A A 5 4 : 8; 2 '■■ 3: 9^ UC SOUTHERN REGIONAL LIBRARY FACILITY 3 ^_^ 1887-1890 BY Sm THOMAS R FARRER (J THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES .\^'^ T - ,^/^MlC(*AL UNION \C^^^ Mr. GOSCHEN'S FINANCE. 1887—1890. Reprinted, with additions, from The Contemporary Review. i MR. GOSCHEN'S FINANCE 1887-1890. BY Sir THOMAS H. FARRER. - 1 I I # - - I \ 4 i i. J » - » » % ^ « - • LIBERAL PUBLICATION DEPARTMENT, 41 & 42, Parliament Street, S W. 1891. LONDON : PRINTED BY THE NATIONAL PRESS AGENCY, LIMITED, 13, WHITEFIIIARS STREET, FLEET STREET, E.C. ICC t c I ' HJ 10 ^ / PREFACE. I— >- QC >< QC CO The following pages are reprinted from three articles in the Contemporary Review, which appeared in October, November, and December, 1890. In revising them for the press, I have done my best to fill up gaps and to correct mistakes ; but am not sanguine enough, in dealing with matters so various and so complicated, to hope that there are no errors -^ left. To various criticisms, public and private, I am much indebted, but they have been such as to strengthen my original conclusions with respect to the financial measures of the last four years. Some 3 thinofs — such as the conversion of the National (0 Debt ; the establishment of the Local Loans Fund ; o and the imposition of additional taxation on busi- ^ nesses and on speculation — have been done well and in a workmanlike manner. But in other matters — more important and more numerous — there have been displayed very different qualities — restless CD cleverness ; rashness mingled with cowardice ; good Q notions made abortive and mischievous by evil , and on which, accord- ingly, the character of finality has been iuijiressed. Fund- holders are no longer in a state of uncertainty and suspense. They know their position for more th.ui a third of a century to come. " They have also secured the advantage of receiving their interest quarterly ; and the payment of (quarterly dividends is not only a convenience and attraction to some investors, but also secures a more even dividend charge throughout the year. "In fine, a strict adherence to national faith, combined with duo regard to the interests of the taxpaying community, has had its reward. The credit of the country has been raised ; its burdens have been lightened ; and its resources have been increased." It should be added that, out of the whole expenses of the conver.sion, which amounted to about £3,000,000, two-thirds, or about £2,000,000, were not added to the debt, but were paid out of sur- plus revenue. One passage in Mr. Hamilton's summary I do not Kffect on quote — that, namel}', which relates to the effect of Fund, the conversion on Sir Stafford Northcote's Sinking Fund — because I have dealt with this subject in another part of this chapter. If Mr. Goschen's method of dealing with this particular part of the subject 8 FINANXE OF 1887—1890. shows his -weakness, the admirable way in which the whole operation Avas conducted is an excellent illus- tration of his strength. Indefatigable industry in mastering details ; full and accurate knowledge of the particular subject ; knowledge no less full and accurate of the City and the money- market; acquaint- ance with the men by whose help such an operation has to be carried through ; all these qualities Mr. Goschen has brought to bear, and we see the result. And if we find that the wheels of the machinery were greased by a small commission or douceur (Is. 6d. per cent.) to stockbrokers, bankers, and solicitors who procured from their clients assents to the conversion, we can afford to forgive this compliance on the part of our Chancellor of the Exchequer with the ways of a very imperfect world, and to smile at the way in which the practical prudence of the City man has prevailed in his person over the purism of the economical philosopher. After all, it was probably not so much any small profit to be obtained from the commission, as the value attached by bankers to a large, simple, and easily convertible stock, which pro- cured the favour of the great bankers. Objections There is, of course, another view of the conversion bycreditors. ^^,j^-^,j^ ^^^ y^^ taken by the nation's creditors ; by widows, orphans, and others Avho have had their in- comes reduced by a present I per cent, and a pros- pective I per cent. These persons find that the stock for which they could before the conversion have obtained par, or a little more, has been converted into another stock, which, since the completion of IMPEKIAL FINANCE. 9 the conversion, has been several pounds buluw par. They may well lament that they were induced by the blandishments of the Chancellor of the Exche([uer, or the advice of their agents who received a douceur for their advice, to convert their stock instead of demanding cash for it. But this is a partial criticism. The clients of the Chancellor of the Exchequer are the taxpayers of the nation, and amongst them are many more widovvs and orphans than there are among the holders of stock. He cannot be expected to be chivalrous ; he has only to be just ; and if there has been no sharp practice on his part, he is to be congratulated on his luck and his skill in catching the market at the moment which served his turn, and deserves the praise of his clients for making a good bargain tor them. There is also another view which may be taken oiowtion by those who are anxious concernmg the credit or unnmi «f the nation. It may be said that public faith in the cieiUt.' "glorious simplicity of the Three pur Cents." has been rudely shaken ; that a Stock, which has already suffered a loss in interest of h per cent., and which must in a few years suffer another similar loss, will no lonofer offer the same attractions to investors; that dealings in this Stock have fallen oft', and will continue to fall off", and that the credit of the nation, as well as the conscience of the investing public, Avill suffer. The answer to this criticism is that it is in a great degree speculative, whilst the present annual gain of 10 FINANCE or 1887—1890. £1,400,000, and of twice that sum after 1903, is cer- tain. The lucky boom of which Mr. Goschen availed himself has been followed by an unusual reaction and depression, not only in Consols, but in all Stock Exchange securities, and we cannot, without much longer experience, tell whether Mr. Goschen's Con- sols have suffered or will suffer more in propor- tion than other securities, or whether they may not hereafter, w^hen people have become used to them, be, when compared with other Stocks, as great favourites as the Throe per Cents, have been. More- over, it must be remembered that, if by the fall in Consols the National Credit suffers, so as to make it more expensive for the nation to borrow, the same fall makes it cheaper for the nation to buy up, pay off, and extinguish debt ; and, consequently, so long as the nation is paying off debt, and not borrowing, it pays off debt on better terms than it would have been able to do if there had been no fall in its price. The Reduction of the Sinking Fund. History of the " S'ew .Sinking Fund." The " New Sinking Fund," as it is called, consisted in 1887 of a fixed sum of £28,000,000 a year, which had, in 1875, been appropriated, at the instance of Sir Stafford Northcote, to the payment of interest and principal of the National Debt. This fixed sum Mr. Goschen reduced in 1887 to £20,000,000, and again in 1889 to £25,000,000 ; so that the annual charge devoted to the discharge of national liabilities will, by Mr. Goschen's action, be for the future IMPEKIM, i INAN( K. H £.S,000,000 k'ss than the sum at \shich Sir Stafford Northcote fixed it. In doing this, and as a part of the same process, Mr. (ioschen prolonged for a con- siderable period the tcniiinablc annuities l)y which, under arrangements n^ade by Mr. Childers in 1883. debt was being paid off. It is important to understand clearly whai this means. It might be thought that Sir Stafford Northcote in 187o imposed heavy additional burdens for the purpose of paying oft" debt. But this was not the case. The sum appropriated to the payment of principal and interest of the debt amounted to £28,750,000 in 1859, and though reduced in 18G0, it had since that date never sunk below £20,000,000, and had gradually risen again to more than £27,000,000. To the amount so appro- priated in 1874-5, which was about £27,000,000, Sir Stafford Northcote added only £900,000.* The satisfactory results which had been thus obtained WQYG largely due to the wise |)olicy of repaying principal by means of terminable annuities, some ot which, as above noticed, Mr. Goschen, when reducing the " New Sinking Fund," postponed. But Sir Stafford Northcote foresaw that as the terminabk- annuities fell in, and as the principal of the debt thus became diminished, and with it the charge for interest, the temptation to use the surplus in relief of taxation rather than in repayment of debt would * See Bu(l<,ret debates of 1887, and esin'cially Mr. CliiMers" s])L'i'(li on April '2")tli. See also Mr. Sydney Buxton's Hudj,'et tal)lfs in Vol. 11. of his Finance mid I'ulitics, \\\\. .S.'U and following:. 12 FINANCE OF 1887—1890. be great ; and it was in order to guard against this temptation that he pledged the countr}' to the annual payment of a fixed sum, so that each year, as the capital was redeemed, and the charge for interest became less, a larger and an ever-increasing sum might be devoted to the reduction of the capital of the debt. Unfortunately for its working, this so-called " New Sinking Fund " was instituted at the end of a period of great prosperity and of considerable economy. The reaction from the boom of 1872-3 had begun ; the long period of depression was commencing ; and the elasticity of the Revenue was for the time being at an end. Shortly afterwards followed the Russo-Turkish war, followed by the Afghan war, the South African wars, and all the Egyptian troubles, involving not onlj' increased expenditure, but a large increase of temporary debt. Notwithstanding these difficulties the New Sinking Fund was maintained at its full original amount ; the Income-tax was raised ; and in 18S0 the original £28,000,000 was increased to £28,800,000, in order to pay off temporary loans. It was not until 1885 and 1886, under great stress of expenditure, that payments of debt were reduced, and the New Sinking Fund temporarily suspended ; but nevertheless the amount appropriated to debt in 188G-7 was only just under £28,000,000. Moreover, this suspension was a mere temporary expedient, and in no way intended to be permanent. Mr- It was reserved for Mr. Goschen in 1887, and ae^ain Ooscfi6n s o reductions in 1889, to declare that £28,000,000 is much too IMPEHIAL FINANCE. 1,3 large a sum for this wealthy nation to devote annually '?f t'>i\ . . . ..... ' fund : his to the discharge and reduction of its liabilities, and i^'asoiis. finally to fix £25,000,000 as a sufficient sum for this purpose. These declarations were made, it is to be observed, when the clouds of war had passed away, when the long period of trade depression, which had existed almost continuously from 1873 to 1887, was at an end, and when there was actually an estimated excess of revenue over expenditure. Mr. Goschen's reasons for these retrograde steps are to be found in his Budget speech of 1887,* to which, in order that full justice may be done to him, reference should be made. In this place, it will only be possible to advert to them very shortly. His first reason was the growing expansion of ex- i- Want of ,,., . „,.. growth in penditure coupled with a growing want of elasticity Revenue. in the Revenue. This want of elasticity was, it was said, especially shown in the produce of the Income-tax, and of the taxes on consumable articles, especially on alcoholic liquors. His second reason was the growth of charges other 2. Giowth_ than the debt charge, from £30,000,000 in 1874-5 une.'''"'"'*" to more than £48,000,000 in 1886-7, and the growth sh-T^^''^^ of the Income-tax from 2d. to 8d. These circum- own stances justified him, he alleged, in appealing to Sir ' Stafford Northcote's own authority, and he quoted words from the speech of Sir Stafford in 1875, in which that statesman said that " he had no doubt that under * See Hmisard, Ajn-il 21st, 1SS7. Mr. (Josolien's Budget speeches arc also jinlilisliod separately in a very convenient form, with tables of aeeouiits ami estimates attached. 14 FIKANCE OF 1887-1890. ordinary circumstances, Avith the ordinary growth of Revenue, we should be very easily able, without any injustice to the country, to bring up the charges for debt to £28,000,000 " ; and further, that " if this should materially alter, it would be only right to remove what we then put on." Mr. Goschen, it is to be observed, took as his year of comparison with 1887 the A^ear 1874-5, i.e., the year before the New Sinking Fund was actually proposed and established. Had he taken the subsequent years, 1875, 1876 and 1877, during which the New Sinking Fund was actually brought into operation, he would have been compelled to increase his £30,000,000 of charges other than the debt charge by £1.500,000 for 1875-6, and by £2,000,000 for the two subsequent years.* It is but fair to his pre- decessor that this should be mentioned, since Mr. Goschen's statement makes the difficulties with which he himself had to contend appear comparatively greater, and those with which his predecessor had to contend comparatively less than they would appear to be if the later years were taken. What Sir s. It is not perhaps very material now to record Northcote i -vt i • i • really did what Sir Stafford Northcote said in 1875 and subse- quent years ; but when Mr. Goschen, who was not measured in his language towards Sir Stafford Northcote when that statesman was his political opponent, now quotes Sir Stafford Northcote as an authority for his present action, it is only just to state what Sir Stafford Northcote's opinions really • See Mr. Cliildors' Return, No. 294 of 1889. say IMPERIAL I'INANL'E. lo were. Now I defy anyone who looks to the general tenor of Sir Stafford Northcote's Budget speech of 1875* in which he proposed the New Sinking Fund ; or to his action in raising the Income-tax in 1876 chiefly in order to maintain the payment of debt ;f or to his subsequent action in respect of that Fund, at the time when the dire necessities of an unfor- tunate foreign policy had driven him into the financial expedient of postponing liabilities from year to year, to gather from them any indication of a,ny such approval of the recent reduction of the New Sinking Fund as Mr. Goschen appears to claim. Sir S. Northcote's most recent utterance on the subject, so far as I know, is in a speech on the Finance of the New Sinking Fund made at Barn- staple on March 27th, 1880, :J: at a time when the financial pressure above adverted to was full}' de- veloped, in which, after explaining that £800,000 had been added to the Fund in order to liquidate tem- porary loans, he emphatically defended the principle and maintenance of that Fund, under circumstances far more difficult than any ]\[r. Goschen has had to deal with : — "In 1876 I proposed, and Parliainent agreed to, an arrangement by which a fixed amount shoiikl be set ajiart, £28,000,000 every year, to i)ay the interest of the debt, and whatever remained over and above was to be applied to the redemption of the principal. JJow, the effect of that is this — Every year, as you redeem a portion of the principal of the * See his jnihlished s|)pechos. p. 200. t Finance ami Pill It irs, \u\. 11., 221. X Published speeches, p. 109. 16 FINANCE OF 1887— 18!JU. debt, of course there is less interest to be paid upon it, and, therefore, if every year you set apart the same sum, it will go on redeeming more and more of the principal. We have now arrived at this point, that out of the £28,000,000 set apart every year, about £27,250,000 is required for interest, and, therefore, there is £750,000 available for discharge of the principal of the debt, that will go on increasing year by year until Parliament alters the arrangement by which £28,000,000 are set apart. Now, what has been proposed in regard to these £6,000,000 which have been converted into terminable annuities is simply this, that you shall go on extinguishing terminable annuities partly by tJie action of the Sinking Fund, and partly by a considerable addition to the £28,000,000 which ive raised to £28,800,000. We do not extinguish the Sinking Fund, xoe only apply a certain portioiu of it toivards the extinction of that debt ^vithin a certain number of years. The action of the Sinking Fund will still go on, and it will 'n,ot be exhausted — not nearly exhausted, — by what tJie call 0)i it noio is. TJierefore, it is entirely false to say that we have in any degree abandoned the principle of the Act q/"1876, or that we have extinguished or suspended the Sinking Fluid." Merits of So much for Sir S. Northcote and his opinion. the case . . , • n i i i against Mr. As regards the merits ot the case, they were exhaus- stated in'the tiv ely dealt with in the Budget debates of 1887,* debates If proposals for remission of taxation, when made by a Chancellor of the Exchequer, could ever be defeated by argument, Mr. Goschen would have been in a bad way. It was shown, for instance, that since 1860 the aggregate wealth of the country had almost doubled, whilst the whole burden of taxation had only increased by 15 or 16 per cent., and that the * See especially speeches of Mr. Gladstone, Mr. Childers, and Mr. Sydney Buxton. Hansard, April 25th, 1887. IMPERIAL FIXANXE. 17 portion of this burden which was applicable to the charge of debt had not increased at all. It was shown that the Income-tax had been patiently and courageously borne for twenty years at 7ii. in the £, and over, for the purpose of reducing other taxes and meeting an excess of expenditure. It was shown that in 1859-60, when the Income-tax was at 9d., producing only £1,100,000 per penny, the sum applied to debt was £28,049,000, or 20s. per head of population ; that in 1870-1 it was £27,142,000, or 18s. per head ; that in 1874-5 it was £26,495,000, or 16s. per head; that in 1880-1 it was £28,169,000, or 16s. per head ; whilst in 1887-8 Mr. Goschen was fixing it at £25,800,000, or only 15s. 6d. per head. It was also shown that in 1887-8 the Income-tax was calculated to produce £2,000,000 per penny ; and that the charge for debt, according to Mr. Goschen's calculations, was only to be three-fourths of the burden, either on the population per head or on the total revenue, which it had been in 1859-60. Lastly, it was shown that former inroads on' the Sinking Fund had been made in order to meet special cir- cumstances of difficulty and danger, whilst the year 1887-8, when Mr. Goschen was making his own exceptionally fatal inroad upon it, was not only a ■ time of no special difficulty or danger, but one of peace and reviving prosperity, with a surplus (which' proved to be much under-estimated) in hand. To all these startling facts and figures Mr; Goschen Failure to made no real reply. He had no great scheme of u.'eseaW reform in petto, such as Mr. Gladstone is said to ""^"^'*- C 18 FINANCE OF 1887—1890. have had when he went out of office in 1874, or such as it is rumoured that Lord R. Churchill had at a later period. His great point was that Income-tax payers ought to be relieved. Now, there is no doubt much to be said for the poorest classes of Income- tax payers. But, as we shall see below, the repeal of Id. of Income-tax might, with accurate estimates, have been effected without touching the New Sink- ing Fund ; and even if it had been impossible to frame accurate estimates, or to find other resources, it would have been far better to retain the 8d. Income- tax for one or two years more than impatiently and hastily to deal a fatal blow to the New Sinking Fund. Argument I am told that these are counsels of perfection ; lar'opinion. that no practical politician dares to keep up the Sinking Fund ; that our people are impatient of their ow^n burdens and careless about those of pos- terity ; and that they would resent and punish by expulsion from office any statesman who was bold enough to keep up taxes in order to pay off a fair amount of debt. Of all this I do not believe one word. There was not, so far as I know, a whisper of public complaint against the New Sinking Fund at the time Mr. Goschen volunteered to reduce it. No such grievance was heard of on the hustings, in the Press, or in Parliament, and if it existed at all, it existed less in the opinion of the public than in the apprehensions of timid and time-serving politicians. But it may be said, " Mr. Goschcn's reductions LMPERIAL FINANCE. 19 were received and Avelcomcd." Of course they were ! Argument . X. from accept- When remission of taxation is offered by the Govern- .nice of . . , ..... reductions. ment the game is given up and opposition is in vain. If the appointed guardian of the public treasury throws open its doors and scatters its hoards, the people cannot be expected to hold their hands. " If they be foul on whom the people trust. How can the baser brass escape the rust ? " or in the racy language of the older poet, how can we expect to have " a dirty shepherd and clean sheep " ? As regards Mr. Goschen's other special reasons Pessimistic above adverted to, it is instructive to compare the compared facts on which he relied with the subsequent results, results : The Treasury Minute justifying his proposals contains the following passage concerning the sup- posed inelasticity of the Income-tax : — " When Sir Stafford Northcote made his proposal in 1875 to increase the debt charge, he had good reason to count on an increased yield per penny of Income-tax, for in the pre- ceding twelve years the yield had risen from £1,249,000 to £1,945,000 ; in other words, more than 50 per cent, in twelve years. From the comparison just drawn it appears that the rise has only been from £1,945,000 to £1,990,000, or less than 3 per cent, in eleven years."* Alas ! for forecasts, and especially for these pessi- mistic forecasts ! Whatever may have been their justification in the past, they proved utterly wrong in their application to the future. According to Mr. As regards ^^ 1 • 1 1 „ income-tax. Goschen's Budget speeches the yield per penny ot * Extract from Treasury INIinute ; Parliamentary Paper, No. 168 of 1887. c 2 20 FINANCE OF 1887—1890. the Income-tax has risen in the four years 1887-8 to 1890-1 inchisive from £1,955,000 to £2,200,000, a rise of £245,000 or more than 12 per cent., an increase nearl}- as great as in the prosperous years preceding 1875.* As regards Again, as regards the taxes on consumable consumable articles, Mr. Goschen in 1887 and in subsequent years, when seeking to justify his inroads on the Sinking Fund, relied much on the want of elasticity in the revenues from alcoholic drinks. But in 1890t he had to express his astonishment at finding that " the increase in the consumption of alcohol last year, as compared \\-ith its predecessor, produced an increase of duty exceeding £1,800,000." His as- tonishment must have been so great as to daze his judgment ; for otherwise he would scarcely have ventured to propose a plan for dealing with the liquor trade which violated sound financial principles by applying the proceeds of general taxation to local purposes ; which transgressed ordinary rules by raising money before determining its application ; which, under the mask of an inejfificient and inade- quate reduction of facilities for drinking, would have given to present licences an increased value and an unprecedented monopoly ; and which has done more to break up the union of parties by which the present Government is supported than any other mistake that they have made themselves, * I have taken these figures from Mr. Goschen's Budget speeches, t Budget Speech of 1890, p. 7 ; Hansard, April 17th. IMPERIAL FINANCE. 21 or any assault that has been made on them by their enemies. But the taxes on alcoholic liquors form but one ^J'^'™*^^f item in the pessimistic views of finance by which with rcHuit*. Mr. Goschen has justified his reduction of the New Sinking- Fund. The real criticism of these views and of that justification is to be found in a com- parison of his Budget estimates with the actual results. They are as follow, as stated by him- self: .* Estimated Surplus. Actual Surplus. 1887-8 . . £289,000 ... £2,378,609 1888-9 . . 212,056 ,.. 2,798 ,000t 1889 90 . . 183,000 ... 3,221,000 1890-1 . , 233,000 The results for the last year arc, of course, yet un- known ; but they will apparently, unless some change takes place, be stated in his next Budget as showing a very largo unanticipated surplus. | Now, if this had happened once or even twice it would have passed as accidental But happening as it has done in every year of Mr. Goschen's Chan- cellorship, it certainly looks as if the habit of his mind were to under-estimate his resources and to provide himself with unnecessary surpluses ; and as if in the course of this operation, and as one of the * See the useful tables attached to Mr. Uoschen's published I>udj;et speeches. t Of this, about i; 2, 000, 000, as above noticed, were applied to Conversion expenses. X See articles in Economist of July 5th and October 4th, 1890, and January .Srd, 1891, which, while deprecatin.L,' exag-ierated expectations, admit a " very substantial growth of revenue in excess" of the estimate. debt. 22 FINANCE OF 1887-1890. steps by which he had arrived at these results, he had needlessly and improvidently reduced his statutory obligation to repay debt. Unexpected Let US understand distinctly what this means. It iia\^ com- is not that he has rendered himself unable to repay mentof'^" debt by repealing too many taxes, or by giving away too much money in aid of Local Taxation or otherwise. All or almost all that he has surrendered in this way might, and would have been equally well surrendered, if he had not diminished the efficacy and invaded the principle of the New Sinking Fund, The Revenue which, according to his own state- ments, he actually received was ample for both pur- poses. Nor is it that he has not paid off debt. The surpluses which have been realised over and above his estimates have been sufficient to pay off all that Sir Stafford's New Sinking Fund, if maintained intact, would have paid off, and more ; and, except so far as they have been specially appropriated to other analogous purposes, they have, under the operation of the Old Sinking Fund (under which the realised sui'pluses of each year must be applied in reduction of debt), been actually applied in payment of debt. These surpluses have exceeded the £2,000,000 by which he diminished the New Sinking Fund in 1887-8 and in 1888-9, and the further £1,000,000 by which he diminished it in 1889-90. He himself has not been backward in claiming credit for " paying off more debt than has ever been paid off before in the same time."* Assuming his statement of liability * See BncUjet Speech of 1889, p. 2.3. IMPERIAL FINANCE. 23 to be correct and complete (which, as we shall see Unsjitisfac- . . tory nature below, is a questionable assumi)tion) we may allow him "f thismoiie . '. . «( payment. thecreditofhaving actually made these payments. But Ave cannot give him the credit of having intended to make them. It is not the amount of debt which unforeseen prosperity enables a Chancellor of the Exchequer to pay off, but the amount which he specifically applies and induces the country to apply for this purpose which makes the character of a bold and successful financier. Moreover, the system, if it can be called a system, it is sure . "^ . . '' . ti) break of paying off debt by a fluke is almost certain cu.wn. to break down. All may go on well whilst the estimates of Revenue are below the mark, as they have been for the last few years. Then, indeed, a surplus is realised, and the Chancellor of the Exche- quer is able to plume himself on the repayment of debt and on having means in hand by which to frame popular Budgets for ensuing years. But the position will be very different when Budgets are again accurate, or when the elasticity of the Revenue disappears. The reduction of debt will then be com- paratively small, while the temptation to further plunder the Sinking Fund as it recovers from Mr. Goschen's depredations will be almost irre- sistible. The real charge against Mr. Goschen's dealings Real charRe with the New Sinking Fund is that he, the ooscheli economist par excellence, the " canonised saint of ciareii the financial purity," as Lord Randolph Churchill once unable to called him, has now, as Tory Chancellor of the '^^^' 24 FINANCE OF 1887—1890. Exchequer, proclaimed, in piping times of peace and prosperity, that £28,000,000 a year is too much for this great and wealthy country to devote annually to the payment of her enormous debt; that £25,000,000 is ample for this purpose ; and that the plan which Sir Stafford Northcote had instituted for a per- manent, steady, and steadily increasing repayment of debt is beyond the will or the power of the nation to accomplish. Indeed, we are now much worse off than we were before the establishment of the New Sinking Fund. We then paid a debt-charge at, the rate of from £26,000,000 to £28,000,000 or £29,000,000 a year without any fixed limit. We have now, thanks to Mr. Goschen, set up an ideal limit of £25,000,000 only. A fatal precedent has been set for future Chancellors of the Exchequer, a precedent which is only too likely to call for speedy imitation. Mr. _ Mr. Ritchie, in his speech at Manchester on October fence of Mr. 16th last, characterises my observations concerning estimates. Mr, Goschcn's estimates of revenue as disingenuous, because, he says, the estimates are framed, not by the Chancellor of the Exchequer, but by the permanent Civil servants. But this, if true, clenches the case against Mr. Goschen. Mr. Ritchie says he trusted naturally, properly, and absolutely to his permanent advisers. In that case he must have believed in his estimates, and is. excluded from any possible credit either for his unexpected surplus or for the reduction of debt which that surplus forced upon him. The best hypothesis for Mr. Goschen, and, perhaps, the true one, is that he did not believe the estimates IMPEIUAL i:iNANCE. 25 submitted to him and yet did jiot dare to refuse them: and that consequently, expecting a surplus, he did not wish to repay debt under the New Sinking Fund and under the old one at the same time. But if this was his part in the matter, it was not the part of a bold or straightforward Minister, In truth, the public will not and ought not to admit that the Chancellor of the Exchequer is not responsible for his estimates, and when for four successive years the estimates of one Minister are always in the same direction, there is surely ground for suspecting some peculiar idiosyncrasy in his character, some tendency towards extreme caution. Now, such an idiosyncrasy may be a very valuable quality, and its exercise may under some circumstances be a great public virtue. When extreme caution in estimating revenues is used for the purpose of economising expenditure we may give credit for the caution and welcome the surplus. But when it is accompanied by unprecedented expendi- ture ; when it is used for the purpose of reducing the Sinking Fund ; when surpluses are actually produced by the reduction of that Fund ; still more when, as we shall see to be the case here, the future is at the same time being anticipated and debt is being incurred, we are justified in stigmatising the caution as weakness, and the surpluses as fallacious. It is impossible to dissociate Mr. Goschen's Budget connection of 1887 from that of ,1888. The reduction of the i"i^,;;:r''" New Sinking Fund by £2,000,000 in 1887 has an 'wulu'ekid obvious connection with the grant of half the Probate Taxation. Duty, amounting to about the same -sum, in aid of 26 FINANCE OF 1S87— 1890. local rates. Now, the new system of Local Govern- ment which we are establishing is quite sure to be expensive, whatever other advantages it may bring Avith it. Further claims are sure to be made upon the Exchequer. What more likely and what more easy than that local ratepayers should demand, and that Chancellors of the Exchequer should concede, the transfer to local purposes of the remainder of the Probate Duty, and that the gap thus caused in the Imperial Finances should be filled up by a further diminution of £2,000,000 or £3,000,000 of the annual debt charge. Facilis descensus Averni. Reasons as good as Mr. Goschen has given will not be wanting, and they will be supported by the weight of his great authority. Effect Mr. Goschen seems indeed to think that he has him- Goschen's sclf, by reducing the New Sinking Fund, raised a bar- on the rier against future attacks on that Fund by some less the Sinking scrupulous Minister. In replying to Lord Randolph Churchill, he said,* in a very pointed manner, that if the sum devoted to repayment of debt remained as large as Sir S. Northcote made it, it would be " a formidable and enticing sum at the disposal of a bold, daring, and enterprising Chancellor of the Exchequer." It is curious that so solid a man as Mr. Goschen should have thus replied to his versatile predecessor. It is still more curious that he should not see that, if the daring schemes which he contem- plated as not impossible were really to come within the scope of practical politics, his own action and ex- * See Hansard, April 21st, 1887, p. 370. IMPERIAL FINANCE. 27 ample, and his own character as a prudent and able tiiiancicr, would be the most valuable precedent that could be urged in their favour. To save the Sinking Fund he throws it overboard, frightened, like Cowper's silly sheep, by an empty noise. " He deems it wisest and most fit, That to save life we jump into the pit." Would that we were able to continue the quota- tioa. The poem goes on : " Him answered then his loving mate and true, But more discreet than he, a Cambrian ev/e, How, leap into the pit our life to save ? To save our life leap all into the grave 1 * * * * Come fiend, come fury, giant, monster, blast From earth or hell, wo can but plunge at last." — From the Needless Alarm. What a pity that his prudent leader could not act the part of the Cambrian ewe ! One other point remains to be noticed — viz., the c.nvei-sion relation of Mr. Goscheu's successful conversion of the Isinkint; debt to the New Sinking Fund. Let us give it in his own Avords : — "At this point I would remind the Committee that last year 1 expressly reserved the application of the £1,000,000 to be saved in the present year — viz., the Conversion Scheme, and said that I did not wish to pledge myself or tlie Government as to whether tlie whole, or a portion, or none of it should 1)0 employnd in the remission of taxation, or, on the other hand, in the diminution of public debt. ' But there,' I said, 'it stands— a sum of £1,000,000, Avhich will be added to the national resources in the year 188'.»-'.»0, and it will be followed by a yet larger sum in the following year.' 28 FINANCE OF 1887—1890. As it has turned out, while the saving in the first year is £1,000,000, it will in subsequent years be £1,500,000. What J propose, therefore, is this. I propose that £1,000,000 of that saving should be annually applied to meet a portion of the deficit due to the Naval Defence Bill, while the £500,000 should be allowed to go to increase the fund available for the diminution of the debt. If I were to act according to pre- cedent, I should be entitled to take the whole of the saving for the benefit of the taxpayers. In no Conversion Scheme has the saving efi"ected on the interest been applied to increase the Sinking Fund. In the Conversion Scheme of 1884, iny right hon. friend the member for South Edinburgh gave the whole net advantage of his convei'sion, such as it was, to the taxpayer. By my conversion operation, on the other hand, if my present proposal is accepted, there will be an amount of something like £500,000 a year added to the sum available for the reduction of the debt. The only argument which I can imagine may be pressed against this proposal is that I ought to give the whole of the saving to the reduction of the debt, because two years ago I diminished the amount available for that purpose by £1,500,000. " Mr. Childers : Two millions. "Mr. Goschen: Yes, £2,000,000; I am obliged to my right hon. friend ; but I have explained before that I consider myself perfectly justified in the course then taken, and if, as I held, and hold, £5,000,000, besides the Old Sinking Fund, is a suflicient and ample annual provision for the reduction of debt, then I feel that if, out of the £1,500,000 which is saved by my conversion, I add £500,000 to that provision, I am doing as much as the most rigid financial purist could expect. I believe that a great majority, both in this House and out of it, will think that I have taken a reasonable, fair, and business-like course in applying this £1,000,000, as I propose to apply it, to meet a portion of the increased charge due to our naval defence plan. The eflfect will })e to diminish the total fixed charge for debt from £26,000,000 to £25.000,000, but out of that £25,000,000 IMPERIAL FINANCE.. 29 there will be as much devoted to the reduction of debt aa is devoted now out of the £20,000,000, and after the jiresent year there will be £500,000 more so devoted. Of the £25,000,000, £19,500,000 in round figures will go in pay- ment of interest and £5,500,000 in reduction of debt."* Again he says, in recording his own deeds : " I have diminished the Sinking Fund by £1,500,000, originally by £2,000,000, but I replace £500,000."t One might think, in reading these passages, that Mr. Goschen in 1889 was actually increasing the fixed sum put aside by Sir Stafford Northcote for payment of debt by £500,000 ! Nothing of the kind. In 1887 it was £28,000,000, and he reduced it to £20,000,000 ; in 1889 it was £26,000,000, and he reduced it to £25,000,000. The position he assumes is that interest saved by conversion ought, as a matter of course, to go in reduction of taxation, and' not to repayment of the principal of debt. For this position he gives no' reason, except precedent ; but no precedent of an earlier date than 1875 is appli- cable to the New Sinking Fund, which did not exist before that year. The only precedent since 1876 Avas the conversion effected by Mr. Childers in 1884< ; but Mr. Childers did not reduce the £28,000,000, if he did not increase it. Moreover, the saving effected by his scheme was infinitesimal.since only £23,000,000 were converted under it, and those into 2J and 2'i per cent, of larger nominal amounts ; and further, 1884 was still one of the barren years cursed by bad trade and African embarrassments. On the other * Budget Speech o/1889,- pp.- 525, 526. t Ibid, p. 22. 30 FINANCE OF 1887—1890. hand, Mr. Goschen's very successful conversion co- incided with times of peace and revived business. Looking to the spirit of Sir Stafford Northcote's Sinking Fund, Mr. Goschen's position appears un- tenable. The New Sinking Fund was not founded on the principle that there should be annually voted so much for the interest and so much for reduction of the capital of the debt. The very essence of the scheme was, that the nation should feel itself bound to pay a fixed sum each year, exceeding the annual interest, and that the surplus, whatever it might be, should go to repayment of principal ; and the merit of the scheme was that, as the payment for interest diminished, the repayment of principal would become larger and larger. Conversion is one principal method of reducing interest, and must have been contemplated in 187G. But not a word is to be found in Sir Stafford Northcote's speeches, or, so far as I know, in any speeches or literature on the sub- ject, suggesting a reduction of the £28,000,000 in case of conversion ; much less of a second reduction of a third million on the ground of conversion, when a previous reduction of £2,000,000 had been made within three years forthepurpose of repealing taxation. Nor does any such suggestion appear to be consistent with the principle on which, as stated above in Sir S. Northcote's own words, the New Sinking Fund is based. The very least we might have expected from such a financier as Mr. Goschcn is that he should have applied the whole £1,500,000 gained by his conver- .sion towards making good his previous reduction of LMl'EUIAl. llNANCi:. 131 £2,000,000. But no ! Wc have heard of the man with a windfall, wlio was not sure how to make the best of it, but was quite sure that the worst possible thing he could do with it would be to fritter it away in payment of his debts. And yet our great economist, in taking credit for the large reductions of debt effected by the unsatisfactory method of under-estimated surpluses, can still say : " I suppose this story " {i.e., a reduction of debt in three years of £28,323,000) " will be satisfactory, unless, indeed, there be members of this House or of the outside public who think that money may be better spent than in reducing the enormous liabilities which still lie upon us with regard to the National Debt." Brave words ! if only the deeds had been as brave ! To sum up. The estimated surplus of 1S87-8 was summary of £289,000 ; the actual surplus was £2,378,009. The ^^^itii^the estimated surplus of 1888-9 was £212,050 ;the actual surplus was £2,798,000. The estimated surplus of 1889-90 was £183,000; the actual surplus was £3,221,000. These three surpluses amounted together to £8,397,009.* The fixed charge for payment of debt was reduced from 1887-8 inclusive by £2,000,000 : and from 1889-90 inclusive by £3,000,000, making altogether £7,000,000, so that the surpluses in these * This ainount, wliicli would, if tlie Old Sinkiii.Lr ImiiiiI liatl been left undisturbed, have been applieil in reduction of debt, was not all of it soapplieil ; i;-2,000,(M)0 was specially ajii.ro- priated to i)aynient of tlieexi)enses of Conversion, and consider- able sums for other anal(><,^ous puri)oses, so that the actual sum apjilied out of the suri>luses in repayment of debt was consider- ably less than the above amount. See Sir W. Ilarcourt's return, No. 343 of 1890, 32 FINANCE OF 1B87— 1890. three years were more than the sums by which the fixed charge was reckiced. But if the fixed charge had not been reduced, the apparent surpluses would have been less by £7,000,000 ; the superficial appear- ance of prosperity would have been less ; and Chancellors of the Exchequer would have had smaller sums to play with in subsequent years ; but, on the other hand, the nation would during this period of prosperity have been silently paying, and have been pledged for the future to pay, the very moderate fixed sum which the prudent management of 1876 had allocated, and which, until Mr. Goschen appeared on the scene, was devoted, to the payment of debt. So to miscalculate the future in a time of peace and plenty as to produce an imaginary deficit ; on the faith of this deficit to reduce by million after million the moderate fixed annual sum which a Conservative predecessor had appropriated to the payment of debt ; to deal with the surplus thus created as if every obligation had been discharged, and as if it might in subsequent years be treated as a fixed rule that £2.5,000,000 a year is all we are able and willing to devote to our debts ; and to show to future Chancellors of the Exchequer how easily they can produce surpluses by repealing obligations to reduce debt — may be good party politics, but it is not heroic finance. Army and Navy Expenditure. Are the So far I havc been arguing ou the assumption that pluses rai the surpluses of recent Budgets, are, as Mr. Goschen IMPERIAL FINANCE. 33 has represented them, real, trustworthy surpluses, available as bond Jide assets. But is this the case ? If not ; if things arc being made pleasant ; if we are forestalling the future, and throwing new burdens on years to come, the charge against the finance of the present Government becomes much more serious. In such a treatise as this it is impossible to do more than touch upon what has no doubt been Mr. Goschen's great difficulty, as it is the difficulty of all Chancellors of the Exchequer — viz., the demands for military and naval expenditure. Against war scares all Governments appear to be powerless. But the Peculiarity i 1^ , ^ of liust four Army and Navy expenditure of the last four years years, im- . X 1 /> II- "leiise ex- has some peculiar features. In the first place, this peiKiiturein . 1 • 1 1 • time of period has been, unlike the previous decades, a time peace, of profound peace. There have neither been wars nor rumours of wars. But the sums spent have been enormous, far exceeding the expenditure of most years of peace, and of many years of war. The following are the figures of Army and Navy Larpc ex- expenditure taken from Mr. Goschen's estimates* : — out of Re- venue. For 1887-8 .... £30,871,000 1888-9 .... 20,823,100 1889-90 .... 32,451,000 1890-1 .... 33,345,000 The figures of actual expenditure for the first three of these years, as given in the Statistical Ab- stract, are as follows :— For 1SS7-8, £30,759,000 ; for 1888-9, £29,108,000 ; for 1889-90, £32,783,000. But besides these sums, met by the revenues of * See the tables appended to his published Budget speeches. D M FINANCE OF 1887—1890. Fiivther chai'ses on the future : whicli are withdrawn from Par- liamentary control. the year, there is more. We have been, and are, spending still more money, which will have to be paid out of the income of future years. Under the arrangements of 1887-8 a debt of £2,600,000 for ports and coaling stations was charged upon the annual increased income of £570,000, which we expect to get from the Suez Canal Shares in 1894 and following years.* This anticipation of future income is, of course, precisely as much a sacrifice of the future to the present as if, instead of forestalling new revenue, we had incurred a debt. In the same year, and by the same Act, we charged future years with the payments for Australian ships of war. In 1889 the payment of £21,500,000 for the seventy new ships, which the scare of that year demanded, was spread over a period of from five to seven years.*!* It is said, indeed, that this £21,500,000 is to cover all the shipbuilding which will be required during these seven years, and that, consequently, there is no real forestalling of the future, but only a determination and equalisation of expenditure. But who shall assure us of this ? Programmes of shipbuilding have in late years been changed almost as often as programmes of stage plays. Judging from past experience, and from the ever varying demands of naval experts and alarmists, it is not unreasonable to expect that before the ships now in construction are paid for, perhaps before they are completed, many of them will be so antiquated and obsolete as to raise a fresh * .51 and .52 Vict., c. 32. t 52 Vict., c. 8. IMPERIAL FINANCE. 35 scare and give rise to a new demand. Even at the moment when I write admirals are domandinc;- mrire cruisers. Moreover, a large part of this £21,500,000 is •charged, not upon moneys to be provided by Parlia- ment, but upon the Consolidated Fund, thereby with- drawing the annual control over the expenditure from the House of Commons. Surely if there is one thing which past experience teaches, and which daily experience illustrates, it is that the fashion in ships is almost as changeable as that of ladies' bonnets ; that plans for building them cannot be per- manent ; and that expenditure upon them ought on no account to be either thrown on the future or withdrawn from annual control, especially by a Government which has the good fortune to light on a period of peace and exceptional prosperity. In addition to the above charges on the future, there is a further sum of £4,100,000 to be spent on barracks, of which £.300,000 is to be paid out of revenue (viz., in 1800-1), and the remainder to be borrowed as wanted, and charged on the future.* How much of all those debts will be paid out of revenue in the years in which the money is spent, how much will be thrown on subsequent years, and for what number of years the burden will continue, it is impossible to make out, and this impossibility and consequent obscurity in accounts is one of the chief charges against ^Ir. Goschen's Finance. But a * Barracks Act, 1S9U (J.'J \- 54 \ict., c. *_'")). I) 2 36 FINA^XE OF 1887—1890. Mr. siiaw returii moved for by Mr. Shaw Lefevre* is very in- Lefevre's . ^ "^ . i i return of structive. Froiii that return it appears that the expeiuiiture estimated Army and Navy expenditure for the in present •' . , year, show- present hnancial year is as loilows : — ing heavy *^ fuun™"" Ordinary expenditure £31,514,400 years. Extraordinary expenditure, including — Imperial Defence Act, 1888 £l,127,951"v Imperial Defence Act, 1889 5,279,082 I g g^^ ^03 Barracks .... 200,000 j > > "^ A'olunteers . . . 100, 000 j Total 38,321,433 Of which there is to be paid Out of Revenue of 1890-1 . . . 33,342,971 Out of Revenue of 1889-90 . . . 407,564 Total out of accrued, or accruing Revenue 33,750^535 Leaving to be paid in future years . . . 4,570,898 It further appears that a large part of this ex- penditure had actually been incuiTed in 1889-90; that £1,500,000 was transferred from the Exchequer balances to the Naval Defence Fund in the same year, and that at the period when Mr. Goschen made his Budget speech it had to be restored to those balances. It was not, however, treated as a liability, and no notice is taken of it in Sir W. Harcourt's Return of the National Debt for 1890.t Fictitious ^^ So far, therefore, from there being any real surplus suqjius. jjj ^jjg present year, there must, according to these figures, as pointed out by Sir W. Harcourt in his speech at Derby in August, 1890, be a heavy * Parliamentary Paper, No. 200 of 1890. + Bxcdfjet Sjjecch, 1890, p. 704 ; and Returns 378 and 343 of 1890. IMPERIAL FINANCE. 37 deficiency, and this deficiency will have to be made good in future Budgets, whilst at the same time we shall no doubt again have to listen to self-congra- tulations on the way in which Ave are paying off debt. It seems scarcely credible that this should be the .Mr. coscheii Finance of a Chancellor of the Exchequer who, when .Northcote's Sir Stafford Northcote proposed to spread over two years the payment of £5,000,000 incurred during a period of commercial depression, and of special ex- penditure on account of wars and rumours of wars in Europe, in Asia, and in Africa, reproached that states- man with conduct " shabby, flabby, and inadequate to the occasion " — conduct wanting in that courage which was calculated to secure repute abroad and credit at home.* The whirligig of politics brings its revenges. Whatever may have been the demerits of former Conservative Chancellors of the Exchequer, we now see that a sound Liberal economist, turned into a Tory Minister with a powerful majority at his back, is at least as unsuccessful in securing permanent repay- ment of debt, or payment of present expenses out of present income, as the predecessor whom, when •out of office, he condemned so vigorously. There may be politicians to whom the future welfare of the nation is a trifle, if it conflicts with present popularity ; there may be others who regard any steady effort to pay off debt as Utopian ; and there are probably more who, knowing well what is brave and right and true, are led or driven by pres- *See Mr. Gosclien's speech, H(()isar(f, A))ril "iStli, 1S79. 38 FINANCE OF 1887—1890. sure or bad company into feeble and cowardly courses, But the antecedents and reputation of the present Chancellor of the Exchequer are such as led his. admirers to hope for other things from him. " Who would nob grieve such Minister must be ; Wlio will not weep if Atticus be he ? " Military One further observation. The scares which have flue to tile caused this expenditure of present, and the fore- "ahe^' ''"' stalling of the future, Revenue, are not owing to the siiouui,' ^^''" recently established democracy. They have now, as pay!^^"'"' o^ former occasions, originated with the services,, with the clubs, with society, and with the London newspapers. So far as the democracy has shown any sign, it takes no interest in, or is opposed to,. them ; and if there is any hope of resisting scares more effectually in the future than has been possible- in the past, that hope lies in the growing power and sense of the democracy. This observation leads to a corollary which is of much importance from a purely financial point of view. It is often said that direct taxation, and especially graduated direct taxation, is dangerous with a democracy, because the masses will, under such a system of taxation, have the excitement of spending the money without feeling the burden of paying it. But in the case of naval and military exjjcnditure it is not the masses, but the classes, who call for it ; and, therefore, if we wish to keep it within limits, it is upon the classes. and not upon the masses that the burden should falL Direct taxation of capitalised property, whatever l.Ml'KUIAL FINANCE. 39 may be its effect on domestic expenditure, need not be feared as an incentive to the worst and most dangerous of all forms of extravagance. New Sources of Taxation. Mr. Goscheu is deeply impressed with the danger Ntnnberaiui of leaving the Revenue to depend on too small a 'riixi's"i-. number of sources, and he has endeavoured to A'quc'.stjon increase them. The general tendency of the last '"'""'" fifty years has, no doubt, been in the direction of simplicity ; taxes on articles of consumption have been reduced to a very small number ; direct taxa- tion has increased ; and the Income-tax has been used as an easy method of meeting growing wants. Mr. Goschen apparently thinks that this process has been carried too far, and he has used his great knowledge and ingenuity, sometimes successfully and sometimes unsuccessfully, to counteract it. The general arguments for and against such a course need not be repeated here. It is notorious that our greatest financiers since 1840 have made their repu- tation by simplifying our tariff, by imposing direct taxation, and by reducing taxes on industry and consumption. Mr Goschen's proposals for new taxation have, therefore, raised a serious question of principle, on which opinions may differ. But the fact that such a question exists renders it the more important to scrutinise those proposals in detail. Upon some of them there will be little or no adverse criticism. 40 FINANCE OF 1887—1890. especially upon those which have extended the pro- increase of ductive system of stamp duties on commercial stamp . . duties on transactions. His amendments of the law with commercial , . f f t •, transac- respcct to stamp duties on the transfer oi debenture stocks and stock certificates ; the voluntary composi- tion in lieu of stamp duty on the transfer of shares or stock of companies or municipal corporations ; the revision and extension of stamp duties on foreign and colonial securities, on mortgage of stock, on equitable mortgages, and on contract notes,* are matters to the policy of which most persons will assent, whilst Mr. Goschen's knowledge and industry are guarantees for their successful manipulation. His tax of £1 per £1,000 on the nominal capital of new joint-stock companies is still more important and more valuable. It produced £157,948 in the first year, and £294,274 in the .second year ; and, considering how little re- gard is paid to expense in starting new companies, and how large are the sums which are appropriated to founders and promoters, one can only regret with Mr. Goschen that the percentage appropriated to the State is not more than 2s. per £100. Taxes on As regards his proposals for new taxation of articles tion."™'' of use and consumption far greater doubts and diffi- culties arise. About the additional £300,000 raised upon beer in 1889 there is little or nothing to be said in the way of adverse criticism. But it is different with the Wheel Tax and Horse Tax, pro- posed, but not carried, in 1889 ; with the additional * See Thirty-third Report of Commissioners of Inland Revenue. App. pp. vi. and vii. IMFEKIAI. FINANCE. 41 wine duty imj^osed in the same year, and with the new duties on alcoholic drinks of 1890. To the wheel and horse taxes, which were to be imposed in wieei and aid of local rates, I shall recur in the following chapter, and shall show that they were taxes involving more than one element which made them not only unpopular, but really objectionable. To Duty on the new duties on alcoholic drinks imposed in 1890, wine. '"^ and their application to Local purposes I shall also recur. On the other hand, the new wine duty must be admitted, even by those who doubted it at first (as I did), to be a success, for it produced j£16o,406 in the first year of its imposition,* and is levied upon what is distinctly a luxury of the richer classes. But the history of the tax is instructive. Originally it was imposed on all bottled wines, as being the more expensive wines. But, as everyone knows who has imported wine, wine is better bottled at Bordeaux than in London ; and it is worth while to pay the extra cost of the carriage of bottles, even on the lightest dinner wines. After trying the ori- ginal proposal, the Chancellor of the Exchequer modified his first tax by a second Act of the same Session, and altered it into an additional tax on sparkling wines alone. As these must all be bottled during the process, and at the place of manufacture, the question of bottling in the one country or the other does not arise ; the distinction between these wines and other wines becomes pal- pable and easy of application, and the tax becomes * T/iirfi/-third Report of Cu.'ifotti.f, ]>. l.S. 42 FINANCE OF 1887—1890. a tax on a species of wine which is altogether a luxury of the well-to-do classes. The case iUustrates the difficulty of imposing new taxation on imported articles when these conditions cannot be secured- Danger of But the more important lesson to be learnt from the protection „ . this^kiiHi"* history of this tax is the tendency of new taxes on articles of consumption to slide into Protection. English people buy wines bottled in France, because in France wines are bottled better than in Eaglaud. With this notorious fact before him, the Chancellor of the Exchequer, in making his first proposal, was betrayed into saying : " It is possible that the bottling trade in England may receive a certain im- petus, but I cannot conceive that that is an objection to the plan." Such words from such an economist as Mr. Goschen mean much in the eyes of an expec- tant trade, and give a very mischievous encourage- ment to Fair-traders. Their effect is well illustrated by the subsequent Report of the Commissioners of Customs, who, parrot-like, echo Mr. Goschen's false note by saying : " The duty was received by the wine trade in this country with satisfaction, as being calculated to transfer to the United Kingdom the share of the bottling industry which had hitherto been centred in the wine producing countries."* Sugar Coupling Mr. Goschen's express desire to multiply Convention r ■ • i sources of taxation with such utterances as these, is it unfair to reflect on what might have happened to a much more important article of consumption — sugar — if the proposals of the Government with re- * Thirty-third Report of Customs, p. 16. IMPERIAL FINANCE. 43 spect to the Sugar Convention had found favour witli the nation ( Fortunately, the proposals, introduced under a Free-trade mask, were, when that mask was stri})ped off, recognised to be so essentially Protec- ti(juist in character, and also, to use Mr. Henry Fowler's epithet, to be so grotesque, that the Govern- ment were frightened out of them before they were submitted to a vote in the House of Commons. But if they had been adopted, and if a differential tax for Protectionist purposes had been imposed on certain sugars, what would have been more easy than to extend the tax to all sugars, and thus broaden the basis of taxation by imposing a duty of a hybrid character on one of our chief articles of consumption ? We have possibly escaped more than one retrograde step by defeating that insidious proposal. The moral to be drawn from these new taxes of Mr. New taxes oil con- Goschen's is that, however desirable it may be to find s"'>ipti"n ' •' _ slioiilil be new sources out of which to get revenue, it is also .ieaUmsiy , , , " . . cnticiseil. our bounden duty to criticise with extreme jealousy every fresh proposal for new forms of taxation, and especially every proposal for taxing articles of use and consumption. Havinof said thus much on these proposals, it is Ri-iiuctio but fair to remember that, warned by experience, Mr. tobaceo, _ rtrt « ion,, I'll I- Goschen has, as a fiscal improvement, taken on the rants, ami ^ . (loM ami extra tobacco duty imposed in 18/8, and amounting to silver pUite. about -id. per lb. ; that he has lightened and improved the carriage duty ; that he has reduced the duty on tea by 2d. a lb. ; that he has reduced the duty on currants from 7s. to 2s. per cwt. ; and that he has ion on 44 FINANCE OF 1887—1890. abolished the duty on gold and silver plate. Would that he had completed this last job by abolishing the antiquated and protective system of compulsory Hall-marking. The new taxes on alcoholic liquors, the proposed wheel and horse taxes, and the additions to the Death Duties are noticed elsewhere in connection with Local Finance. Looking to what we shall have to say about them as well as to what has been said concerning the other new taxes above mentioned, Mr. Goschen's proposals for new taxes lead us to the same conclusion to which the consideration of other parts of the subject leads us — viz., that whilst the financial management of the last four years bears witness to a very unusual degree of skill, industry, and ingenuity, it does not display a corresponding amount of courage, of thoroughness, or of popular insight ; and that, above all, it is open to the charge of weakness in the maintenance of principles which have been adopted by our greatest financiers, and of which we had reason to believe Mr. Goschen to be a convinced and resolute advocate. Conclusion as to Imperial Finance. Conclusion Revcnuc repeatedly under-estimated ; current Imperial cxpcnses repeatedly postponed ; so that estimated hasTeifn deficits and surpluses are alike uncertain and untrust- obwciin,"' worthy; the fixed sum which had been made appli- cable to permanent debt largely diminished ; taxes at the same time taken oflf ; and subsidies to local IMPERIAL FINANCE. 45 authorities largely increased ; these, so far as Im- perial Finance is concerned, are characteristic fea- tures in the Budgets we have been examining. It is not too much to say of them that, in these respects, they have mystified the national accounts, and have sacrificed prudence to popularity. It is obvious that this cursory review of Imperial Finance is altogether imperfect without a considera- tion of what has been done in the matter of local finance in its relations to Imperial Finance ; and of the changes which have been made in the Death Duties. With these subjects I shall deal in future chapters. CHAPTER II. LOCAL AND IMPERIAL FINANCE. Subjects (leak with in this chapterT Loans from Imperial Exchequer for Local Purposes.— Grants out of Imperial Exchequer to Local Authorities. — History of these Grants.— Mr. Goschen's Case in 1870. — Case of Urban Ratepayers since 1870. — Measures of present Government. — Grants to Rural Districts in aid of Main Roads. — Transfer of Licence Duty and Probate and Drink Duties, and Reduction of Inhabited House Duty. — 1. Embarrassing to Imperial Exchequer. — 2. Weakening and Demoralising to Local Government. — 3. Distribution Unjust. — Finance of Metropolitan Police. — Conclusion as to Local Finance. In the last chapter were considered the measures of the last four years, so far as they related to Imperial Finance alone. In the present chapter I propose to make some observations on the measures of the same pei'iod, so far as they relate to Local Finance and its connections with Imperial Finance. I propose to consider, in the first place, the subject of loans made by the Imperial Exchequer to Local Authorities, and then to discuss the much more important subject of Grants made by the Imperial Exchequer to Local Authorities. To deal properly with this part of the question it will be necessary to consider the principles of these grants ; the history T,nrAL AND IMPERIAL FINANCE. 47 and nature of Local Taxation as examined and illus- trated by Mr. Goschen in 1870-1872 ; the subsequent increase in Local Taxation ; the action of the Govern- ment with respect to Local Grants from 1887 to 1800, including those of 1887 ; the proposed Van, Wheel, and Horse Tax ; the allocation in aid of Local Rates of the Licence Duties and half the Probate Duty in 1888, and of a part of the duties on alcoholic liquors in 1800; concluding with certain criticisms on the system of subsidies thus introduced and extended. Loans from the Imperial Exchequer for Local Purposes — Local Loans Fund. One of the first subjects to which Mr. Goschen i'"!">s from directed his attention m his first Budget speech was KxcUequer , for local the intricate subject of Local Loans — ie,of loans purposes, made by the Imperial Exchequer to Local Authorities for local purposes. The practice of making such loans has grown up during the present century out of wants arising from time to time, and, like other similar practices, has been irregular and uns3'stematic: and though it has been, on the whole, useful and well managed, it has in some cases been attended with loss. It would be out of place here to attempt to give the details of this practice ; details which Mr. Goschen states he found it difficult not only to explain hut to understand. They are set forth with admirable clearness in a Treasury Minute,* which * Parliamentary Paper No. 166 of LS87. 48 FINANCE OF 1887-1890. also explains in detail Mr. Goschen's plan for amend- ing it. Principle of The underlvine: principle of the whole scheme is local loans. J o i i to make the national credit available for local wants ; so that the nation becomes a borrower, on the one hand, of such funds as are needed for local purposes, and a lender, on the other, to such local authorities, and for such local objects, as may from time to time be authorised by Parliament. The loans are all made repayable by instalments of different amounts extending over different periods, and they bear various rates of interest. It is obvious that such a system as this is open to the gravest objec- tions, unless the utmost care is taken that the security given to the nation for the money it lends is good, and that the interest paid by the local authority is sufficient to recoup to the nation the interest which it has to pay for the money it borrows, and all the expenses which it incurs. Unfortunately, thi» imperfec- has uot always been the case. Out of upwards securities of £100,000,000 which have been advanced by the fusion of nation, £12,000,000 have been remitted, of which £6,500,000 are now treated as gifts, and £5,500,000 as bad debts. Nor is this all. The money advanced by the nation for these loans has been borrowed or otherwise procured in different ways ; and has been supplied to the different lending departments, and advanced by and repaid to them in different ways. Much confusion has resulted. Some improvement was made by Sir Stafford Northcote in separating the payment of interest from the repayment of accounts. LOCAL AND IMPERIAL FINANX'E. 49 capital.* But under the arrangements as they existed prior to 1887 no account existed, or could exist, showing, as regards capital, the whole amounts borrowed and lent for the time being ; and showing, as regards interest, the relation between the interest paid by the nation to its creditors, together with the annual expenses of management on the one hand, and the interest received by the nation from its debtors on the other. Mr. Goschen's Local Loans Fund scheme has remedied this defect. In the first place, a special and distinct form of Esiai.iish- National Debt, called Local Loans Stock, has been separate ^ Loial Loans created, and, except for temporary purposes, all t^mi «ith moneys to be advanced by the State are obtained by deiit.' further issues of this stock ; and, in the second place, a Local Loans Fund has been created, into which are paid all moneys thus borrowed, and all other moneys applicable to local loans (i.e., interest and principal repaid, &c.), and out of which all advances to local borrowers and other outgoings are made. The capital account of this fund shows, on the receipt side, all moneys borrowed by the State for the purpose of local loans, and all instalments of capital repaid by local borrowers ; and, on the payment side, all ad- vances made to local borrowers, and also (in the form of cancellation of Local Loans Stock) all repayments of capital, if any, made by the State. The income account of the fund shows, on the receipt side, all the payments of interest made by local borrowers ; and, * Finance and Politics, ii., 180-183. E 50 FINANCE OF 1887—1890. on the payment side, the dividends on Local Loans Stock, the interest on temporary loans borrowed by the State, and expenses incurred in carrying on the business of the fund. In addition, a sum of £130,000 a year is charged to the income account as a sinking fund for the repa3anent of the five millions and a- half of bad debts above referred to. If, after making these payments, there is any surplus on the income account, it is carried to the capital account, and to that extent obviates the necessity of further bor- rowings. It is thus possible to see by a glance at this account what amount the nation has borrowed ; what amount it has lent ; what sums are overdue ; and whether the annual incomings and outgoings Two annual show a surplus or a deficiency. Two annual accounts 3.CCOIllltS published, have been published, the one for the year ending one shows March 31st, 1888, the other for the year ending March 31st, 1889.* From the latter account it ap- pears that the Local Loans Three per Cent. Stock amounted to £40,958,707. The income account for 1887-8 showed, after the payment of all outgoings, a surplus of £78,576, which was transferred to the capital account in the accounts for the following year. The income account for 1888-9 shows no such surplus, but, on the contrary, a deficiency to the extent of about £18,000, so that this amount of annual expenses, which ought to have been paid out of income, remains unpaid. It appears to demand inquiry why there should be so great a difference between the two years — the one showing a surplus * Parliamentary Papers, 36 of 1889, and 9.3 of 1890. adeticiencv. LOCAL AND LMl'ElilAL 1 INANCE. 51 of £78,000, the other a deficiency of £18,000. If the present deficiency does not arise from temporary or accidental circumstances, the conchision seems to be that the interest charged by the State to local bor- rowers is insufficient, and that, if the fund is to re- main solvent, the rate must be raised. If further experience proves this to be the case, it will be an illustration of the value of the new form of account. The whole arrangement is one which reflects great credit on Mr. Goschen and the Treasury. A very important but very complicated subject has been disentangled and rearranged in such a manner as to make the results clear, and to leave with Parliament the responsibility of seeing that these results do not land the Local Loans Fund in insolvency. There are probably few statesmen except Mr. Goschen who would have combined the knowledge, the skill, and the perseverance necessary to make so good a job out of such a difficult, unpromising, and unpopular subject. The scheme, judging by the results, appears open cntkismbj to one criticism. The present price of the 2| per st.me. " Cent. Consols (Goschen's) is about £95, whilst that of Local Loan Stock, which is a 3 per cent, stock, is only about £100 or £101. If the price of each were in proportion to the interest, that of Local Loan Stock ought, of course, to be higher than it is, and it is open to question whether the Local Loan Stock would not have borne a higher price if, instead of being a dis- tinct stock, it had formed part of the large mass of 2^ per Cents. It is interesting to observe that Mr. E 2 52 FINANCE OF 1887—1890. Gladstone took this point in 1887. In suggesting that it would be better to make this (i.e., the Local Loan Stock) a 2| per cent, stock, he said : " Unques- tionably a new 3 per cent, stock would not represent to the public credit in so good, legible, and cheap a form as the greater stocks."* It is clear that the price of any such stock depends upon its quantity and the facility of dealing with it, as well as upon its safety and the amount of annual return. Grants out GRANTS OUT OF THE IMPERIAL EXCHEQUER TO chequer to LOCAL AUTHORITIES. Local History and Nature of these Grants. Their origin This subject is, of courso, far larger and more im- and history. pQj.|;g^^-, j; than that of the loans. It raises most serious questions, not only of finance, but of social politics. These grants have long formed a difficulty with suc- cessive Governments. The burden of direct local taxation, in the form of rates upon the occupier, who almost always pays them in the first instance, and upon the landowner, who may, and in many cases does, lose rent in consequence, has been a constant grievance, and this grievance has of late years been aggravated by the new duties thrown on local au- thorities and the consequent increase in the rates. Under these circumstances, the pressure for relief out of the Imperial Exchequer has been such that few Governments have been willing, and none able, to withstand it. A system has consequently grown * Hansard, April 25th, 1887, p. 440. LOCAL AND IMPERIAL FINANCE. 53 up of doling out from the Imperial pocket, in re- sponse to the most pressing applications, various annual sums, to be applied by local authorities to special purposes and in special ways dictated to them either by Parliament, or by some one of the offices of the Central Government. The sums annually charsred rii«"- . ... J r> aiiiounl. on the public revenue m aid of local taxation — ex- clusive of the Education Grant — appear to have in- creased from a million and a-half in 1858 to upwards of six millions in 1887. The principal additions were made in the years 1866 to 1869, 1873 to 1875, and 1878 to 1882.* I am, however, unable to analyse these figures. They do not correspond with the grants in aid of local taxation in the Civil Ser- vice Estimates, or with any figures I can find in the Reports and Returns of the Local Government Board. The evil of such a state of thino-s is obvious. It Kviisof these places the Imperial Exchequer at the mercy of a com- jnunts. bination in the House of Commons ; it transfers the shifting of burden of local wants from the local backs which ought to bear it to the back of the nation which, as a general rule, ought not ; it exempts local property from the burden of the expenditure by which that property benefits, and throws that burden on the in- dustry, capital, and consumption of the whole country. But this transfer of burdens is, perhaps, the least part of the evil. The more serious consequence is the in- nemoraiisa- road it makes on the principle of local self-govern- sovemment. * See Mr. Childers' Return, I'jirliaiaontary Paper *294 of 1889, p. 5. 54 FINANCE OF 1887—1890. ment. When, and so far as, counties, towns, and dis- tricts manage their own business and pay for their expenses by means of taxes imposed by their own representatives on themselves, they are compelled carefully to examine their own wants ; to measure them against their own resources ; to ascertain accurately what is wanted, and to do that and no more ; and to do it in the most efficient and economical way. It is in such a course of action that good local government consists ; it is by such proceedings that public spirit, independence, self-control, and all the great qualities which make Ideal of good citizens are tested and developed. The ideal tioii. 1 " " condition of finance in a perfect system of local self- government is one in which each local authority levies its own taxes upon its own subjects within its own area ; in which it has the power of applying the proceeds of these taxes, within certain limits fixed by general law, for the local advantage of its own citizens ; and in which it has power to increase or diminish its taxes, at its own discretion, according to its means and its wants. If the present system of rating within a given area for the purposes of that area embraced all property within the area, and were just in its incidence on that property, it would fulfil these conditions. But we know that it does not. All purely personal property, as well as some of the largest and most important interests in land, escape from rating ; and hence many of our present diffi:cul- ties and the pressure for Imperial relief, bringing in its train the evil results referred to above. LOCAL AND I>ri'EIl[AL FINANCE. 55 It may be said that I have exaggerated this evil, Dt-parture because the local ratepayer is also an Imperial tax- in "1. Constable, present average ... « itli thei).iv _ ci 1 T ,„- other ■ 2. boldier... similar 3 ^ 3 seaman R.N classes. 4. Highest unskilled and lowest skilled labourer 67 12 ... 67 12 "The foregoing table shows that the present pay and pen- sion of the constable compare as follow with those of the other classes : — Under Pre- sent Scale, per Cent. " 1. Constable more than the soldier ... ... 57| 2. Constable more than A.B. seaman R.N. ... 59 3. Constable more than highest unskilled and lowest skilled labour 34^ " This table does not show the whole of the advantages that the constable enjoys compared to Class 3. Constables have the right to expect, and a large proportion of them ac- tually receive, promotion to higher grades with increased rates of pay and pension, whereas in the labour market it is understood that the unskilled labourer seldom rises into the ranks of the skilled, nor do those in the lower grades of skilled labour frequently advance to higher grades. Con- stables have also allowances, such as clothes, fuel, medical attendance, and, in a proportion of cases, lodgings at cheap rates ; while, on the other hand, their wives are not allowed to trade, and they are liable to removal from one district of London to another. These considerations are all omitted, but, if included, would no doubt make the difference in favour of the constables still more marked." 2. As regards pension alone. " Assuming constables to retire after an average service of only twenty-two years, their pensions compare with those of the other classes as follows : — LUCAL AND LMPEKIAL FINANCE. 101 Per Cent. " Constables more than civilians of similar position... 30 Constables more than soldiers 82 Constables more than A. B. seaman 89 Constables more than petty officer R.N. ... ... 17 " If the constables serve for twenty-five years, even under the existing scale, their pension is more than double that of the soldier and the sailor, while it exceeds that of a Civil servant and petty officer by 44 and 46 per cent, respectively." It further appears that the pensions of the Metro- Gi.nving ,. ,^ 1- • 1 1 • • pension politan Police constitute a very heavy and increasing ^un.i. charge. In his report of June last* Mr. Finlayson, the Government actuary, says : — " The number of pensioners is rapidly increasing and the average annual pension to each pensioner is also increasing. The charge for pensions last year was £197,000. It will pro- bably surpass £200,000 this year under a continuance of the present system. In 1895 it is likely to be £250,000 a year, and by 1900 not far from £300,000 a year." And he afterwards estimates the ultimate pension charge for 14,250 men at the existing scale at £520,000 a year, which will be increased to £556,500 when the 1,000 men whom Mr. Matthews is adding to the force come on the pension fund. Mr. Matthews is, as he has told us, increasing the Recent in. force by 1,000 men, thereby, of course, increasing the nuniiHis, expense of pay and pension proportionately. He has peiisi'..ns. also, since the above tables were published, as we are informed by the newspapers, raised the active pay of the present force, though by what amount we do not yet know. Their pensions have also been * Parliamentary Paper 6075, 1890, p. 191. 102 FINANCE OF 1887—1890. Tendencies towards in- crease of expense. raised by the Police Act of last Session.* The effect of the Bill, as originally proposed by the Govern- ment, was to give each policeman an absolute right to a pension of thirty-fiftieths of his pay after twenty- five years' service. The amount of the pension was raised by Mr. Matthews in the House to thirty-one- iiftieths. What the aggregate effect of all these changes will be we do not yet know. But it is obvious that they will increase the aggregate immediate expense of the force ; they will increase it still more when pensions come into full operation ; and they will increase the disparity between the remuneration given to the police and that given to other classes of pubh'c servants and to other workmen. It would be beyond my limits to discuss the general question whether the work of the police is such as to require much larger pay and pension than is given to other classes. But one or two observations on this point may not be oat of place. In the first place, there is, I believe, no difficulty whatever in recruit- ing the police ; and in the general exodus from the rural districts to the towns, which is characteristic of the present time, the great attraction of places in the police for the best of our young countrymen forms, according to general report, a noticeable feature. In the second place, policemen have votes, and the London members are, as has been admitted in Par- liament, not inaccessible to this consideration. In * Police Act, 1890, First Schedule, and Hansard, August 5th, 1890. LUCAL AND IMPERIAL FINANCE. 103 the third place, there is a striking tendency in demo- cratic Governments, whether national or municipal, to raise the pay of muscle, and to depress the pay of brains. Whether this is a wise tendency, time will show. If democracies, with tendencies to undertake ever more and more of industrial work, refuse to pay adequately for directing and organising power, they will assuredly come to grief On the other hand, if they pay for muscle-labour extravagantly, they will also assuredly come to grief There seems to be a notion that there is some indefinite fund, call it capital or profits, or what you will, out of which wages may be raised indefinitely ; and that in raising the pay of that class of labourers which is employed by Governments, we are raising the standard of the pay of all labourers. There cannot be a greater fallacy. You cannot make a cake bigger by dividing it. The wages of labour form the first and heaviest demand on the property of the people, and if the wages of one class of labourers is increased out of due proportion, the excess will have to be made up by some deficiency or falling off in wages elsewhere. We cannot pay our policemen or other public labourers extravagantly, without diminishing the funds available for other labour. But these are considerations outside my present subject, and I only refer to them for the purpose of showing how many and how strong are the tendencies to over-pay the police, and how important it is that we should main- tain in full efficiency the ordinary constitutional checks on these tendencies. 104 FINANCE OF 1887—1890. isiiai The usual checks on extravagant public expendi- checks oil i r> i • i • i expenditure tui'e are, 01 course, to be found in the resistance and wanting. . p i • i control of the taxpayers. Were it not lor this the pressure of the public services on our Governments would be irresistible. If the Chancellor of the Ex- chequer had not the taxpayer at his back, the army, navy, and other public services would drain the life- blood of the nation. If Town Councils and County Councils did not stand in fear of the ratepayers, there would be no limit to local outlay, honest pos- sibly, but also possibly dishonest. In examining the finance of the Metropolitan Police we shall find that the anomalies of its management have reduced these checks to a minimum, and that, weak as they have always been, they have been still further weakened by the action of the present Govern- ment. Expense of The whole annual expense of the Metropolitan tan Police : Policc,* accordiug to the last account, was in round vkkZ*^" numbers (excluding balances on both sides of the account) £1,600,000, and this amount will, no doubt, in consequence of the circumstances above mentioned, be larger in future years. This sum, after deducting certain special receipts from the Government Departments and other persons for special services, is made up by a rate on the Metro- politan Police area (which includes part of the Coun- ties of Middlesex, Surrey, Kent, Essex, and Hertford, but excludes the City of London), aided by an Ex- chequer grant, which is now termed an Exchequer * Parliamentary Paper 154 of 1890. LOCAL AND LMl'EKIAL FINANCE. 105 contribution. The fixed limit of the rate is 9d., but the Government contribute a sum equivalent to a 4d. rate, thus reducing the actual rate to 5d. The 5d. rate amounted last year to £731,978, and the Government contribution to £584,825.* As regards the 5d. rate, the Home Secretary has always had, and still has, power at his own discretion to levy the whole of it, and he has levied it accord- ingly ; but until this year he has had power to levy no more.f As regards the Government grant, it was before J;';;*^ropoii- 1888 made by an annual vote of the House of Com- ^;\'t',,Vi,'l'wn mons ; but by the Local Government Act of that [.'^'['.'^Jf^^^'*^ year the Exchequer grant was turned into an Ex- 'J'^'"'^- chequer contribution ; the amount was fixed for future years on the footing of the grant made in 1887 ; and it was made payable to the Receiver of the Metropolitan Police, to be by him applied to police services under the directions of the Secretary of State. J It was thus withdrawn altogether from the control of the House of Commons, and the only sum, now voted, other than the payments for special services to Government Departments, are the salaries of the Commissioner, Receiver, and Assistant-Com- missioners of Police. The effect of this change, Expendi- coupled with the uncontrolled power of the Home million and becretary over the od. rate, is to place m the hands checked, of a single Minister the control of a large and * 51 and 52 Vict., c. 41-3-4. Parliamentary Paper 154 of 1890. t 31 and 32 Vict., c. 67. X Local Government Act, 1888, 33, 24, and 27. 106 FINANCE OF 1887—1890. Power ot rating for pensions made un- limited. growing department of the public service, costing more than a million and a-half of money, without any check on that expenditure, either by the rate- payers, who pay the greater part of it, or by the representatives in Parliament of the nation, which pays the rest. Is there in the whole machinery of Government such another anomaly ? But this is not all. I have already referred to the pensions of the police and to the very large cost they must ultimately involve. In fact they have hitherto constituted one of the great difficulties of the Home Secretary. They amount at present to about £200,000 a year. To meet them there is a small special pension fund, but it is grossly inadequate, as it amounts to little more than £50,000 a year. In order to make good the deficiency, the Secretary of State has been in the habit, under the enactment mentioned below, of contributing out of the Metro- politan Police Fund, i.e., the fund out of which the active service is maintained, an ever-increasing sum, which in 1889-90 amounted to £145,769, or nearly* the same amount which Mr. Goschen now proposes to contribute from the drink duties. Mr. Matthews is, as above mentioned, increasing the force by 1,000 men, and is also increasing both pay and pensions, and to meet the additional expense he had no funds till Mr. Goschen came to his as.sistance with £150,000 out of the drink duties. This subsidy will enable him to dispense with the * Parliamentary Paper 154 of 1890 ; 20 and 21 Vict., c. 64, a. 15. LOCAL AND IMPERIAL FINANCE. 107 contribution he has hitherto made from the Police Fund to the Pension Fund, and to apply the whole of the Police Fund to the maintenance of the active force. There will consequently not, even at first, be any diminution of the present 5d. rate, but only a change in its application. This, however, is not all. There will inevitably, at no distant time, be a large it must •' . . " soon 1)6 increase in the rate. Hitherto, as above mentioned, exercised, the Secretary of State has had power to levy a cer- tain rate and no more. By the Act of this Session he has obtained power to increase that rate to an}' amount whatever which may be necessary, in order to pay the pensions as determined by the Act, and this without consulting either Parliament or the ratepayers.* As £130,000 is about the present produce of a penny rate in the County of London, some future Home Secretary will probably have, in course of time, to impose an extra 2d. rate in the Metropolitan Police area, in order to meet the charge which the present pension system must inevitably bring with it, and he will be able to do this by a stroke of the pen without consulting either the House of Commons or the ratepayers. Before the present Government meddled with the checks on Metropolitan Police, the checks on extravagant ex- tine, always penditure were extraordinarily weak. The London been weak- ratepayers, imlike any other ratepayers, had no voice whatever ; and the representatives of London * This is the effect of s. 19, sult-ss. 1 aiid 4, ami s. 32 of tlie Police Act, 1890. 108 FINANCE OF 1887—1890. in the House of Commons were not strong enough, or perhaps, intelligent enough, to look after the interest of the ratepayers. The ordinary control which the Treasury exercises over the spending departments was in this case weaker than usual, because the sum paid out of the Exchequer as a grant or contribution was not a sum which would be greater or less, according as the Treasury might fail or succeed in reducing expenditure, but a sum equal to four-fifths of the rate on the Metropolis, the whole of which was always levied and expended, and in the levy of which the Treasury had no direct interest. But two checks remained, viz., the annual vote of the House of Commons, and the limitation to a fixed amount of the rate which the Home Secretary had power to levy. Both these checks have been removed by the present Government, and the Home Secretary now stands exposed to the demands of a growing and powerful service, with arbitrary and unusual means of satisfying those demands placed in his hands, and with no force at his back, enabling or compelling him to resist them. Is it wonderful that under these circumstances the Metropolitan police should be an expensive force ? And is it not to be expected, after what has recently been done, that it will become more and more expensive ? Unsatisfac- It is a remarkable thing that, in the Parliamentary ^onon'ti!" discussions on the Bill of last Session, the unlimited Police hill, pfj^ygj. of rating London thus conferred on the Secre- tary of State was, so far as I can find, never even LOCAL AND TMI'ERTAL FIXANX'E. lOf) referred to. Several Metropolitan members did, indeed, take part in the discussions, but seldom, if ever, for the purpose of guarding the interests of the ratepayers. Some of them, so far from looking to these interests, were active in pressing on the Government an increase of the already liberal pen- sion scale, involving, of course, an increase in the rates, a pressure to which Mr. Matthews, after resist- ing it successfully in the Standing Committee, par- tially succumbed in the House.* One of these members, Mr. Baumann, distinctly stated that his object in seelcing to give London policemen an indefeasible title to a liberal pension after twenty- five years' service was to oust any control by the representatives of the ratepayers if at any future time the management of the police should be handed over to them.f Indeed, the remarkable feature throughout the very unsatisfactory discussions on this Bill was the absence of regard for the rate- payers and the pressure put on the Government to be more liberal at their expense. Nor is the case as regards the rest of England very different. The effect of the Police Act is to level up the pensions of the county and borough police to those of the London police, and few remonstrances were heard except from Scottish members, Avho gallantly stood up for their own independence. * See Report of Stamling Coiumittee, No. 317 of 1890, pp. 12, 13, for motions by Mr. Burdett-Coutts and Mr. liauinann. See also Hdusarfl, Anji;nst 5t!i, 1890; and First Schedule to the Police Act, 1890. t HiniHcird, August 5tli, p. 19o'2. 110 FINANCE OF 1887—1890. It may be that, iu the case of the police, central- isation is necessary ; it may be that the police require much more liberal treatment than any other class of public servants, or indeed of other workmen. Those are matters too large to discuss here. But when we are all professing principles of decentralisa- tion and local self-government, do not let us forget that our latest act in this important matter of the police has been one of centralisation and Imperial recrulation ; that the control of the police vote has been withdrawn even from the House of Commons ; and that, under the combined influence of Imperial subsidies, of the police vote, and of a dread of strikes, the Government have obtained an unlimited power of rating London for police pensions ; that the pen- sions of the police have been fixed on a most liberal scale, at the cost of the ratepayers, by the Imperial Parliament ; and that questions of economy have not been discussed as they would have been if the management of the police had been really local, and if those who managed the police had had to find the money and to pay the bill. I have dwelt at some length on the Police ques- tion, partly because it illustrates the general con- nection between Imperial subsidies and centralisa- tion, and partly because it is an additional argument to show that in the recent financial arrangements London has little to be grateful for — and this at a time when a newly constituted and inexperienced municipal council has to face wants in respect of water, of drainage, of thoroughfares, of improve- LOCAL AND LMPERIAL FINANCE. Ill ments of all kinds, involving an increased expendi- ture of immense though uncertain amount. Conclusion. Concerning Local Finance. To conclude : We have seen that with Mr.Goschen's Conclusions . . as to Local settlement of the Local Loans question there is every Finance, reason to be satisfied. As regards other and more important matters, the case is very different. It has been shown that in 1870 Mr. Goschen proved that the case of local taxation which most required relief was the case of the ratepaying occupier in urban districts, especially in London ; and that he proposed to grant this relief, not by doles from the Imperial Exchequer, but partly by handing over the House Duty to local authorities, and partly by shifting a portion of the burden from occupier to owner. It has also been shown that in the Government measures of the last four years these principles have been entirely abandoned ; that the ratepayers who have been most favoured have been the rural rather than the urban ratepayers ; that the pernicious system of doles from the Imperial Exchequer has been extended and intensified ; that the national finances have been endangered and embarrassed; that local independence has been weakened rather than strengthened ; and that the distribution of the Imperial doles has been unfair and unsatisfactory, especially to the Metro- polis. There is a still more serious criticism upon 112 FINANCE OF 1887—1890. the course thus adopted : that it has failed to tax the source of revenue indicated bj Mr. Goschen in 1870 — viz., the property of owners as distinguished from occupiers of land. But this part of the subject, together with the cognate subject of the Death Duties, must be reserved for another chapter. CHAPTER III. WHAT MIGHT HAVE 15EEN OR MIGHT STILL BE DONE. Land and Rent within each area a proper subject for direct Local Taxation — Inhabited House Duty — Why not transferred? — Death Duties made worse by Mr. Goschen's changes— Suggestions as to future of Local Finance — 1. Restore Probate and Alcohol Duty :— 2. Transfer Inhabited House Duty : — 3. Charge of a portion of rates on rent : — 4. Local Taxation of capital values in form of Death Duty on land — Confusions and anomalies produced by recent changes — Conclusion. In the last chapter I showed how the action of the Government had extended the system of subsidies, and pointed out some of the evils which arise from them. In the present chapter I propose to discuss the sources of revenue out of which present local resources may properly be assisted ; to consider shortly, so far as it concerns this subject, the great question of the Death Duties ; to make some general suggestions as to the steps which are now possible ; and to end with some general conclusions on the Finance of the last four years. Land and Rent within Each Area a Proper Subject for Direct Local Taxation. Besides the positive evils of the system of subsidies Reasons for which I have pointed out in a former chapter, there ami rent. 114 FINANCE OF 1887—1890. is another fundamental objection to this system, viz., that it fails to give to local ratepayers relief by taxa- tion of the special fund which forms the most natural and unobjectionable source of relief, viz., the real property -within their locality. This fund consists of local j)roperty, and is therefore the most obvious source out of which to supplement local rates. It is the source suggested by Mr. Goschen in 1870, when he proposed to enable the occupier to deduct half the rates from his rent, and when he proposed to transfer the Inhabited House Daty to the local authorities. It is a fund which is increased in value by expenditure out of local rates. It is a fund which, in urban districts, where the burden of rates is most felt, is constantly becoming larger and, therefore, more able to bear taxation. It is a fund which does not bear its fair share of Imperial taxation, and which in towns does not (unless in the case where the owner is also ratepayer) bear any direct share of local taxation at all. It is property which local authorities are accustomed to assess, and which they are, there- fore, competent to tax. It is property which it is their interest to tax fully and fairly, but which it is not their interest so to tax as to kill the goose which lays the golden eggs. It is a fund in taxing which they will not be casting a greedy glance on the public purse of the nation. Finally, it is a kind of property which is already the subject of invidious criticism, and which, if not fairly taxed, will undoubtedly be the object of dangerous attacks. All reasons — financial, political, and social — point to this source, rather than WHAT MIGHT BE DONE. 115 to Imperial funds arising from taxes on pure person- alty or taxes on general consumption, as the appropriate source from which local wants should be met. And yet this is a source which the recent 'J''^ '"^IV'^^ ^ nf taxation action of the present Government has left untouched. ;>"iwthed The land, Mr. Goschen says, has suffered heavily since iiT fallacious „.. Croschen himselt, as he has been careful to explain the negative elsewhere,* the real controversy — especially in towns, ;iss"i"i>tioii. where the burden is heaviest — is not between land and personalty, but between the occupier, or tem- * See Bi(dffet Speech of 1888, p. 13, and Local Taxation passim. on 126 FINANCE OF 1887—1890. porary tenant of capitalised real property, and the owner of that property. So far as the new Probate Duty goes to relieve the owner, the relief does not help the occupier, but helps the owner, who already pays far too little. So far as it goes to relieve the occupier who is himself the pro- prietor of personalty, it is a payment out of one pocket into another. The transfer of the Probate Duty may be a relief to the country landowners. It is to a very small extent, if any, a real relief to the urban ratepayer, and leaves his real grievance un- touched. No doubt it would be well if capitalised personalty could be made in any reasonable way to pay towards the expenses of local as well as of central government. But as it cannot be localised this cannot be done ; and where it has been attempted, as in the United States, the attempt has failed egregiously.* All the more reason why it should pay, and pay heavily, to the Imperial Exchequer ; but no reason why, if local resources can be found, it should be handed over by the Imperial Exchequer to local authorities. The objections to such a course I have already stated ; -j- and, of course, so far as the Imperial Exchequer is concerned, the only result of parting with it is to make a gap which, if filled up, must be filled up by other taxes, which will probably be taxes falling on in- dustry and consumption. + See Taxation in American States and Cities. By K. T. Ely. Pul)lislied by Crowell, New York. See also article in Times of November 14th, 1890. * See page above. WHAT MIGHT BE DONE. 127 Secondly, Mr, Goschen appears to think that be- cause he has thus localised the application of one- half of a special Imperial fund, the Probate Duty, and has added to the Succession Duty as much as makes the rate of Succession Duty equal to the rate of one-half the Probate Duty, he has done away with the inequalities of the Death Duties as between realty and personalty referred to above. For the reasons above given, I think the reasoning by which he claims to treat one-half the Probate Duty as a local rate, and to deal with the other half as the only portion of the Death-tax on personalty which has to be set against the Imperial Death-tax on realty, is altogether a fallacy. But even if it were right and politic so to divide the duty, the division would produce no equality of taxation a,s between the suc- cessor to personalty and the successor to realty. The one would still be paying a great deal more than the other, and it is little consolation to him to be told that one-half of what he pays is to go to local rather than to Imperial purposes. Let us test Mr. Goschen's reasoning by the case I ooschen's ' have given above. wisoningby o example. Under Mr. Goschen's plan, Peter, the freeholder, will pay to the State 4i per cent, instead of 3 per cent, on £4,500— £202 instead of £135— and the period in which he has to pay is slightly altered and prolonged. Martin, the leaseholder, will pay as before, £300 down ; and £130 by instalments, extending over the same periods over which Peter's payments extend. 128 FINANCE OF 1887—1890. Jack, the legatee of pure personalty, will pay £600 down as before ; but he will have the comfort of thinking that £150 out of his £600 will be paid into a fund oat of which Peter, being a landowner, wall probably get much more benefit in the shape of reduced rates than he does, whilst he will probably have to pay some other tax in order to recoup the Imperial Exchequer. Mr. Goschen's plan is like much else that he has done — sufficient to admit and emphasise the injus- tice he proposes to redress, whilst it does so little towards redressing it, and so much to introduce new anomalies and confusions, that it cannot possibly be left where it is. Mr. One other important alteration is due to Mr. Ooschcn's .—. Estate Goschen's Budget of 1889, viz., the Estate Duty. This is a new and additional duty of 1 per cent, on personal estates of £10,000 and upwards in value, and on Successions to realty of like amount. The following were Mr. Goschen's words in introducing it:— " The deficit now has reached the more manageable sum of £917,000. How is it to be met ? There are not wanting people who will suggest a very easy expedient. One half- penny on the Income-tax would cover the whole amount, and such a course would produce no friction, no remon- strances, no agitation, no resistance. The Income-taxpayers are so accustomed to be made the victims of emergencies and of financial timidity on the i)art of Chancellors of the Exchequer, that they would only be grateful because it was not a penny that had been imposed, and they were only mulcted in a halfpenny. Inventive electioneerers WHAT mi(;ht jje done. 129 have already announced that the shipbuilding proposals would involve a large increase in the Income-tax; but those who have listened to and followed the exposition of ray views as regards the Income-tax will have felt that I consider myself abso- lutely precluded from taking this easy and tempting course. I am not prepared to propose additional taxation whicli will weigh to any extent upon the struggling professional or trad- ing class, the men with incomes from £300 to £600 and £700 a year, whose situation requires them to spend all, or nearly all, that they earn — the men who have no margin, or only a very small margin, which they can lay by. I would look to the surplus which can be put by, rather than to the resources which cannot be diminished without imposing a sacrifice out of proportion to the sacrifices made by other classes of the community. The Death Duties afford me the means of reach- ing accumulations such as I have described, and accordingly it is to the Death Duties that I turn, and I look to see whether on this field I can find some constitutional way of meeting the re(juirements of the National Exchequer. I will not impose an additional tax on those whose accumulations only just suffice to produce an income which, under the Income-tax Act, is considered so small as to deserve the application of reductions and exemptions. For, on the whole, I think it will l)e generally recognised that it is the men whose fortunes are considerable who pay least in proportion to their aggregate income and property. I propose, there- fore, to look to the estates which amount to £10,000 and up- wards, £10,000 representing an income of about £300 or £400 a year, and not more. What I propose is to levy an additional tax of 1 per cent, on all estates of more than £10,000, whether they consist of realty or personalty, and to do this by means of a separate duty, partly because I do not wish to mix it up with the Probate Duty, and partly because it is not desirable that the inequalities which attach to the existing Death Duties, and which can be justified in them, should extend to the new tax. In the existing Death Duties real property, even when it passes absolutely, is always charged on the life K 130 FINANCE OF 1887—1890. interest. The new duty will be charged similarly on both realty and personalty — that is to say, on the capital value when the property passes absolutely, and in the case of realty or personalty passing for limited interests under settle- ment, on the interest actually taken by a successor. I estimate that the yield of this new duty will be on a full year £1,000,000, but that in the present year it will produce £800,000."* Admits This proposal is of extreme importance, because it graduated is a declaration from very high authority in favour capitaUsed" of taxing capitalised property, and because it is the property. jjjQg^, decided step yet taken in favour of graduating that taxation, so as to make the percentage greater the greater the value of the property. For these pur- poses, the tax as passed is valuable as a precedent, and if it had been passed as proposed it would have been still more valuable. As it is, it has merely created new anomalies and increased existing injus- tices. But is In the first place, this new tax is charged and application, levied at once, like the Probate Duty, upon the whole value of the aggregate personal estate if of the value of £10,000 or upwards ; but in the case of land it is charged only upon any particular gift or other succession amounting to £10,000 or upwards. If a testator distributes £10,000 in personalty amongst legatees, the whole of it must pay the Estate Duty. If he distributes ten times that amount in land amongst devisees, no devisee will pay Estate Duty, unless the particular estate devised to him is valued * Budget Speech of 1889, p. 17. WHAT MIGHT BE DONE. 131 according to the low and artificial valuation of the Succession Dutj Act, at £10,000 or upwards. In the second place, the value of the land is not, as in the case of personalty, the present estimated market value, but a value calculated artificially upon the present actual net rental treated as a terminable annuity which is not in any case to exceed ninety- five years. In the third place, the Duty on personalty is to be paid at once — that on land by instalments, as in the case of Succession Duty. Applying this to the illustration given above, the iiiiwtration incidences of the new Estate Duty on Peter, Martin, and Jack would be as follows : — Peter will pay nothing, because his net rental of £300 a year would not, when capitalised according to the statutory rules, amount to £10,000. Martin and Jack will each pay, in addition to what they now pay, 1 per cent, on £10,000, or, in other words, each will pay an additional £100 ; and they will pay this down at once. The gross injustice of the old Death Duties is thus tih- chancres very greatly aggravated by the recent changes ; new tii.scheii" anomalies are introduced ; together with an amount yated exis't- of confusion which makes the system almost unin- una coiifu- telligible. There are two good points in Mr. Goschen's changes. In the first place, his intentions, rather than his performances, have called fresh attention to the injus- tice of the present Death Duties, and have opened a K 2 132 FINANCE OF 1887—1890. Certain prineiplCH of future refonn su'4 Kested. door which will not easily be shut. In the second place, he has left the whole subject, which was con- fused enough when he took it in hand, in a state of muddle in which it is impossible to leave it. These duties, which form so important a part of our taxa- tion, are now in such a state of complication as to make it very difficult even for an expert to under- stand them. They differ according to the degrees of relationship. They differ according to the nature of the property — realty, leasehold, settled personalty, unsettled personalty. They differ according to the amount of the property. They differ according to the different methods of valuation applied to different sorts of property. Each of these differences is com- pound in itself, and when the differences are com- pounded with one another they form a mass of com- plexity and confusion which was a disgrace to our finance before Mr. Goschen meddled with these duties, and which his action has made much worse. A good idea of the variety and complexity of these duties may be obtained from a useful publication by Mr. E. Harris, of Somerset House (Clowes and Sons), in which he has cast the different categories under which the Death Duties fall into a tabular form. How many they are, when all are numbered, it beats me to say — but certainly some hundreds. To attempt in such an article as this to grapple adequately with this great subject, and to say fully and precisely what should be done in the matter of the Death Duties, is beyond my scope. There are, how- ever, some points of principle towards which Liberals WHAT MKJIiT BE DONE. 133 should steadily set their faces as objects to be achieved : — 1. Capitalised property, whether real or personal, should be made to bear a larger share of the national, and, where possible, of local, burdens than it now bears. 2. Capitalised realty should be made to bear as heavy a share of these burdens in proportion to its value as capitalised personalty. 3. Freeholds and leaseholds should be treated alike. 4. The burdens on capitalised property, real or personal, should be graduated so that the larger properties shall bear a larger pro- portion of taxation, 5. In order to carry these reforms into effect, real and personal property should on death be placed in the hands of one single adminis- trator, with power to charge the whole estate, or any part of it, with the requisite taxation. There are two preliminary questions of principle other ques- which any reforming Minister will have to encounter principle before determining by what methods to attempt dded. these objects, viz. : — 1. Whether to maintain the existing distinctions founded on nearer or more distant relationship to the testator or ancestor ? This is largely a question of popular feeling. 2. Whether to assimilate the present mode of charging personalty, viz., by an immediate payment, 134 J-INANCE OF 1887—1890. to the present mode of charging realty, viz., by in- stalments ; or whether to assimilate the mode of charging realty to that of charging personalty by making both payable at once ? The latter, though better and more convenient in a public point of view, is open to the objection that it makes a sale of, or charge on, the land necessary. Besides these questions of principle, there is the further question how far the existing duties can be reduced in number, simplified, and rendered intel- ligible. Their present variety and complexity is an evil only less than their injustice. The above suggestions with respect to the Death Duties are independent of their relations to local finance. What these relations should be is more fully considered below. But here it may be well to anticipate the two principal of these suggestions, viz. : — 1. That the Probate Duties should be restored to the National Exchequer. 2. That local rates should be reinforced by a municipal Death Duty on local realty. Future of a SUGGESTIONS AS TO THE FUTURE OF LOCAL fiance. Finance. Summary of Returning from this digression on the Death Xfrt* Duties, and looking to what has been done by the cominRs. present Government in the matter of local finance, and its relations to Imperial finance, we come to the following conclusions. The distinction between Im- WHAT MIGHT BE DONE. 135 perial and local finance, instead of being sharply drawn, has been made more uncertain and obscure than ever, and room has been made for still further confusion. Subsidies out of the Imperial Exchequer, condemned by every sound financier, have been in- creased and extended; the real grievance of the rates, as pointed out by Mr. Goschen, viz., the in- creased burden of new urban rates, has been neglected; * Exchequer grants to country districts have been ex- tended ; Imperial subsidies have been given on the footing of the old Exchequer grants, a distribution condemned by Mr. Goschen himself, even as lately as 1888,* as most unjust ; not a finger has been raised to remedy the grievance pointed out by Mr. Goschen in 1870, viz., the incidence of rates, and especially of urban rates, as between owner and occupier ; and even in the case of the Death Duties the tendency on the whole has been to aggravate the existing injustice. A groat opportunity has been missed ; and new difficulties have been placed in the way of future reformers; for every local subsidy once given is difficult to recall. It not only becomes a kind of vested interest, which it needs an heroic effort to reform, but forms a precedent for further misapplica- tions of public money, as Mr. Goschen has himself found in the matter of the Exchequer grants. Still, notwithstanding these difficulties, I believe that there is sufficient public virtue and public interest in the country to support a real, thorough, and sub- * Budget Speech, p. 16. 136 FINANCE OF 1887—1890. stantial reform of the relations between Imperial and local taxation ; and that the grievances left unre- dressed are so deeply felt that any Chancellor of the Exchequer who is bold enough to attempt to redress them will receive efficient support. Those who have anything to do with the public business of our large towns know how bitter is the feeling on the subject of the incidence of urban rates ; how much this feeling interferes with the physical and social improvements on which we have all set our hearts ; and how dangerous this feeling may become to the ownership of land. We are not far from an Irish land question in London. A bold and patriotic statesman may well take advantage of this feeling to put local and Imperial finance on a sound footing. What, then, are the measures to be taken for that purpose ? In this we shall find that we have to be grateful to Mr. Goschen for many valuable hints. 1. Restoration of Probate and Alcohol Duty. Restoration In the first place, I would suofgest, for reasons of Probate . ^ "" Duty. which have been fully stated above, that the half of the Probate Duty now given to local authorities should be withdrawn from them : and that the whole of the Death Duties on pure personalty should be treated as what they really are — viz., taxes which have nothing local in their character, which must be collected by Imperial officers, and which naturally fonn part of Imperial and not of local revenues. WHAT MKJIIT HK DONE. 137 This would involve a withdrawal from local funds of about £2,000,000 a year.* In addition, there is the £1,000,000 to be derived, And Drink ' r- 1 Duties to under the Act of 1890, from the new taxes on imperial alcoholic liquors. This, again, is a purely Imperial tax on general consumption, and has nothing of a local character about it. If it should hereafter be determined, in the interests of temperance, to intro- duce a system of high Licence Duties, it will have to be considered whether the present Duty should con- tinue. By a system of high Licence Duties, I mean a system which discourages the sale by retail of alcoholic liquors by very heavy duties. Such a system is said by its advocates to have been successful in some parts of the United States. These duties are there treated as matters of local tinance and local legislation, differing in different places ; and there seems to be no reason why they should not be so treated in England. But if no such system i s intro- duced, and the duties on alcohol continue as they now stand, the whole of them ought clearly to belong to the Imperial Exchequer. How, then, is this sum of £8,000,000 to be recouped to the present local ratepayers ? for I assume that in some form or other their demands, not only to this amount, but to a much larger amount, must be satisfied. * In these and lliu following liguros I am y .1. Fletclier Moulton, Q.C. Pajre and Pratt, 1SS9. lifpoi't (if Local (lovernnient Coniniittee of County Council on -Mr. Montagu's Bill, adojited hy the Council, May 21st, 1889. Evidence given to the Town Holdings Committee ; Session of 1890. tions. 14'2 FINANCE OF 1887—1890. Which of these two theories is the true one, we can- not stop to inquire. Whether the real incidence of rates is upon the occupier or upon the owner is one of the most perplexing questions in political economy, and it is probably not capable of any simple or uniform answer. The ultimate incidence of rates is certainly upon the owner in some cases, especially in agri- cultural districts ; it is no less certainly upon the occupier in other cases, especially in towns. But though we may not be able to solve this problem, it is not difficult to give practical answers to the above objection. If the burden of rates now falls on the owner, he these objec- will sustain no loss by a change which makes him pay directly that which he now pays indirectly. On the contrary, he will be relieved from the in- vidious imputation of exceptional immunity from taxation. If, on the other hand, the occupier now pays more than he ought to pay, it is just that the law should relieve him. To the argument that it cannot do so, and that the landlord will always take out in rent what he is made to pay in rates, we may reply, that if this were true, the position of the landowner must inevitably be one of great odium, and even of danger ; for a title to property which does not bear, and can- not be made to bear, its due share of public burdens is a very unsafe one. Even supposing the argument to be well founded, it would be greatly to the ad- vantage and safety of the landowner to be made to appear to pay. WHAT MIGHT BE DONE. 143 There is, however, every reason to believe that the law can relieve the occupier Taxes have a habit of sticking where they are imposed ; and, as a matter of fact, our laws have been framed on the principle that it is possible to throw the burden of local taxation on the owner. Many of our old rates, e.g., the Sewer Rates, were known as landlord's rates ; whilst in recent times Sir K Peel's Income-tax has been imposed on owners, and they are expressly prevented from contracting themselves out of it. Relief to the occupier is a burning question, and will not wait for settlement until philosophers have determined to their satisfaction the question of the ultimate incidence of rates. In the meantime, the above considerations show that we may safely pro- ceed to consider how to charge rates upon rent, with the confident hope that, by so doing, we shall not only meet a crying want, but render the title to land more stable. Putting aside this preliminary theoretical objection, the different proposals I have referred to are beset by many difficulties, and in considering them there are several features in the case which it is important to bear in mind. First, the relation between the occupier who pays Number , , , • J • 1 and variety the rates and the owner or owners is not a simple of interests . , , . T 1 1,1 i i to be taxed. one, especially in London and other great town?. There is often lease behind lease, and the complete ownership is made up of a series of different interests, beginning with the actual occupier and ending with the freehold reversioner. This makes it necessary, 144 FINANCE OF 1887—1890. in providing for the incidence of taxation, to spread it as fairly as possible over all the interests concerned. It is not only the ultimate freehold, but intermediate beneficial interests also, which ought to bear their fair share of the burden of local taxation. Here, however, there is one set of interests which raises a serious question — the interests, namely, of those who retain only a rent-charge without any reversion in the corpus of the property, or, which comes almost to the same thing, with a reversion so small as to be of little or no value. Fixed interests of this description may be rendered more secure, but are not increased in value, by the expenditure of rates, and the argument drawn from such increase fails. On the other hand, if such interests are not taxed, there will be a large and uncertain proportion of real property still remaining exempt from local taxation ; and on this ground it will probably be desirable, at any rate in the case of future contracts, that such rents should, like other rents, be subject to deduction on account of rates. The case of such rents already reserved by existing contracts presents much greater difficulties, and is further noticed below. Number Sccoudly, the taxes, the burden of which has to be of'nites.'find distributed, differ widely in their application, and in poses'' to'"^ the way in which their expenditure benefits different are"appiied. interests in the land ; but they differ in this respect by varying degrees, so that it is impossible to say that one tax ought to fall on one particular interest, whilst another ought to fall on a different interest. WHAT MKJHT I?E DONE. 145 The effect of the expenditure of a Lighting or Paving Rate is comparatively transitory, and that of a rate for the purposes of main drainage, or of the Thames Embankment, is comparatively permanent. But the benefit of neither of them is coincident v^ith any particular interest of occupation, lease, or ownership. Moreover, besides such rates as these, there are a number of rates, e.g., poor rate, school rate, and police rate, which benefit all the successive interests in the land. This consideration seems to me to make it impossible to say, with the Bill above referred to, which bears Mr. Montagu's name, that certain special rates for permanent improvements ought to be charged on the freeholder, and certain others on the occupier. Thirdly, there exists at present in this country niflficuity of an established system of valuation and rating, J^'-nt system moderately well understood by the Assessment t'ion. Committees whose business it is to make the valua- tions. It is an assessment of annual value ; it is avowedly based on rent ; and has, in the actual rents obtained in the market, a certain basis and test. When it is suggested that rates shall be based on assessments of capital values, by taking the whole capital value of the land and houses, and then charging them according to a given rate of interest on this capital value, it is, no doubt, conceivable that such a system might be adopted. But it would be a complete subversion of the system which now exists, and would need a very different machinery. This objection appears to be fatal to many of the 146 FINANCE OF 1887—1890. proposals which have been made for taxing capital values by means of annual rates.* Proposal to Fourthly, a similar objection seems to be fatal to and imiia- Mr. Moultou's ingenious plan of assessing and taxing iutei>\''* the land and the buildings upon it separately. Some valuers say they can do it. But the only ultimate bases of a valuer's knowledge are actual market values, and as the land and the houses upon it are sold and let together, no such basis can exist for a separate valuation of the two things. Moreover, the question is not so much a question between the owner of the house and the owner of the land, as a question between the owner and occupier of both house and land. Taxation of Fifthly, there is, nevertheless, a sound foundation lents not n ^ • c t ^ sufficient i.y for the contention oi the many persons who are dissatisfied with a mere taxation of rents such as was proposed by Mr. Goschen in 1870. Kent and capital value are two different things ; and rent is often no test of capital value. In the case where a lease has been paid for by a premium ; in the case of land which can be, but has not been, built on ; in the case of an old lease in an improving quarter ; in the case of land in the neighbourhood of towns, and in all the pleasant residential parts of England ; the actual rent, which is often a mere agricultural rent, bears no proportion to the real value ; and if rent alone were taxed in proportion to its amount, * The experiment lias ])een largely tried in the United States, and does not seem to have heen successful. See Taxation in Aiiicricini States and Cities, l)y R. T. Ely. Crowell, New York. WHAT MIGHT BE DONE. 147 there would be a large quantity of real property which would escape local taxation altogether. Sixthly and finally, there is the consideration that •"■^'^tinK *' •' . i-r)iitr;icts. we have to deal, not only with new contracts, but with existing contracts. As regards the latter, it is true, on the one hand, that many, if not most, exist- ing leases contain stipulations that the occupier shall pay the rates ; and it is also true, on the other, that we are certain, in the case of existing contracts, that the incidence of new and unforeseen burdens falls on the occupier and not on the owner. This sixth and last consideration is one which raises great difficul- ties — especially in cases where the interest behind the occupier consists of a fixed rent with little or no reversion, and where, consequently, such interest is not benefited by the expenditure of new rates. These different considerations appear to point to ("luiusioii some important conclusions, viz. : — wnsiiieni-** First, that, as in dealing with Imperial taxation, the best financiers have found it necessary to deal with taxes on income apart from taxes on capital, so, in dealing with local taxation, it will be necessary to keep rates on annual values or rent apart from taxes on capital or ground values. The one may be dealt with by deductions from rent, but the other must be dealt with by a separate and different tax. Secondly, that the burden of rates must be dealt with as a whole, and that it is impracticable to deal with one rate as an occupier's tax, and with another rate as an owner's tax. Thirdly, that the only principle on which a scheme L 2 tloiis 148 FINANCE OV 1887—1890. for taxing owners can be justified is the principle that at present certain important interests in land and houses now escape local taxation, and that these interests ought to bear their fair share of the burden. i'iiuiiiiu.s Lookins", then, at rates as taxes on income, we to l)G adopted in have to consider how a fair share of their burden can p;vit