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War-Time Financial Problems - IX


2. I

3. II

4. III

5. IV

6. V

7. VI

8. VII


10. IX

11. X

12. XI

13. XII

14. XIII

15. XIV

16. XV

17. XVI

18. XVII


20. XIX

21. XX



_May_, 1918

The New Budget--Our own and Germany's Balance-sheets--The Enemy's
Difficulties--Mr Bonar Law's Optimism--Special Advantages which Peace
will bring to Germany--A Comparison with American Finance--How much
have we raised from Revenue?--The Value of the Pound To-day--The 1918
Budget an Improvement on its Predecessors--But Direct Taxation still
too Low--Deductions from the Chancellor's Estimates.

One of the most interesting passages in a Budget speech of unusual
interest was that in which the Chancellor of the Exchequer compared
the financial methods of Germany and of this country, as shown by
their systems of war finance. He began by admitting that it is
difficult to make any accurate calculation on this subject, owing
to the very thick mist of obscurity which envelops Germany's actual
performance in the matter of finance since the war began. As the
Chancellor says, our figures throughout have been presented with the
object of showing quite clearly what is our financial position. Most
of the people who are obliged to study the figures of Government
finance would feel inclined to reply that, if this is really so, the
Chancellor and the Treasury seem to have curiously narrow limitations
in their capacity for clearness. Very few accountants, I imagine,
consider the official figures, as periodically published, as models of
lucidity. Nevertheless, we can at least claim that in this respect the
figures furnished to us by the Government during the war have been
quite as lucid as those which used to be presented in time of peace,
and it is greatly to the credit of the Treasury that, in spite of the
enormous figures now involved by Government expenditure, the financial
statements have been published week by week, quarter by quarter, and
year by year, with the same promptitude and punctuality that marked
their appearance in peace-time. In Germany, the Chancellor says, it
has not been the object of German financial statements to show the
financial position quite clearly. It is, therefore, difficult to make
an exact statement, but he was able to provide the House with a series
of very interesting figures, taken from the statements of the German
Finance Ministers themselves.

His first point is with regard to the increase of expenditure. The
alarming rate with which our expenditure has so steadily grown appears
to be paralleled also in Germany. Up to June, 1916, Germany's monthly
expenditure was L100 millions. It has now risen to over L187 millions.
That means to say that their expenditure per diem is L6-1/4 millions,
almost the same as ours, although our expenditure includes items such
as separation allowances and other matters of that kind, borne by the
States and municipalities in Germany, and so not appearing in the
German imperial figures.

As to the precise extent of the German war debt, there is no
certainty, but the Chancellor was able to tell the House that the last
German Vote of Credit, which was estimated to carry them on to June or
July, brings the total amount of all their Votes of Credit to L6200
millions, and that it is at least certain that that amount has been
added to their War Debt, because their taxation during the war has not
covered peace expenditure plus debt charge. Up to 1916 they imposed no
new taxation. In 1916 they imposed a war increment tax, something in
the nature of a capital levy, which is stated to have brought in L275
millions. They added also that year L25 millions nominally to their
permanent revenue. In 1917 they added in addition L40 millions to
their permanent revenue, "Assuming, therefore, that their estimates
were realised, the total amount of new taxation levied by them since
the beginning of the war comes to L365 millions, as against our L1044
millions. This L365 millions is not enough to pay the interest upon
the War Debt which had been accumulated up to the end of the year."

Mr Bonar Law then proceeded to give an estimate of what the German
balance-sheet will be a year hence on the same basis on which he had
calculated ours. With regard to our position, he had calculated that
on the present basis of taxation we shall have a margin of four
millions at the end of the present year if peace should then break
out. As will be shown later, this estimate of his is somewhat
optimistic, but at any rate our position, compared with that of
Germany, may be described as on velvet. A year hence the German War
Debt will be not less than L8000 millions. The interest on that will
be at least L400 millions, a sinking fund at 1/2 per cent. will be L40
millions. Their pension engagements, which will be much higher than
ours owing to their far heavier casualties, have been estimated at
amounts ranging as high as L200 millions. The Chancellor was sure
that he was within the mark in saying that it will be at least L150
millions. Their normal pre-war expenditure was L130 millions, so that
they will have to face a total expenditure at the end of the war of
L720 millions. On the other side of the account their pre-war revenue
was L150 millions. They have announced their intention of this year
raising additional permanent Imperial revenue amounting to L120
millions. From the nature of the taxes the Chancellor considers it
very difficult to believe that this amount will be realised, but,
assuming that it is, it will make their total additional revenue L185
millions. That, added to the pre-war revenue, gives a total of L335
millions, showing "a deficit at the end of this year, comparing
the revenue with the expenditure, of L385 millions at least." The
Chancellor added that if that were our position he would certainly
think that bankruptcy was not far from the British Government.

Another point that the Chancellor was able to make effectively, in
comparing our war revenue with Germany's, was the fact that, with the
exception of the war increment tax, scarcely any of the additional
revenue has been obtained from the wealthier classes in Germany.
Taxation has been indirect and on commodities which are paid for by
the masses of the people. "The lesson to be drawn from these facts is
not difficult to see. The rulers of Germany, in spite of their hopes
of indemnity, must realise that financial stability is one of the
elements of national strength. They have not added to their financial
stability." The reason for this failure the Chancellor considers to be
largely psychological. It is, in the first place, because they do not
care to add to discontent by increased taxation all over the country,
but "it is still more due to this, that in Germany the classes which
have any influence on or control of the Government are the wealthier
classes, and the Government have been absolutely afraid to force
taxation upon them."

It is certainly very pleasant to be able to contemplate the financial
blunders by which Germany is so greatly increasing the difficulties
that it will have to face before the war is over. On the other hand,
we have to recognise that the Chancellor, with that incorrigible
optimism of his, has committed the common but serious error of
over-stating his case by leaving out factors which are in Germany's
favour, as, for instance, that Germany's debt is to a larger extent
than ours held at home. Since the war began we have raised over L1000
millions by borrowing abroad. Our public accounts show that the item
of "Other Debt," which is generally believed to refer to debt raised
abroad, now amounts to L958 millions, while one of our loans in
America, which is separately stated in the account because it was
raised under a special Act, amounted to L51-1/2 millions. It is also
quite possible that fair amounts of our Treasury bills, perhaps also
of our Temporary Advances and of our other war securities, have been
taken up by foreigners; but quite apart from that the two items
already referred to now amount to more than L1000 millions, though at
the end of March last their amount was only L988 millions. It is also
well known that we have during the course of the war realised abroad
the cream of our foreign investments, American Railroad Bonds,
Municipal and Government holdings in Scandinavia, Argentina, and
elsewhere, to an amount concerning which no accurate estimate can be
made, except by those who have access to the Arcana of the Treasury.
It may, however, be taken as roughly true that so far the extent of
our total borrowings and realisation of securities abroad has been
balanced by our loans to our Allies and Dominions, which amounted at
the end of March last to L1526 millions. We have thus entered into an
enormous liability on foreign debts and sold a batch of very excellent
securities on which we used to receive interest from abroad in the
shape of goods and services, against which we now hold claims upon our
Allies and Dominions, in respect to the greater part of which it would
be absurd to pretend that we can rely on receiving interest for some
years after the war, in view of the much greater economic strain
imposed by the war upon our Allies.

Germany, of course, has been doing these things also. Germany has
parted with her foreign securities. She was selling them in blocks for
some weeks before the war, and Germany, of course, has done everything
that she could in order to induce neutrals, during the course of the
war, to buy securities from her and to subscribe to her War Loans.
Nevertheless, it cannot have been possible for Germany to carry out
these operations to anything like the extent that we have, partly
because her credit has not been nearly so good, partly because her
ruthless and brutal conduct of the war has turned the sentiment of the
world against her, and partly because the measures that we have taken
to check remittances and transfers of money have not been altogether
ineffective. On this side of the problem Germany has therefore an
advantage over us, that her war finance, pitiful a$ it has been, has,
not owing to any virtue of hers, but owing to force of circumstances,
raised her a problem which is to a great extent internal, and will not
have altered her relation to the finance of other countries so much as
has been the case with regard to ourselves. We also have to remember
that the process of demobilisation will be far simpler, quicker, and
cheaper for Germany than for us. Even if the war ended to-morrow the
German Army would not have far to go in order to get home, and we
hope that by the time the war ends the German Army will all have been
driven back into its own country and so will be on its own soil, only
requiring to be redistributed to its peace occupations. Our Army will
have to be fetched home, firstly, over Continental railways, probably
battered into a condition of much inefficiency, and then in ships, of
which the supply will be very short. The process will be very slow and
very costly. Our Overseas Army will have to be sent back to distant
Dominions, and the Army of our American Allies will have to be ferried
back over the Atlantic. Consequently if Germany is able to obtain
anything like the supply of raw material that she requires she will be
able to get back to peace business much more quickly than any of her
Anglo-Saxon enemies, and this is an advantage on her side which it
would be unwise to ignore in considering the bad effects on her
after-war activities of the very questionable methods by which she has
financed and is financing the war.

Since we are indulging in these comparisons, it may be interesting to
consider how our American Allies are showing in this matter of war
finance. The _Times_, in its "City Notes" of April 15th, observed, in
connection with the unexpectedly small amount of the third Liberty
Loan, that the reason why the smaller figure was adopted for the issue
was that it seems quite certain now that the original estimate for
the expenditure in the fiscal year ending June 30th next was much too
high. This estimate was 18,775 million dollars. The _Times_ stated
that the realised amount is likely to be hardly more than 12,000
million dollars, of which about 4500 million dollars will represent
loans to Allies, and that the estimate for the year's largely
increased tax revenue was 3886 million dollars, which now seems
likely to be exceeded by the receipts. If this be so, out of a total
expenditure of L2400 millions, of which L900 millions will be lent to
the Allies, the Americans are apparently raising nearly L800 millions
out of revenue. Therefore if we deduct from both sides of the account
the pre-war expenditure of about L215 millions and deduct also the
loans to Allies from the expenditure, it leaves the cost of the war
to America L1285 millions for this year and the war revenue L562
millions. If these figures are correct it would thus appear that
America is raising nearly half its actual war cost out of revenue as
the war goes on.

On the other hand, in the New York _Commercial Chronicle_ of April 6th
the total estimated disbursements for the year are still stated at
over 16,000 million dollars, that is to say, L3200 millions roughly,
so that there seems to be considerable uncertainty as to what the
actual amount of the expenditure of the United States will be during
the year ending on June 30th. In any case, there can be no question
that if the very high proportion of war cost paid out of revenue shown
by the _Times_ figures proves to be correct, it will be largely owing
to accident or misfortune; if America's war expenditure has not
proceeded nearly as fast as was expected, it will be, no doubt, owing
not to economies but to shortcomings in the matter of delivery of war
goods which the Government had expected to pay for in the course
of the fiscal year. It certainly would have been expected that the
Americans would in this matter of war finance be in a position to set
a very much higher standard than any of the European belligerents
owing to the enormous wealth that the country has acquired during the
two and a half years in which it, in the position of a neutral, was
able to sell its produce at highly satisfactory prices to the warring
Powers without itself having to incur any of the expenses of war. On
the other hand, its great distance from the actual seat of operations
will naturally make it difficult for the American Government to impose
taxation as freely as might have been done in the case of peoples
which are actually on the scene of warfare; so that it is hardly safe
to count on American example to improve the standard of war finance
which has been so lamentably low in Europe in the course of the
present war. According to their original estimates the proportion of
war cost borne out of taxation seems to have been on very much the
same level as ours, and this has all through the war been very much
lower than the results achieved by our ancestors at the time of the
Napoleonic and Crimean wars.

On this point the proportion of our expenditure, which has been borne
out of revenue, the Chancellor stated that up to the end of last
financial year, March 31, 1918, the proportion of total expenditure
borne out of revenue was 26.3 per cent. On the estimates which he
submitted to the House in his Budget speech on April 22nd, the
proportion of total expenditure met out of revenue during the current
financial year will be 28.3 per cent., and the proportion calculated
over the whole period to the end of the current year will be 26.9 per
cent. These proportions, however, are between total revenue and total
expenditure during the war period. The proportion, of course, is
not so high when we try to calculate actual war revenue and war
expenditure by deducting on each side at a rate of L200 millions a
year as representing normal expenditure and revenue and leaving out
advances to Allies and Dominions. On this basis the proportion of war
expenditure met out of war revenue up to March 31, 1918, was, the
Chancellor stated, 21.7 per cent. For the year 1917-18 it was 25.3 per
cent., for the current year it will be 26.5 per cent., and for the
whole period up to the end of the current year 23.3 per cent. The
corresponding figures for the Napoleonic and Crimean wars are given by
Sir Bernard Mallet in his book on British Budgets as 47 per cent. and
47.4 per cent. So that it will be seen that, judged by this test, our
war finance, though very much better than Germany's, is not on so high
a standard as that set by previous wars. It is true, of course, that
the rate of expenditure during the present war has been on a scale
which altogether dwarfs the outgoing in any previous struggle. The
Napoleonic War is calculated to have cost some L800 millions, having
lasted some twenty-three years. Last year we spent L2696 millions, of
which near L2000 millions may be taken as war cost, after deducting
normal expenditure and loans to Allies.

Nevertheless, this argument of the enormous cost of the present war
does not seem to me to be a good reason why the war should be financed
badly, but rather a reason for making every possible effort to finance
it well Are we doing so? At first sight it is a great achievement to
have increased our total revenue from L200 millions before the war to
L842 millions, the amount which we are expected to receive during
the current year on the basis of the proposed additions to taxation,
without taking into account any revenue from the suggested luxury tax.
But, as I have already pointed out, the comparison of war pounds with
pre-war pounds is in itself deceptive. The pounds that we are paying
to-day in taxation are by no means the pounds that we paid before the
war; their value in effective buying power has been diminished by
something like one half. So that even with the proposed additions to
taxation we shall not have much more than doubled the revenue of the
country from taxation and State services as calculated in effective
buying power. When we consider how much is at stake, that the very
existence, not only of the country but of civilisation, is endangered
by German aggression, it cannot be said that in the matter of taxation
the country is doing anything like what it ought to have done or
anything like what it would have done, willingly and readily, if a
proper example had been set by the leading men among us, and if the
right kind of financial lead had been given to the country by its

When we look at the details of the Budget, it will be seen that the
Chancellor has made a considerable advance upon his achievement of a
year ago, when he imposed fresh taxation amounting to L26 millions,
twenty of which came from excess profits duty, and could therefore
not be counted upon as permanent, in his Budget for a year which
was expected to add over L1600 millions to the country's debt,
and actually added nearly L2000 millions. For the present year he
anticipates an expenditure of L2972 millions, and he is imposing fresh
taxation which will realise L68 millions in the current year and
L114-1/2 millions in a full year. On the basis of taxation at which it
stood last year he estimates for an increase of L67 millions, income
tax and super-tax on the old basis being expected to bring in L28
millions more, and excess profits duty L80 millions more, against
which decreases were estimated at L3-1/2 millions in Excise and L37
millions in miscellaneous. He thus expects to get a total increase on
the last year's figures of L135 millions, making for the current year
a total revenue of L842 millions, and leaving a total deficit of
L2130 millions to be provided by borrowing. Increases in taxation
on spirits, beer, tobacco, and sugar bring in a total of nearly L41
millions. An increase of a penny in the stamp duty on cheques is
estimated to bring in L750,000 this year and a million in a full year,
and the increases in the income tax and the super-tax will bring in
L23 millions in the present year and L61 millions in a full year.
Increases in postal charges will bring in L3-1/2 millions this year
and L4 millions in a full year.

There has been little serious criticism of these changes in taxation
except that many people, who seem to regard the penny post as a kind
of fetish, have expressed regret that the postal rate of the letter
should be raised to 1-1/2 d. This addition seems to me to be merely an
inadequate recognition of the depreciation of the buying power of the
penny and to be fully warranted by the country's circumstances. Either
it will bring in revenue or it will save the Post Office labour, and
whichever of these objects is achieved will increase the country's
power to continue the war. The extra penny stamp on cheques has been
rather absurdly objected to as being likely to increase inflation.
Since the effect of it is likely to be that people will draw a smaller
number of small cheques, and will make a larger number of their
purchases by means of Treasury notes, the tax will merely result
in the substitution of one form of currency for another, and it is
difficult to see how this process will in any way increase inflation.
Other arguments might be adduced, which make it undesirable to
increase the outstanding amounts of Treasury notes, but in the matter
of inflation through addition to paper currency, it seems to me that
the proposed tax is entirely blameless. The increase of a shilling in
income tax and super-tax produced a feeling of relief in the City,
being considerably lower than had been anticipated. It is hardly the
business of the Chancellor of the Exchequer in this most serious
crisis to produce feelings of relief among the taxpayers, and it seems
to me a great pity that he did not make much freer use of these most
equitable forms of taxation, having first made arrangements (which
could easily have been done) by which their very severe pressure would
have been relieved upon those who have families to bring up. Death
duties, again, he altogether omitted as a source of extra revenue. His
proposed luxury tax he has left to be evolved by the wisdom of a
House of Commons Committee, and has thereby given plenty of time to
extravagantly minded people to lay in a store of stuff before the tax
is brought into being.

Space will not allow me to deal fully with the Chancellor's very
interesting analysis of our position as he expects it to be at the end
of the financial year on the supposition that the war was then over.
He expects a revenue then of L540 millions on the present basis,
making, with the yield of the new taxes in a full year, L654 millions
in all, without including the excess profits duty, and he expects an
after-war expenditure of L650 millions, including L50 millions for
pensions and L380 millions for debt charge. It seems to me that
his expectation of after-war revenue is too high, and of after-war
expenditure is too low. He says that the estimates have been carefully
made, but that they include "a recovery from the absence of war
conditions," but surely the absence of war conditions is much more
likely to produce a diminution than a recovery in taxation. Under the
present circumstances, with prices continually rising, the profits of
those who grow or hold stocks of goods of any kind automatically swell
The rise in prices has only to cease, to say nothing of its being
turned into a fall, to produce at once a big check in those profits,
and when we consider the enormous dislocation likely to be produced by
the beginning of the peace period expectations of an elastic revenue
when the war is over seem to be almost criminally optimistic.

The Chancellor arrived at his after-war debt charge of L380 millions
by estimating for a gross debt on March 31, 1919, of L7980 millions,
which he reduces to a net debt of L6856 millions by deducting half
the expected face value of loans to Allies, L816 millions, and L308
millions for loans to Dominions and India's obligation. But is he,
in fact, entitled to count on receiving any interest at all from our
Allies for some years to come after the war? If not, then on that
portion of our debt which is represented by loans to Allies we shall
have to meet interest for ourselves. He also gave an imposing list of
assets in the shape of balances in hand, foodstuffs, land, securities,
building ships, stores in munitions department, and arrears of
taxation, amounting in all to nearly L1200 millions. It is certainly
very pleasant to consider that we shall have all these valuable assets
in hand; but against them we have to allow, which the Chancellor
altogether omitted to do, for the big arrears of expenditure and the
huge cost of demobilisation, which is at least likely to absorb the
whole of them. On the whole, therefore, although we can claim that
our war finance is very much better than that of our enemies, it is
difficult to avoid the conclusion that it might have been very
much better than it is, and that it is not nearly as good as it is
represented to be by the optimistic fancy of the Chancellor of the

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