REVENUE AND EXPENDITURE




CHAPTER I

PRELIMINARIES

ONCE upon a time there was in the land a vigorous
race of critics of public finance. Hume was their
type, and Gladstone their flower, the greatest of
financial ministers, who would turn the labels on a
dispatch-box to save the public money. They have
passed from the scene. Now in Elysium it is
theirs bitterly to lament the wastage of Ambrosia.
Nor have they left to us many inheritors of their
tradition. It seems a rule of our history that a
revival in morality should always be followed at a
short interval by a reaction into vice. As the
license of the Restoration followed the Puritan
ascendancy, so a time of financial license followed
the financial puritanism of early and mid-Victorian
times. We were all getting richer. Things on
which to spend public money, armaments and
great schemes of social reform, were becoming
more and more dazzling and spectacular. By their
brilliance public opinion was distracted from the
dull details of how much was being spent, and in
what way. To trouble oneself ajid others about
the cost of great schemes of aggrandisement, to
examine the details of expenditure, to seek for
\vaste and to oppose it, came to be looked upon as



4 NATIONAL FINANCE

signs of pusillanimity. After the Commonwealth
the Puritan in public life was put down for a
querulous kill-joy. So when the Gladstonian
tradition began to fade a critic of public finance
was put down for a prude, who spoiled the fun of
spending other people's money. Perhaps that era
of impatience with the dull details of economy is
not yet quite over ; but signs are not wanting that
the worst of it has passed. Public opinion is
beginning to remember again that the nation is not
infinitely rich. National power and security, it is
remembered, cannot be increased indefinitely by
the simple expedient of raising as much money as
possible and spending it on national purposes.
There is a limit beyond which the nation cannot be
taxed without permanently injuring its industrial
and commercial prosperity ; and to injure that is to
injure its power and to diminish its security,
because it injures its capacity to pay for its
protection. It is a strictly limited part only of
the nation's whole annual income that can safely
be taken by the state to be spent on national
purposes ; and since that is so, it is of vital concern
that full money's worth should be had for every
pound that is taken and spent. Economy and
efficiency in expenditure are of no less moment for
a nation's well-being than the maintenance of total
expenditure at an amount adequate to provide for
those services which are indispensably necessary ;
and one who condones the waste of a pound of
public money is doing his country exactly the
same disservice as one who denies to public
services a pound needed for some safeguard with
which it is dangerous to dispense,



PRELIMINARIES 5

With the return to such ideas the cause of
economy has revived : and there revives with it
an interest in financial methods. As the province
of the Government's activity is extended and the
complexity of its business is increased, it is forced
ever more closely upon the attention of the
politician and the public that schemes for the
reform of established things and ideas for new
departures come to nothing unless they provide
for ways and means. It is the man who holds the
purse and who knows how best to fill and empty it
that is the final master of the situation. A wise
man who wishes to control an institution such as a
hospital or a board of guardians makes it his
business to become chairman of the finance com-
mittee: who pleases may then be patron or president.
It is not that figurehead, it is the man with the
purse-strings in his hand, who has the last say.

What is true of the government of a hospital is
no less true of the government of the nation. On
the formation of a modern Cabinet the strongest
member of the Government after the Prime
Minister makes a bee-line, so to say, for the
Chancellorship of the Exchequer, knowing that
power over the nation's purse is the power that
gets done those things which he wants done.
Nowadays money and not the sword is the
ultimate motive power in all reforms and the
ultimate sanction of all authority. All other
particulars of good government profit a state
little unless its system of public finance is well
designed, well understood, and well protected and
maintained. The last two needs depend much
upon the second. Unless the system is well






6 NATIONAL FINANCE

understood by an instructed public, and the
financial administration is constantly illuminated
by the light of public opinion, there is danger both
that its methods may lapse into mere routine and
inefficiency, and that the administrators may be
tempted to take liberties. It is the financial engine
that drives the state along, and it is public opinion
and public criticism that keeps the engine working
smoothly and at full power. Unfortunately
criticism by the light of nature alone is of little
use. The critic needs some acquaintance with the
way in which the nation manages its money and
keeps its accounts ; but a little goes a long way.
So much as may be gained from the following
pages should go far enough at least to enable a
critic to confront questions of financial policy
without undue dismay.

SOME GENERAL PRINCIPLES

The financial business of a state is not much
different in nature from that of a private person.
A state has to live and to do its work, and for that it
must have money. Its money must be got from
somewhere ; it must be kept somewhere while the
state has got it ; and it must be paid to somebody in
return for goods and services. The chief difference
between the state and a man in this connection is
that, whereas a man gets as much money as he
can, sure to find a use for all that he can get, the
state gets (or at least ought to get) only so much
money as it needs for certain specific uses pre-
scribed beforehand. The uses may change from
year to year, and in these days of legislative



PRELIMINARIES 7

activity they have a tendency constantly to
increase ; but they have always their definite limits.
Otherwise the financial affairs of both the state
and the individual have the same chief divisions,
three in number, getting, keeping, and spending.

The state gets its money in three ways : as
taxes which it levies ; as fees for services which it
performs, in the law courts for instance ; and as
prices for goods which it sells. Keeping the
state's money is a simple matter. It is kept as
that of the individual is kept. Just as a house-
holder keeps a little ready money in his pocket, as
little as possible, for safety's sake, and leaves the
rest at his bank; so the state keeps small cash
balances, as small as possible, in the pockets of the
servants to whom it entrusts the duty of making
payments for it, and leaves the rest at the Bank of
England. In the matter of payment too the state's
household bills are very like those of the father of
a British family. There are payments which may
be classed as establishment charges, the wages of
servants, civil, military, and naval, and the upkeep
of buildings. There are bills for goods bought, of
which the biggest are for ships and guns and
munitions of war : these, we are often cheerfully
assured, may be compared with the householder's
burglary and fire insurance premiums. There is
interest to be paid on the national debt. " Effective"
charges is the technical name given to all these.
In addition the state has pensions to pay to its
servants who have earned their ease personally,
and to some lucky few who have earned it by the
exertions of their ancestors, charges which are
called " non-effective."



8 NATIONAL FINANCE

So, as in the case of any one of us, in the case of
the state also revenue and expenditure are the two
words that sum up the whole of financial business.
To trace the taxpayer's pound from its exit out of
his pocket to its entry into the pocket of the state
as revenue, and back again as expenditure into the
pocket of some other taxpayer who is the state's
creditor, is the work before us. It will simplify
that work if now at the outset certain general
principles are stated which govern the whole
process.

In financial business as in all other functions of
government the body of the state has two members,
the legislative and the executive. The Legislature
says what is to be done and the Executive does it.
The functions of the state for the performance of
which it needs money, are, as said, unlike those of
the individual, strictly limited. The Legislature
lays down what those functions are, how much
money is to be spent on each, and how the funds
needed are to be obtained. The Executive then
proceeds to obtain them in the appointed manner
and to apply them to the appointed ends. The
sovereign legislative power is with Parliament,
subject to the Crown's formal power of veto,
now mummified. Such propositions as these
would scarcely be worth stating, were it not that
certain circumstances to be described hereafter
have misled some continental writers into sup-
posing that in matters of finance the sovereignty
of our Legislature is shared by the Executive. 1 It
is not so. Part of the provision which Parliament

1 E.g. R. Gneist, Das Englische Verwaltungsrecht. (Berlin,
1883.)



PRELIMINARIES 9

makes as to how much money is to be spent and
what it is to be spent upon is made for a year only,
and is made afresh every year. Part has been
made at various times once for all. But every
penny that is collected and every penny that is
spent is collected and spent under the authority of
some Act of Parliament, permanent or temporary.
In the matter and manner of getting and spending
the Executive is wholly subject to Parliament and
has no power to move a hair's breadth beyond
the powers which Parliament entrusts to it. In
financial matters, it is true, Parliament of necessity
allows to the Executive rather wider discretionary
powers than it allows to it in other matters of
government. As will be seen, for its own con-
venience and protection Parliament actually
imposes upon the Executive and limits to it the
whole initiative in matters of revenue and ex-
penditure. But by doing so it is not sharing its
sovereignty with the Executive. In financial as
in other matters the Executive is but the arm of
Parliament, which is the head.

At the top of the Executive is the Crown ; and by
the Crown is meant in practice its constitutional
ministers, responsible to Parliament. The true
head therefore of the financial administration is the
Cabinet. There sit the responsible ministers who
are the heads of the administrative departments,
so that from the collector of income-tax round the
corner and from the sub-assistant-paymaster on a
warship at Hong Kong to the Prime Minister in
Downing Street there is a direct chain of re-
sponsibility and control.

In its work of collecting the revenue and of



io NATIONAL FINANCE

spending it the official hierarchy is guided by
several general principles, laid down at various
times by Parliament. Underlying as they do the
whole business of financial administration, they
should be mentioned here at the earliest possible
opportunity. It is all the more necessary because
much of our more detailed inquiry into the system
of national finance must be concerned with the
manner in which, to meet the exigencies of practice,
departures great and small are made from the
strict application of the general principles.

The first principle is that no money can be got
and none spent save under the authority of
Parliament. An amplification of that is that no
money got can be spent save for the purpose to
which Parliament has appropriated it.

The second is that all money got must be paid
into a single fund, the Consolidated Fund, and that
all money spent must be paid out of that fund.
That is a great principle, but it is a difficult one to
observe. As a statement of actual facts it is a rough
approximation only to the truth. In practice there
are many minor exceptions to it, and even in
matters of importance it is only maintained by
some very artificial devices.

The third is that the unit of time in financial
administration is the year. The financial year now
begins on April ist and ends on March 3ist.
Expenditure for the year must be met out of
revenue for the year, and revenue must not be
left to accumulate from year to year. That again
is rather a pious aspiration than a rigid rule. But
the greater the financial morality of an administra-
tion, the more strictly it adheres to it.



4

. i:



PRELIMINARIES 11



Such rules as these need, and are capable of,
as little apology as Euclid's postulates. In the
first are implicit the longest chapters of our
political history. Appropriation, as we shall see,
is the check which Parliament imposes upon the
power of the Executive, to keep it subservient to
the sovereign power of the Legislature.

The second rule, that about the Consolidated
Fund, is the sheet anchor of simplicity and
efficiency in the nation's accounts. It is of use too
to Parliament as a way of maintaining its control
over the whole of revenue and expenditure,
because in the Consolidated Fund it has the public
money in full view and under its thumb. For that
reason it has been resolved by the House of
Commons "that this House cannot be the effectual
guardian of the Revenues of the State unless the
whole amount of the taxes and of various other
sources of income received for the Public Account be
either paid in or accounted for to the Exchequer." l

That revenue and expenditure should balance
year by year is the golden rule of economy. It is
even an absolute essential of solvency. Bank-
ruptcy is the port towards which a state steers
that allows its debts to accumulate. To obscure
the fact that they are being allowed to accumulate
by raising loans to pay them off temporarily can
only prolong the journey. The converse form of
accumulation, the accumulation of a balance of
revenue from year to year, is equally uneconomic.
It needlessly deprives the nation of wealth for
which profitable uses could be found, and keeps it
lying idle and sterile.

1 Resolution of 3oth May, 1848.



12 NATIONAL FINANCE

These are elementary principles. They are
buried so deep at the root of our subject that they
are apt to be forgotten altogether. To dig them up
and have a look at them just once before we go on
is not waste of time if it fixes in our minds the
idea that the purpose of all financial machinery is
to secure in the first place full parliamentary control
of incomings and outgoings ; in the second place,
that the one shall yearly balance the other ; in the
third, that the taxpayer shall not be asked to find
more money than is needed; and lastly, most
important, and most difficult of attainment, that
there shall be no waste in expenditure.



ORGANISATION

In matters of government a system well designed
is a very necessary thing ; but in practice a system,
however well designed, is worth just as much as
is due to the integrity, ability, and loyalty of the
men that work it and no more. Ultimately the true
safeguard for pure and efficient administration in
financial matters is the high tradition of the public
service, both in the Legislature and in government
offices. No tightening of the screws of system
could possibly compensate for a screw loose there.
The public spirit of the servants of the state is the
spirit that gives life to dead rules and regulations ;
and it is the confidence with which we have learnt
to rely upon it in our own affairs that is our most
valuable public asset. Men matter more than rules,
and what matters most in the servants of the
commonwealth is that they should have those



PRELIMINARIES 13

personal qualities which we have learnt to count
upon in our civil servants.

But of almost equal importance in its effect upon
the working of a system is the manner in which
men are organised to work it. A brief account
therefore will be useful of the principal organs of
government which deal with our financial affairs.
Much of it will be familiar to any one who has ever
read a morning newspaper or walked down White-
hall ; but it will save us trouble in future chapters,
and prevent us from having to refer therein to
unexplained terms and names. Our present object
is to describe the organisation only of the various
bodies, not their functions.

The triple Legislature of King, Lords, and
Commons we may pass over with a reference, and
turn to the Executive. At its head stands the
Cabinet, the committee of ministers who are heads
of executive departments, over which presides the
Prime Minister. The sub-committee of the Cabinet
called the Imperial Defence Committee, with its
added Naval and Military members, exercises no
doubt a powerful influence on financial policy, but
it is influence without responsibility. The sub-
committee has no executive work to do for which it
can be called to account, and the light of day is not
shed upon its proceedings.

Immediately below these high powers stands the
Treasury. The Treasury is a Government office
which exercises general control over the whole
business of financial administration. Its obscure and
gloomy haunt at Treasury Chambers in Whitehall is
the centre of the web. Nominally it is controlled by
a board which holds a commission to perform duties



14 NATIONAL FINANCE

performed of old by the Lord High Treasurer.
The Board of Lords Commissioners of the
Treasury consists in theory of a First Lord, the
Chancellor of the Exchequer, who is also Under-
Treasurer, and four or five Junior Lords, with a
parliamentary secretary and a financial secretary,
all of whom are members of Parliament and of
the Ministry. But in practice this Board does
not act.