CHAPTER XI

SINKING FUNDS

A NATIONAL Debt is like a toothache ; it is best of
all not to have one, but if you have got one it is
next best to get rid of it as soon as you can.
Perhaps the harm of having a National Debt is not
quite so certain as the harm of having a tooth-
ache, but it is certain enough. Of course the
economic harm of borrowing money and spending
it on an unproductive object, such as a battleship,
is obvious. It takes the nation's wealth away
from factory, field, and mine, where it would breed
fresh wealth, and robs it summarily of all hope of
progeny by drowning it in the North Sea. But it
is not quite so obvious, once that original waste
of capital in the economic sense has been made,
that there is any particular harm in allowing things
to stay as they are, and in going on paying interest
on the capital which has been spent. Interest is
paid by taking money out of the pocket of the
taxpayer and putting it back into the pocket of the
holder of Consols. In a rich country like this the
inhabitants themselves can and do provide all the
money which the Government needs to borrow.
We hold our own National Debt, and all that the
payment of interest on it means is that every year



308 NATIONAL FINANCE

a certain amount of money is taken out of the
pockets of British taxpayers in general and put
back into the pockets of a small number of them
who are lucky enough to have investments in
British Government stock. The nation as a whole
is no poorer : what it loses in one place it gains
in another. Why then make a great effort to pay
off debt, if we should be none the richer for the
repayment ?

Of many good reasons for paying it off the best
is to maintain the nation's credit. When a nation
goes about to borrow, the security which it offers
as a pledge to the lender is its taxable capacity.
The more debt it has outstanding, the more that
capacity is burdened to pay interest, and the less
security has the nation left to pledge when it needs
a fresh loan. Crises will come, wars and great
social reforms, when loans are necessary. Were
a nation to make no effort to pay off its debts
during the peaceful intervals between the crises,
it would find at each crisis that, with less security
left to pledge, it had greater difficulty in borrowing,
until at last its credit would have become exhausted,
and it would fall into ruin and bankruptcy.

A prudent state takes advantage of every lull
and interval of peace to pay off debt as fast as it
can. It hopes not to have to borrow in future, but
it knows that that is a hope for perfection. In
course of time it is sure to have to go to the
lenders again. The more debt that it has paid off
during the lull, the better security will it have to
offer when that evil day comes, and the better
bargain it will be able to make. If it makes no
effort, if it allows its debts steadily to accumulate



SINKING FUNDS 309

and its general credit to deteriorate, it must ulti-
mately find itself beneath the yoke of the financiers.
Several states of South America and the Balkans
know that humiliation. By overspending revenue,
by contracting debts and not paying them off,
and by neglecting to increase taxable capacity by
development and good administration, they have
brought their credit so low that lenders will no
longer trust to their mere promise to repay what
is lent. They ask for a special security, such as
the pledge of part of the customs' duties. In a
later stage of financial decay, such as that which
we see in China, lenders demand that their agents
shall themselves collect and control the pledged
revenues. In truth a nation which can no longer
borrow money on its general credit is no longer
wholly free. It falls into subjection to the lenders,
and by accepting from them directions as to its
policy alienates to them in substance, if not in
form, a part of its sovereign rights. It cannot
make war or carry out its schemes of development
unless the financiers please. It must wait until they
choose, and if they demand it, it must let slip from
its own hands into theirs a part of its indepen-
dence before they will allow it to proceed. That
state only whose credit stands so high, which has
such good securities to sell, that lenders come to
it not as givers but as receivers of favour, can
consider itself as truly independent. Statesmen
who allow the credit of the government for which
they are responsible to deteriorate are guilty of
a moral high treason no less blameworthy in kind
than if they were to plot to bring about an alien
invasion.



310 NATIONAL FINANCE

The shame of both evils is the same ; both
deprive the nation of control of its own destinies.
And to the deterioration of credit two things in
particular contribute : to borrow when you can do
without, and not to pay back when you can. To
labour at the repayment of debt whenever times of
peace and prosperity make that possible, and to
maintain with rigid virtue a liberal provision there-
for, are amongst the strongest obligations of
patriotic statesmanship. They are also amongst
the most difficult to fulfil. There is little popu-
larity to be gained by repaying debt. Nobody
feels immediately the benefit of it ; that lies hidden
in the future. It is fatally easy to divert funds to
some more showy purpose, from which somebody
with a voice and a vote will get direct benefit. It
is easy, but it is disastrous.

So easy is it that it has always been the hardest
thing in the world, even in times of peace and
prosperity, to maintain a liberal or even a reason-
able provision for the redemption of debt. An
annual sum to be applied to that purpose is called
a Sinking Fund. During the last century and a
half many different sorts of Sinking Fund have
been tried, and always a raid upon them has
been the favourite expedient of a Chancellor
of the Exchequer short of money. Everybody
recognises the need of such funds, and almost
everybody forgets it as soon as there is the least
difficulty in making the two ends of the Budget
meet.

"What is the good," says Chancellor By-ends
to Prime Minister Halt-by-the-Way, "of keeping
up this year such an absurdly large provision for



SINKING FUNDS 311

the redemption of debt ? So much was never
meant to be spent in the service of high and dry
financial morality except in an ordinary year and
this is no ordinary year. There is our Better Cir-
cumvallation of Cuckoos (England) Act for which
money has to be found ; or what of the bye-election
at Gotham ? "

"Very true/' says the other; "this year the
cuckoos ; and next year it will be time enough to
get to work on the debt again."

So the Sinking Fund is raided, and when next
year comes yet higher walls have to be built round
the elusive birds, and the renewal of provision for
redemption is postponed to another year.

So notoriously open to attack is provision
made to redeem debt that all sorts of schemes
have been invented at various times to protect
Sinking Funds from raids, either by hiding them
or by fortifying them with laws. One of the ar-
rangements for hiding them away from the spoiler
is still in use, and we shall have to deal with it
shortly later on. But as to all the others ex-
perience has shown that no hiding and no legal
protections are of any use. It is idle to try and
bind future Parliaments with an Act of Parliament,
because what Parliament has done Parliament can
undo again whenever it likes. With the wisdom
gained from experience, all artificial protections,
concealments, and guarantees of the Sinking Fund
have been abandoned, and the various provisions
for the redemption of debt have been concentrated
into two sums devoted annually to that purpose,
called the Old and the New Sinking Funds, which
we will consider in turn.



312 NATIONAL FINANCE



THE OLD SINKING FUND

A Government has got no business to get more
money out of the taxpayers than it needs for the
immediate business of Government, or to keep
funds lying idle for which it has no present use.
Money is the manure of industry. It should be
left to enrich that field ; to keep it locked up in the
Government's box is to empoverish the nation.
Like any other house of business the Government
must keep a little carry forward in the form of
an Exchequer Balance at the end of the year,
and a tiny reserve in the Civil Contingency and
Treasury Chest Funds. But it should not allow
funds to accumulate in any other way, and in fact it
does not. If it is in possession of more funds than
are needed for its business, some use should be
found for them by which they can be set free again
to fertilise industry. Such an use can always be
found in the redemption of debt. Public money
not needed for any other purpose can be well
employed for that, and so it is.

It is not until the end of a financial year that
the Government knows how much it will need for
the services of that year, or how much it will have
with which to meet its need. Not until the end of
the year does it know whether it has any surplus
funds in its hands ; but when on March 3ist receipts
into the Exchequer Account for the year and issues
from it for the year's services have been finished
and balanced, then the Government knows whether
it has anything left over. If it has, it sets that
surplus to the credit of a fund which is called the



SINKING FUNDS 313

Old Sinking Fund, because it is older than the
New Sinking Fund, and devotes it to the reduction
of debt.

It is not the gross balance of the Exchequer
Account on March 3ist that falls into the Old Sink-
ing Fund, but a part of it only. It is that part
which represents the excess, if any, of sums
received into the Exchequer Account in respect
of public income over expenditure chargeable
against that income. In order to make this matter
clear to ourselves we must notice that in the
record of receipts into the Exchequer Account and
of issues from it a difference is made between those
on Revenue Account and those on Capital Account.
They are recorded separately. First of all the
revenue receipts are stated, customs and excise,
and so on ; and against them as chargeable against
revenue is set the expenditure on Consolidated
Fund Services and on Supply Services. Then the
record proceeds to show other receipts and issues,
which are receipts and issues of money borrowed
temporarily on capital account. It is only the
surplus of revenue receipts over expenditure
chargeable against revenue that has no special
use provided for- it and is free and idle. Capital
receipts are as a rule all allocated to special pur-
poses that do not end with the year, and the sur-
plus of capital receipts over capital expenditure
at the end of the year is neither idle nor free.
It is therefore only the revenue surplus that
can appropriately be applied to the reduction of
permanent debt. Were the surplus of temporary
borrowings on capital account to be so applied, an
equal amount would simply have to be re-borrowed



NATIONAL FINANCE

and we should have the absurd result that we were
paying back debt with one hand and at the same
time borrowing an equal amount with the other.

An analysis of the record of the Exchequer
Account at the year's end will help to make clear
the nature of the surplus credited to the Old
Sinking Fund. The figures given are those for
1912-13. At the end of that year the record of the
Exchequer Account may be summarised as fol-
lows :

ANALYSIS OF EXCHEQUER RECEIPTS AND ISSUES,
1912-13.

REVENUE.



Revenue Receipts 188,802,000

Expenditure chargeable against
Revenue 188,622,000

Surplus 180,000 ... 180,000

CAPITAL.

Other Receipts 42,625,000

Issues 47,945,000



Deficit 5,320,000 .., 5,320,000



Net Deficit 5,140,000
Balance in Exchequer 1913, April ist 11,469,000

Balance in Exchequer 1913, March 3ist ... 6,329,000

Revenue receipts consist of customs, excise,
income tax, etc. Expenditure chargeable against
revenue consists of Consolidated Fund and Supply
Services. Other receipts and issues, on capital
account, consist of all the transactions in respect of



SINKING FUNDS 315

Treasury Bills, Terminable Annuities and the rest
of them. Our analysis shows that there was no
surplus of total receipts over total issues. Total
issues exceeded total receipts by 5,140,000, so
that Exchequer Balances were reduced by that
amount. But revenue receipts exceeded expendi-
ture chargeable against revenue by 180,000. That
surplus of 180,000 was the sum that on March 31,
1913, was automatically credited to the Old Sink-
ing Fund.

On March 3ist at 4 p.m. the balance of the
Exchequer Account is struck, and the surplus to
be credited to the Old Sinking Fund, if any, is
immediately ascertained. It is immediately ascer-
tained, but it is not immediately issued. It may
be left for long months swelling the Exchequer
Balance. According to the Sinking Funds Act
of 1875 the Treasury may issue it from the Ex-
chequer Account for the redemption of debt at any
time it pleases in the course of the next financial
year. Often it does not issue it until the last
quarter of that year, more than nine months after
its amount was ascertained. When the Treasury
considers that the time has come to make use of it,
it issues it all at once or in instalments to the
National Debt Commissioners, and they employ
it for the reduction of debt in a manner to be
described shortly. They must use it all up within
six months of the time at which it was issued, so
that a part or the whole of it may still be in their
hands unspent at the end of the financial year
following that in which it came into existence.
They may apply it to buying or redeeming any
Government stock the interest of which is charged



316 NATIONAL FINANCE

directly and primarily on the Consolidated Fund.
That includes Consols (Goschens and Childers),
Terminable Annuities, and Exchequer Bonds. It
is provided by the Treasury Bills Act of 1877 ( 7)
that they may also apply it to the purchase of the
renewable (Supply) Treasury Bills. Another and
the only other purpose to which it may be applied
is the repayment of Deficiency Advances made by
the Bank of England under the Exchequer and
Audit Act. It may not be applied to the repay-
ment of Ways and Means advances made under
the annual Appropriation Act, nor may it be
applied to the purchase of Ways and Means
Treasury Bills issued under that Act.

If we stop and think for a moment we shall
perceive that in allowing the Old Sinking Fund to
be used for the repayment of Deficiency Advances
the Legislature has left a big hole in the arrange-
ments meant to secure that the Fund should be
used for the real reduction of debt and for no other
purpose. What are Deficiency Advances ? As we
have seen they are sums borrowed from the Bank
in anticipation of revenue, with which to pay the
interest on the National Debt. To allow the
Advances to be repaid out of the Old Sinking
Fund is simply to allow the Treasury to apply that
Fund in aid of the revenue of the year. Suppose
that the Treasury finds that the Exchequer Balance
is running uncomfortably low, and that at the
same time it has 2,000,000 to the credit of the Old
Sinking Fund. All that it has to do in order to
rake that 2,000,000 into the revenue is to get a
Deficiency Advance of 2,000,000 at the end of the
quarter with which to pay dividends, and then,






SINKING FUNDS 317



when the advance falls due, to repay it with the
2,000,000 from the Old Sinking Fund. It has
nominally used that sum in repayment of debt.
Actually it has used it in relief of the revenue.
The operation has the effect of emptying the Fund
back into the Exchequer Account to strengthen
the depleted Exchequer Balance. Thus the surplus
of one year's revenue is used to make good a
deficiency in that of the next. There is something
to be said for allowing that to be done. It is
legitimate, it may be argued, to make use of the
Old Sinking Fund to refresh Exchequer Balances
when they are in danger of undue depletion,
because had the Treasury no power to do so it
would have to refresh them by the issue of more
Treasury Bills, or by borrowing in some other
way; and it is no good to be reducing one sort
of debt at the same time that you are increasing
another. But there is a good deal to be said
against it. It allows the Treasury too wide a
discretion. To make use of the Fund in aid of the
revenue is legitimate enough when there is an
unexpected depletion of Exchequer Balances, owing
to the realised revenue not coming up to the
estimated revenue. The danger is that the Treasury,
relying on its power to make use of the Fund in
aid of revenue, may be tempted to relax its opposi-
tion to overspending by the departments, and to
the presentation of Supplementary Estimates. The
true use of the Fund is to reduce the fixed debt of
the country, and a very reasonable provision would
be that it should not be used to fortify Exchequer
Balances by the repayment of Deficiency Advances
without a special application to Parliament for
leave, to be given by a vote in Committee of Ways
and Means.