing is cut off sharply on March 3ist : all out-
standing balances are used up on one or another
of the year's accounts and the accounts start
absolutely blank for the following year. But if
we look further afield through the accounts until
we come upon certain two, called respectively
the Civil Contingencies Fund and Treasury Chest
Fund, we shall find what we are in search of, a
true reserve, balances which are not wiped out
every year, but are continued from the accounts of
one year into those of the next. They are not a
general reserve; they are available for certain
special purposes only. The purposes for which
they are available are different, and we will con-
sider them in turn.

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