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

The System Of National Finance - II

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



IN the classic maxim set upon the title page of this
book, Mr. Micawber summarises and illustrates
the whole theory of state finance as it ought to be ;
and his practice is no less illustrative of state
finance as it too often is. Having disregarded its
own good rules, the improvident state finds itself
in the King's Bench with a deficit, borrows a
shilling for porter, and cheers up. Against such
financial tribulations foresight is the only pro-
tection. A virtuous state that wants to keep out
of gaol must look ahead ; it must not wait for some-
thing to turn up. Before it embarks upon the
business of the year it must calculate what ex-
penses it will have to meet and make plans to meet
them. Ours, being a virtuous state, does so by
means of forecasts of expenditure called Estimates.


The very first step in the financial arrangements
of a year is the preparation of estimates of the ex-
penditure to be met. To approve them is the work
of the Legislature, but to prepare them is that of
the Executive. Parliament will have the last


word upon them, but Parliament cannot of course
itself make them out ; for that the detailed know-
ledge of the Executive is needed. First of all the
responsible Ministers must make up their mind
on the broad matters of policy which affect ex-
penditure. We may picture them as feeling their
way tentatively with the Chancellor of the
Exchequer, and finding out what they can get
without a pitched battle. Then the departments
can prepare details of the expenditure needed to
effect the purposes of the Ministers, and to carry
on the Government, in the light of the experience
of preceding years. Lastly the detailed estimates
are presented to Parliament for its consideration.

In logical order, as in order of time, the pre-
paration of the Estimates is the first part of the
nation's annual financial business to be considered ;
and it is not only the first but by far the most
critical. Both in form and substance the estimates
are the foundation of the whole financial structure
of government. In form they are the basis of the
national accounts ; as services are sorted out in
the estimates, so are they sorted out in every
account kept thereafter during the year. That at
least is the theory. As a fact, it is the form of the
accounts that has determined the form of the
estimates, which is the reason why no man can
tell what some of the estimates mean.

Everything as regards efficiency and economy
in public expenditure depends upon the prepara-
tion of the estimates. Theoretically, Parliament
has the right and opportunity to criticise and
amend them. Actually, so enormous is their
bulk and intricacy, so wide and varied is the


special and technical knowledge needed for an
understanding of their details, so timid in con-
sequence are the non-professional members of the
House of Commons of suggesting or making
alterations, that the changes made in the House of
Commons are commonly very slight. Once a thing
is down in the estimates as presented to the
House, it is a hundred to one that it stays there.
Small matters are overlooked, large matters be-
come party questions by which the Government
stands or falls. Nowadays, in short, the theoretical
responsibility for our national expenditure may
still be with the Commons, but the work is too
much for them, and it results that the practical
responsibility is with the departments which pre-
pare the estimates, each under its Minister. The
manner in which the estimates are prepared is
therefore of the greatest concern to every taxpayer.
It is at the time when they are being discussed
and formulated in detail in the departments that
economies can be made in his interest ; when they
are being passed in Parliament in blocks and un-
discussed it is too late. Once the estimates have
been published by the departments which draw
them up the tax-payer's fate is sealed.

Let us then trace this vital process in some
detail. April ist is the beginning of the financial
year. To allow time for the Government to make
its financial plans well beforehand, the estimates
for the year are taken in hand in the preceding
autumn. The Treasury, the co-ordinating depart-
ment which has the general superintendence of all
financial administration, is the moving spirit. On
October ist it sends a circular letter to the officers


responsible for the preparation of the estimates in
each civil department, requesting them to prepare
estimates of the expenses of the departments
in the coming year. There are two stereotyped
admonitions in this circular ; one is general, that
the state of the public revenue demands the utmost
economy ; the other is a particular warning against
assuming last year's estimates as the starting point
for those of the next. The latter is a necessary
warning. It must always be a temptation to one
drawing up an estimate to save himself trouble
by taking last year's estimate for granted, adding
something to any item for which an increased
expenditure is foreseen. Nothing could be
easier, or more wasteful and extravagant. It is
in that way that obsolete expenditure is enabled
to make its appearance year after year in the
estimates, long after all reason for it has ceased to
be. By this warning and by the general admoni-
tion as to the need for economy the departments
are no doubt duly impressed.

A start having been made by the Treasury's
letter, the responsible officers set their staffs to
work at getting out the estimates for their depart-
ments. In every case it is the department which
will be responsible for the spending of the money
that is responsible also for the preparation of the
estimate ; as the department makes its bed, so will
it lie on it. In the case of the estimates for the
Civil Service and Revenue departments the pro-
cedure of preparation differs from that in the case
of the Navy and Army estimates. Let us consider
the Civil Service estimates first. For these the
Treasury itself has a particular responsibility ; it


is the Financial Secretary of the Treasury, as
under-study to the Chancellor of the Exchequer,
who presents them to Parliament, although it is
the Ministers of the departments who look after
their respective estimates after they have been
presented. The Treasury does not of course pre-
pare them itself; it would not have the necessary
knowledge. That work is done in the departments,
but it is done under the close supervision of the
Treasury. With its letter early in October the
Treasury sends to the Civil Service departments
forms of estimate, showing the last year's figures,
with blanks left for the estimated figures for the
new year. They make out their estimates in
detail, obtaining if necessary subsidiary estimates
from their branch departments. Having made
them out, they transmit them to the Treasury.
The bulk of them reach it between December ist
and an early date in January. An explanation of
each goes with it from the department which
prepared it, and a note of the particulars for
which express Treasury sanction is necessary.
At the Treasury the estimates are examined and
checked by a special official of standing, the
Estimates Clerk. They are then submitted to the
Financial Secretary for his approval. In general
the Treasury criticises, suggests, and amends, and
in any difference of opinion with the department
which prepared the estimate it has the last
word. Having run the gauntlet at the Treasury,
having been subjected there to a detailed ex-
amination and gained a final approval, the Civil
Service estimates are ready for presentation to


The Treasury's criticism of the Civil Service
estimates and its decisions on the new points which
arise thereon are not all confined to the period
between its receipt of the draft estimates from the
departments and their presentation to Parliament.
Were it so its control would be of little value ;
time would not serve for a careful examination,
and after the estimates have once been cast into
form, even as a draft only, it is harder to make
alterations in them than before. As we have seen,
each Civil Service department is correlated with
one of the six departments of the Treasury
presided over by a Principal Clerk. In fact a
great part of the relations between the department
and its Treasury friends in the course of the year
consists in the discussion of questions concerning
the next year's estimates, an increase in staff here,
it may be, or in pay there, or in a grant somewhere
else. All the year round the Treasury section is
thrashing out questions of expenditure and
economy with its group of departments. So,
when the estimates come to be prepared, as
regards most of the changes in them the depart-
ments have only to embody the result of con-
clusions already come to by the Treasury and
themselves, and the Treasury has only to see
that the course which it has decided upon is
followed. Sometimes, it may be, a department
will make the actual preparation of the estimates
an opportunity to have another try for something
that it has been refused. It may even be that some-
times the repeated proposal, concealed in those
voluminous pages, escapes the Treasury's par-
ticular notice and slips through in the hurry of


the moment with a formal approval ; but if it does,
some one is to blame.

Over the Civil Service estimates the Treasury
exercises in this way an effective control : as the
business of government grows, and expenditure
with it, the control must become more difficult of
maintenance ; but it is still a practical and sub-
stantial check upon extravagance. Over the
estimates for the Navy and Army its control is
now little more than the shadow of a formality.
Since their preparation fixes the amount of the tax-
payers most onerous burdens, and now, in the
permanently congested state of parliamentary
business, fixes it irrevocably, it is worth while to
consider the process in some detail.

In October or early in November the Admiralty
and the War Office set the process of preparation
in motion ; and now is the critical time for economy.
Whatever limit can be set to the ambitions of the
executive branches of the offices at this time is
effective : once the estimates are cast into shape, it
is too late. If a charge can be kept off the estimate
as it leaves the department which prepared it, if
some proposed expenditure can be reduced or
postponed, it will be saved to the public. Once it
is on, and the estimate cast into its considered
form, there is little hope for the public in any of the
subsequent stages of examination at the Treasury
or in the House of Commons.

At the Admiralty the ball is set rolling by the
First Lord, who directs the departments responsible
for the several Votes to prepare a sketch estimate
for the coming year. Guidance on matters of high
policy, such as the programme of ship-building, is



obtained by each branch from its head, in consulta-
tion with the Board of Admiralty. A sketch is
made out of each Vote, and is submitted to a
central Admiralty Finance Committee. The Com-
mittee co-ordinates the whole, considers in con-
junction with the Lord of Admiralty concerned
what is the justification for each item and what
economies should be made, and sends the general
sketch estimate Vote by Vote with its report in
detail to the First Lord. In the process of pre-
paration of the sketch estimates, the last stage
is the First Lord's revision in the light of the Com-
mittee's report. He fixes the total of each Vote
of the sketch, and thus arrives at a grand total
which he communicates to the Chancellor of the
Exchequer in November or December, in a letter
explaining the chief differences between the new
estimate and its predecessor (and stating the total
amount to be required). Now in theory should
high debate take place upon the policy of the
Estimates between the champion of spending and
the champion of economy. According to the great
Gladstonian tradition it is the function of the
Chancellor of the Exchequer to act towards the
estimates of spending departments as advocatus
diaboli. As guardian of the people's purse and as
the man who will have to find the money, it is for
him to see that no service is included that is not
essential, and that every service that is included is
provided for in the most economical manner. After
all has been done that can be done by mutual
concessions, unreconciled differences between the
Chancellor and spending ministers are left to the
decision of the Cabinet and of the Prime Minister.



Howfar this great tradition of the nineteenth century,
that makes the Chancellor the watchdog of economy,
has been maintained in the twentieth century will
be for its future historian to say. One thing is
clear : that the power and utility of the Chancellor
in this respect must be affected by that development
in our system of government which now allows him
the initiative in schemes of fresh legislation involv-
ing heavy expense, and .makes him, through the
Treasury, responsible for large headings of expendi-
ture, such as Old Age Pensions. One who is
himself so big a spender as the Chancellor has now
to be is not well placed to resist the spending of
others. Formerly the criticisms of the Chancellor
could be met only by a defence of the policy of the
department. Now when he says to a minister,
"You are a spendthrift!" he is liable to be met
with the most embarrassing of all answers, "You
are another ! "

When the First Lord, the Chancellor, and the
Cabinet have come to an agreement about the sketch
estimate, it goes back to the Admiralty. The
estimating departments of the office take it up again
and work out the sketch into the draft of a detailed
estimate. This draft passes through the same
stages as the sketch. It is prepared by the
responsible departments, criticised and revised by
the Departmental Finance Committee, and revised
and approved by the Board of Admiralty and the
First Lord. Passed by them, it becomes the final
estimate, and it is submitted to the Treasury for its
ratification. This final step is now little more than
a formality. Already when the estimate reaches
the Treasury it has been considered and approved


in all essentials by the Cabinet. It is little likely
that after that the Treasury will think it worth
while to make much remonstrance on questions
of substance. In questions of detail its power
is little more. No doubt it looks to see that
any relevant decisions which it has made upon
questions of Admiralty finance in the course of the
year are followed in the estimate, and that salaries
and allowances conform to the votes authorised.
But with the growing volume and intricacy of
departmental business, and with the growing in-
dependence of the heads of the Admiralty and
War Office, matters of the sort which come to
the Treasury for decision grow fewer and farther
between. Eloquent of the extent of the super-
vision exercised by the Treasury over Admiralty
and War Office estimates is the circumstance that
those estimates are now submitted to it in print
for its ratification. The work of the Government
printer is not much increased by alterations at the

At the War Office the estimates are prepared
in much the same way as at the Admiralty. In
November, the Financial Secretary fixes a day by
which the departments should send to him their
sketch estimates. Then, in the departments, sketch
proposals of their requirements are prepared by
the financial advisers of the executive officers, under
the directions of the members of the Army Council.
Their proposals are collated by the heads of the
financial branch. In consultation with the Army
Council, the Secretary of State thrashes the matter
out with the Chancellor of the Exchequer, and
agrees a total. An agreement having been arrived


at between them, the sketch estimates come back
to the War Office. Meetings are held of the
members of the Army Council and the heads of
the financial staff of the office. The Secretary of
State gives directions as to general policy, and
the estimates are cut down to the amount available.
Finally, the executive departments elaborate the
sketches into a full draft estimate ; the Secretary of
State passes them ; and they go in their final form
to the Treasury for its formal ratification.

Such is the process by which the Executive
determines the demands which it will make upon
the taxpayer. In the chronic congestion of parlia-
mentary business, the demand once made and the
form of the estimate fixed, the thing is practically
settled. If economy is to have its say, it must be
before the estimates are taken in hand and while
they are being made out. In this connection
economy has two chief functions. It must see that
no services are included that are not needed, that
is economy in matters of policy : and it must see
that in the provision for needed services there is
no extravagance, that is economy in matters of

The Estimates for the Civil Departments are
less affected than those for the Navy and Army by
broad questions of policy. New spending on civil
objects is usually a matter for initiation by an Act
of Parliament. Such liabilities as those incurred
for Old Age Pensions do not make their first
appearance in an estimate. In the other particular,
economy in detail, the control which the Treasury
has over Civil estimates under the system described
is more than formal. By means of its close relations


with the Civil departments all the year round, the
Treasury can exercise in their case a very efficient
check on waste, and can enforce its measures by
its active scrutiny of their draft estimates.

But it must be apparent from what has been
said that with the Navy and Army estimates it is
otherwise. Many matters of high policy which
may lead to large new expenditure make their first
appearance therein. It is by the naval estimates,
for instance, that the country is committed to
building an additional battleship, and that costs
round millions. Over such high matters the
Treasury, as a department, exercises not even a
formal surveillance. The only external restraining
force for economy, parallel to the spending force
of the executive branches of the department, is
the Chancellor of the Exchequer; and with the
diminution in his power as an economiser which
attends the increase in his power as an initiator of
legislation and a spender we have already dealt.
In the region of detail, in the work of enforcing
economy item by item in the Naval and Army
estimates, the force of the Treasury is atrophied
to a rudiment.

Naturally, and perhaps inevitably, with the
increase in the volume, intricacy, and technicality
of the business of the great spending depart-
ments, the external control of them by the Trea-
sury has weakened. It has passed to other
hands. As Treasury control has weakened, the
Admiralty and War Office have had themselves
to undertake control and surveillance of them-
selves in matters of finance. The necessary
work of parallel and independent restraint on the


spending of the Admiralty and War Office, which
the Treasury used to do, is now done to a large
and increasing extent by their own internal financial
branches. As the adviser and helper of the executive
spending branches of an office, a well-organised
internal financial branch has great advantages over
an external power like the Treasury. It has more
intimate association in daily intercourse with the
spenders, and it has the detailed and technical
knowledge of their work, lack of which has been
the chief reason for the enfeebling of Treasury
control. On the other hand it is at one great
disadvantage in comparison with an external
power, that it is not wholly independent

Since the reality of financial criticism and control
over the chief heads of expenditure has thus passed
nto the hands of the internal financial branches of
the Admiralty and War Office, it is worth while to
consider the conditions under which they can best
do their work as economisers. We are dealing
here with one part only of their work, but that
which is also the most vital, the services which
they can render to economy at the time when the
expenditure for the year is being crystallised by
the preparation of the estimates. Later we shall
have to apply what is said here to the other chief
part of the work, that of checking waste in actual
expenditure. In the first place, it may be said that
the first condition for efficiency in the work of the
financial staff is that it should labour, not at arm's
length from the executive, but in organised con-
nection with it. It is clearly not enough that it
should be a mere body of accountants and book-
keepers, working in isolation : it should be a body


of financial advisers also, taking part in the every-
day work of the executive staff. When the esti-
mates are being prepared, for instance, it should
have a say for economy in their preparation. By
working all the year round in close touch with the
executive staff the financial staff must gain an
equipment of technical knowledge, and by that the
advice which it gives at the critical period of the
crystallisation of charges must gain greatly in
weight. In the second place, the financial staff,
although working in organised connection with the
executive, should be independent in the official
hierarchy of the authority of executive officers,
and subject only to that of the permanent chief of
the financial side of the office ; and he in his turn
should be subject only to the authority of the
minister and in direct communication with him.
That is needed in order that criticisms and repre-
sentations may travel unintercepted straight from
subordinate financial officials to the top.

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