The Online Library of Liberty

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• Preface to the Third Edition
• From Preface to the Second Edition
• From Preface to the First Edition
• General Introduction
• Chapter I
• Chapter Ii
• Book I: Public Expenditure
• Chapter I: State Economy. General Considerations
• Chapter II: The Cost of Defence
• Chapter III: Justice and Security
• Chapter IV: Administrative Supervision. Poor-relief
• Chapter V: Education. Religion
• Chapter VI: Expenditure On Industry and Commerce. Constitutional and Diplomatic Expenditure
• Chapter VII: Central and Local Expenditure
• Chapter VIII: Some General Questions of Expenditure
• Appendix.: On the Classification and Guiding Maxims of Public Expenditure.
• Book II: Public Revenue the Economic Or Quasi-private Receipts
• Chapter I: The Forms and Classification of Public Revenue
• Chapter II: The State Domain. Lands and Forests
• Chapter III: The Industrial Domain
• Chapter IV: The State As Capitalist. Administrative Revenue
• Chapter V: State Property.—general Considerations On Quasi-private Revenue
• Book III: Public Revenue (continued) the Principles of Taxation
• Chapter I: Definition and Classification of Taxation
• Chapter II: The General Features of Taxation
• Chapter III: The Distribution of Taxation
• Chapter IV: The Tax System: Its Forms
• Chapter V: The Shifting and Incidence of Taxation1
• Chapter VI: The Principles of Local Taxation
• Chapter VII: The Canons of Taxation
• Book IV: Public Revenue—concluded - the Several Kinds of Taxes
• Chapter I: Taxes On Land
• Chapter II: Taxes On Capital and Business
• Chapter III: Personal and Wages Taxes
• Chapter IV: Taxes On Property and Income
• Chapter V: Taxes On Consumption: Their Classification: Direct Consumption Taxes
• Chapter VI: Internal Taxes On Commodities
• Chapter VII: Customs Duties
• Chapter VIII: Taxes On Communications and Acts
• Chapter IX: Taxes On Successions1
• Book V: The Relation of Expenditure and Receipts
• Chapter I: Introductory—state Treasures
• Chapter II: Public Indebtedness, Its Modern Development
• Chapter III: The History of the English Debt
• Chapter IV: History of the French Debt, Indebtedness In Other Countries
• Chapter V: The Theory of Public Credit and Public Debts
• Chapter VI: The Forms of Public Debts
• Chapter VII: The Redemption and Conversion of Debt
• Chapter VIII: Local Indebtedness
• Book VI: Financial Administration and Control
• Chapter I: Introductory—historical Development
• Chapter II: The Budget—its Preparation—the Collection of Revenue
• Chapter III: The Vote of the Budget—control and Audit
• Chapter IV: Administration and Control In Local Finance

BOOK VI

FINANCIAL ADMINISTRATION AND CONTROL

CHAPTER I

introductory—historical development

§ 1. We recognised at the commencement of our inquiry that problems of administration and control form an integral part of the science of finance. It is not sufficient to consider public revenue and expenditure with the relation that exists between them. The constitutional guarantees for the proper application of outlay and the due and moderate levy of taxes, the machinery by which those processes are effectively carried out, and, finally, the agencies by which, and the manner in which, the public accounts are prepared and verified, have important effects on both income and outlay, which need to be studied if we want to understand thoroughly the nature and working of public economy. To the discussions of the preceding books we have to add one on ‘Budgetary Legislation’ in the widest use of the term.1

So long as financial topics were regarded as a part of applied political economy, there was some excuse for omitting to notice matters that seemed rather to belong to the domain of public law. But when we treat them as forming a distinct branch of political science, this reason loses all plausibility. At the same time it must be said that we are not directly concerned with constitutional or administrative principles and details. Legal and political conditions are of importance only in so far as they produce financial effects, and need be considered only from that particular point of view. Their more elaborate and thorough investigation must be left to the jurist or political philosopher.

§ 2. It is instructive to note that this side of public economy, though often neglected by modern writers, was the part of finance that first attracted the attention of students and practical administrators. The most important part of the financial system to those engaged in its working is the machinery by which the various state requirements are duly met, while to the contributor, the authority that taxes him, the way in which it uses its powers, and the checks on its action are the really vital matters.1

The modes of financial regulation, like the forms of expenditure and revenue have been gradually developed in the progress of society. It is unnecessary to repeat the account already given of the primitive stage in which little special regulation is requisite. The sentiment of the tribe, or, later on, of the ruler, is the all-sufficient authority for outlay or contribution. Careful official organisation and refined constitutional rules would, under such conditions, be as impossible as any of the other expedients of higher social life, e.g. the credit, or railway system, or modern constitutional government. To this earliest form succeeds the period in which the domain is the chief source of public revenue, as in the city States of Greece and Italy, and also in feudal Europe; and here the whole financial mechanism is not very different from that of any private economy. State or royal officers collect rent and administer the public property placed under their care by the methods usual at the time. Receipts are thus directly applied to meet the public wants according to the ruler's discretion. Along with this economic or quasi-private revenue may be placed the beginning of indirect taxation. The various services rendered by the ruler afford a ground for indefinite exactions, and his prerogative rights, which can easily be stretched beyond their due limits, are enforced by his servants.

When public economy has progressed thus far, methods of account and control make their appearance. The Roman Treasury was under the charge of the Quæstors, but complete unity of system did not exist, and it seems to have been the Censors who acted as finance ministers under the direction of the Senate. Even in the time of the Empire there was a separation between the distinct treasuries of the State and the Princeps, though the course of movement was towards fusion, and the official organisation for the collection and control of revenue was minutely subdivided and graded. The method of farming out the taxes on commodities and inheritances must also be regarded as a further mark of that incompleteness of system which was inherent in the ancient state economy.

Mediæval kingdoms, and such smaller bodies as the free cities were likewise forced to devise means for the due regulation of their income and expenditure. Thus methods, at first rude and imperfect, were gradually improved. The English Exchequer, with its curious and picturesque forms, was an agency of this kind, to which the King's debtors had to account, and his creditors to apply for payment.1 The Carolingian Empire had its check on accounts, as the rules of the Capitularies show, a system continued under the Capetiens, but essentially of the nature of a private economy.2

A striking characteristic of this stage is the rare and infrequent use of direct taxation. It only appears as an occasional and extraordinary resource reserved for times of emergency, and quite distinct in its nature from either the economic revenue or the dues (Auflagen) on commodities. The importance of this circumstance in the present connexion arises from the need of the contributors’ assent to legalise the employment of direct levies. However cut down and reduced in later times, it was the common law of the feudal State that direct taxation required the consent of the classes who had to pay it.

§ 3. The growth of the monarchical power from the preceding condition was gradual, and is illustrated by the history, both of the later Roman Empire and of the several European countries in the 15th and 16th centuries. The collection of revenue came more and more to assume the aspect of a public function; the ministry of finance was recognised as a government department, and the methods of control and accounting were further improved. This special progress is bound up with the whole course of political development, and can be fully explained only by reference to the actual historical conditions. The increase of royal authority, the greater cost incurred in the performance of public tasks, and the more frequent use of money in transactions, conjoined in giving higher importance to financial administration.

One consequence of the increasing centralisation of government was the inclusion of such smaller public economies as the cities and minor districts in the state organisation. The resulting absorption—total or partial—of their revenues had the natural effect of making the need for full accountability on the part of those engaged in collecting or expending public funds still more pressing. The loss of popular liberties, and the absence of due control on accounts, explain the oppression and waste that usually mark the financial practice of absolute governments. When the salutary check imposed by the opinion of the contributors is removed, it is vain to expect the observance of those maxims of prudence embodied in the canons of taxation, nor can we expect a proper supervision of the many items of expenditure.1

The secrecy in respect to public revenue and expenditure that was formerly so noticeable, and which has been dispelled by the extension of constitutional government, had extremely evil effects. On the one hand, prodigality and injustice often escaped notice, while, as an aggravation, fair and legitimate taxation and expense were through ignorance frequently regarded as grievances. Publicity and responsibility have been proved by a lengthened experience to be the necessary conditions for an efficient administration of finance. Though every country that has any semblance of a settled government must possess some of the constituents of a financial administration, and though it is possible as in the case of the Roman Empire to have a highly developed system of taxation and expenditure managed by an extensive official class, without any check on the ruler's will, yet the probability of prudent management and due adaptation to the special conditions is extremely small. Sound finance is so bound up with good government that one cannot be had without the other. Observance of the technical rules of public economy might indeed be carried out by a body of trained administrators under an absolute monarch, but unless the checks provided by the full publication of authentic accounts and the indirect influence of public opinion in some shape or other are in operation, it seems hopeless to expect it.2

§ 4. The rise of constitutional arrangements in respect to financial matters undoubtedly originated in England, and therefore it may be said that in their present form the guarantees for proper administration are the result of her example, extensively imitated during the past century by other countries. We find the principle that grants to the Crown should be voluntarily made by the Estates of the Realm definitely established in the 14th century, as also the right of inquisition into the application of the funds so provided.1 But the events of the 15th and 16th centuries practically destroyed this older system of parliamentary control, which had to be reconquered from the Stuarts. The issues of the Civil War were closely connected with the right of taxation, and even on the Restoration the supplies to Charles II. were determined by the Parliament. Votes for particular purposes—e.g. that for the navy—were limited to the amount deemed requisite in each case, though this restraint was in fact easily evaded. But the rudimentary character of financial control is very apparent during this period.

The Revolution of 1688 made parliamentary supervision and control a reality. By the expedient of an annual Appropriation Act, limiting and defining the purposes of expenditure, and the amount to be devoted to each, it became impossible, without directly breaking the law, to use the public funds in any way other than those sanctioned by Parliament. The establishment of cabinet government, with the inevitably resulting dependence of the executive on the legislature, brought the details of financial management before the Lower House, which had already asserted its superiority to the Upper one in respect to money bills.2 The annual financial statement known as ‘the Budget’ thus arose, and the many intricate rules as to the legislative conduct of financial business were developed as occasion needed.

The preparation of the materials, and the final checks on the accounts, were, as we shall see, added subsequently, and will probably undergo further change, but it is here sufficient to remark that the growth of British financial legislation and control has been quite indigenous, and in full harmony with the general movement that has made the law of the constitution so peculiarly flexible and capable of being adjusted to new conditions. Budgetary regulations are really a mass of laws and conventions in which the latter are perhaps the more important.1

§ 5. Other countries have followed the example of England, and the rules that in her case have been left elastic, and supported only by the sanction of public opinion, have hardened into the rigid provisions of a written constitution. To find the neatest expression in strict legal form of the code that governs the conduct of finance at home, we have to refer to the legislation of France, Italy, and Belgium, though of course there are variations due to peculiarities of constitutional development.

Historically, this remarkable result began with the revolt of the American colonies. The right of taxation was the actual cause of dispute,2 and the establishment of American independence involved the complete control of the representatives over the national finances, a privilege expressly provided for in the existing Constitution3 and hedged round by effective guarantees.

In France the Constituent Assembly at once asserted the principle that no taxes were legal except those voted by the delegates of the nation, but it did not extend the control of the popular will to the equally important matter of expenditure. As M. Stourm has shown,1 this task was reserved for the Restoration period, and indeed it is naturally later in order. The prevention of illegal exactions is a far more urgent work than that of securing a perfectly correct application of the supplies voted for the public service, and it is besides much easier to deal with. The rapid growth of constitutional government has brought the question of financial control into greater notice, and the general result has been a fuller recognition of the essential principles of popular consent and administrative responsibility, as they have been developed in England. The very bitterness of the disputes on these points—specially illustrated in Prussia2 —proves the tendency towards their more complete establishment.

The formation of a thorough system of audit and account is one of the latest steps in the attainment of a good financial organisation. In respect to it England has not held the same leading position. The system in use on the Continent is rather French than English in its forms and methods, and has moreover a judicial instead of an administrative character.3 Institutions of the kind have to be judged by their fruits, a test which after all may be endured without fear by the present English methods, imperfect as they may seem when abstracted from the particular instance in which they are employed. A final characteristic of modern finance in this department is the partial co-ordination of general and local income and outlay. Social and economic conditions have contributed to this centralising movement, by which the scattered elements of local finance are collected and compared with those of the State. The necessity for bringing the checks of a wider public opinion and the restraining power of the central government to bear on local action is a further reason. Careful audit and strict observance of the technical conditions desirable in any body of accounts are now regarded as indispensable in the regulation of the finances of the minor political bodies, and their natural result is to be seen in a closer relation of central and local finance.

§ 6. The preceding historical notice was requisite in order to understand the actual condition of financial method and regulation in the civilised nations of the present day. Though the varieties that still exist are by no means unimportant, either in themselves or as evidences of the differences in political development that have produced them, there is sufficient uniformity to allow of a description which will hold true generally, and the departures from which will also admit of classification and explanation. In the succeeding chapters these general features will be concisely examined.

CHAPTER II

the budget—its preparation—the collection of revenue

§ 1. Financial processes are necessarily recurrent; from the initial steps for the provision of funds to the final closing of transactions certain proceedings are required that must be repeated on every similar occasion. We may, by taking an instance of each and combining them, bring together the several stages of a financial period, and thus study the operation of modern public economy on one of its most important sides. Such a study will naturally commence with a notice of the preparations for what is known as the Budget.

This term, first applied in England to the annual financial statement,1 has in other countries and in theoretic discussion come to mean the financial arrangements of a given period, with the usual implication that they have been submitted to the legislature for approval. There is therefore a combination of the ideas of (1) a valuation of receipts and expenditure, or a public balance-sheet, and (2) a legislative act establishing and authorising certain kinds and amounts of expenditure and taxation.2 The convenience of the term as including the several steps of financial legislation and control is so great that it is in that wider sense that we shall use it.

§ 2. The first requisite in the formation of a budget is an approximately correct idea of the expenditure within the period to be considered. In order to combine efficient legislative control with regularity in payment for services and commodities, it is necessary that this estimation shall take place beforehand. Accordingly in the modern State we find that the several departments of administration have to frame what are known in England as their ‘Estimates’ some time previous to the opening of the budgetary period. The particular mechanism and division will vary in each country, but in all the general process must exist.1

The task of bringing together the scattered elements of outlay devolves on the Ministry of Finance, and the head of this department has in most countries an indefinite power of control over the expenditure. It is always open to him to remonstrate against, or at least to comment on, what appears to be extravagant outlay, and in the fullest development of this power lies a useful safeguard for economical administration. The control exercised by the Treasury in England over the spending departments, though often unpopular, is yet in this respect of the utmost value. The necessity for giving a plausible reason for every new item of expense is a hindrance to new and unnecessary claims that keeps within limits the natural tendency to increase, and checks the waste so common in public economy. Its chief defect lies in the fact that it has not sufficient expert advice and accordingly offers an indiscriminate opposition to all expenditure, prudent or the reverse. But this defect, specially prominent in time of war, is hardly avoidable under present conditions.

English methods are probably more effective than those of other countries. In France, the system of control hardly exists, while in the United States the division of authority and the influence of the Committees of Congress hinder effectual supervision.1 Still, even in those countries a finance minister with sufficient courage and determination has been able to exercise a salutary influence, as the cases of Sully, Colbert and Villèle, as also those of Hamilton and Gallatin, prove. The close connexion of the several divisions of the financial system, on which we have often laid stress, is very clearly seen in this part of the subject. Prudent reduction of outlay is quite as effective as skilful adjustment of resources.

Nevertheless, it is in dealing with the latter side of the national account that the financier's function is supposed to specially consist. It lies with him to say what under the given circumstances will be the receipts available to meet the estimated expenditure, and if there be an absence of equilibrium to suggest the best mode of restoring it. For the probable yield of existing taxes, and the receipts from the domain in its various forms, the Minister of Finance is dependent on his advisers, who direct each branch, but it is essentially his duty to propose such alterations as may seem proper, and the more definite his responsibility is made, the better is the prospect of efficient management. The creation of the budget is therefore a work of administrative art, in which the use of proper methods will very materially improve the financial position, and contribute to the public advantage.

§ 3. A number of questions naturally arise in respect to the regulation of this initial stage of action. We have spoken of the budget as covering the several financial processes of a period, but we may say that in practice this rather vague term means a year. The convenience of taking stock of the public income and expenditure, and the fact that ordinary outlay is usually repeated every year, but not oftener, as well as the recurrence of the principal physical and economic conditions in the same time, contribute to bring about this result. Even where legislative sanction is not annually sought,2 the accounts are separately stated for each year. A longer term would conceal the real variations: a shorter one would fail to eliminate accidental changes and the effect of special circumstances.

But though the yearly period is always selected, there is no agreement as to the date of its commencement. Various dates (January 1st in France, Belgium, and Austria; April 1st in England, Germany, and Denmark; July 1st in Italy, Spain, the United States, and Canada) have been chosen for the opening. The reason that has determined the adoption of these different dates is financial convenience. If the English finance year coincided with the civil one (as it did up to 1854), the budget would have to be presented either long before, or some time after, the opening of the period; but the former would make accurate calculation of receipts and expenditure almost impossible; the latter would compel expenditure without Parliamentary sanction or a recourse to ‘votes on account.’ The French budget has generally to be prepared ‘fourteen or fifteen months before the period of its execution,’1 to the detriment both of its accuracy and unity. What particular date shall be taken in each country can only be settled by reference to its legislative and administrative habits, but the aim of bringing preparation and execution as close as possible to each other should be the guide, and this accounts for the selection of different dates in different nations.

More important than the particular period are the form in which the budget is presented and the matter to be contained in it. Due arrangement and classification of the several chapters, or, in English phrase, ‘the votes,’ will make the nature and movement of expenditure much more intelligible, and also strengthen the constitutional check that the legislature possesses. A grouping by the several ministerial departments—good so far as it goes—does not suffice; the English division into ‘consolidated fund’ and ‘supply’ services, with the subdivision of the latter into ‘Army,’ ‘Navy,’ and ‘Civil Service’ votes, is not full enough, while the further breaking up into ‘votes,’ which may be for ‘millions’ or for ‘thousands,’ is too detailed, and is open to sudden changes which vitiate comparison. Either is, however, superior to the separate ‘appropriations’ of the American system, which hinder a clear presentation of the annual expenses as a whole, and therefore make effective criticism impossible.

Next to the proper arrangement of the many heads of outlay comes the question whether the total amounts, or merely the balances of the various expenses and receipts, shall be presented, or, in technical language, whether the budget shall be a ‘gross’ or a ‘net’ one. The latter is the earlier and in some respects the more natural method. In a great spending department, such as the Army, it would seem that any trifling gains should be treated as deductions from the sum of expense, with which alone the nation is really concerned. In like manner the cost of working the Post Office might seem immaterial in a financial point of view, so long as the net gain remains unaltered, a statement that is equally true of the Inland Revenue and the Customs. There is, too, the further difficulty that with an extensive state domain the presentation of the gross figures gives, as already noticed, an exaggerated idea of both expenditure and income.1 The Prussian or the Indian budget presents a very different appearance, according as the gross or net items are taken into account. But this notwithstanding, the ‘gross’ system is, on the whole, better, inasmuch as it brings all financial details under direct review. In the spending departments it prevents irregularities in disposing of public property, and in dealing with the funds so obtained; or, at the worst, it gives opportunity for bringing them to light. Again, in regard to the earning departments, it is well to have their cost of working carefully watched. The expense incurred in collecting taxation is a form of outlay that may be much reduced by suitable arrangements, and the introduction of a thorough control over it is a decided improvement. Even in the industrial departments of the State a like vigilance will prove useful. If the English Treasury sometimes keeps too tight a hand on the Post Office, its supervision removes the occasion of many scandals, though in such cases the recognition of something more than the purely financial aspect of the business should, as in the parallel instances of the Army and Navy, be secured by the concession of powers of remonstrance to the minister in charge of it.1

§ 4. Of somewhat the same character is the dispute as to the separation of the budget into distinct parts. In an undeveloped financial system the usual course was to assign a special receipt to meet each special charge. Thus the term ‘ship money’ explains the original purpose of the charge, and the ‘hereditary excise’ was designed to provide for the King's expenses. As the public economy advanced, this separation was seen to cause inconvenient complications. Some accounts had surpluses, others deficits, and their combination into a ‘consolidated fund’ supplied a remedy for this want of balance. Compensation and elimination of chance influences were better attained by the fusion.

Recently the system of special budgets for particular kinds of expenditure has been somewhat widely employed, though it is an expedient evidently calculated to confuse the public accounts, and to prevent the true situation of the finances being understood. The general rule of meeting expenditure out of income should be openly transgressed only by the use of a loan. A surplus on the ordinary budget, with a deficit on one or more extraordinary ones, is a direct infraction of the principle that the finance accounts should be submitted fully, simply, and in unity.1

Another point of some delicacy is the determination of the precise items to be included in a given budget. Starting with the intention of giving the receipts and expenses of a particular year, we may either take the actual incomings and outgoings of the Exchequer, or we may endeavour to assign to the year under notice all the revenue, whenever received, that properly belongs to it, and charge against it all expenditure incurred in it, though perhaps not paid till a much later time. In the former or English method there is a simplicity and directness that commends itself to any one who realises the benefit of those qualities in finance, while the latter appears to have the advantage of giving a more precise account of the real result of the transactions of the period at the sacrifice of a good deal of delay. This part of the subject more fitly belongs to a later chapter, but here we must note the greater difficulty of estimating under the French system, though it again has not much substantial effect.2

Lastly, there is the problem of deciding on the proper method of estimating the expenses and receipts of the approaching year. On the correctness of these estimates rests, in a great degree, the success of the budget, and no parliamentary majorities, or use of official power, can alter the hard facts of finance. Sincerity and care are both needed for success in this operation. One very natural course is to take the figures of the immediately preceding or some earlier year, generally the last for which the accounts were made up, as the basis. Another method nearly as mechanical is to take the increases during preceding years and count on a like result in the future. In reality these facts should only be regarded as elements in the calculation. The revenue and expenditure of a State do not move in a definite course; they are acted on by many distinct causes, and it is on these that the financier should frame his estimates. In dealing with expenditure the statements of the several departments concerned are the starting point, but it may happen that their requirements will prove more costly than they themselves admit, a consideration that should not be overlooked. Still, the results of experience and the great extent of the modern public economy make valuation easier than it was; special emergencies apart, expenditure is well within the field of rational prevision.1 The receipts present greater variations within the ordinary limits, though they are not subject to the great sudden changes that expenditure may show. Agricultural and industrial prosperity or adversity will leave their mark on the revenue returns. The elasticity of certain taxes has been already noticed, and the public income as a whole is sometimes liable to fluctuate. The task of estimation is therefore a work that cannot be reduced to any automatic rule. The circumstances of each country, and each particular year, have to be examined on their merits. In this respect the modern development of statistics has been a most efficient auxiliary. The financier of the present day has at his disposal materials that were unknown to his mediæval, or even eighteenth-century, predecessor. Population, banking, shipping, agricultural, and industrial statistics, together with the criticisms to which they are subjected, are available as aids in forming a judgment on the probable course of the facts material to the growth of revenue, and as these technical instruments improve we may expect even greater accuracy in the future.

§ 5. The several processes just described are essential preliminaries to a due presentation of the budget for the consideration of the national representatives. This legislative examination and approval, however important or even vital in the modern constitutional State, is nevertheless, as we saw in the last chapter, a late addition to the financial mechanism, and therefore, before considering it, we shall deal with the more general machinery by which the public revenue is brought into the Exchequer. At first the contributions in kind were delivered directly to the leader of the tribe, who also collected the economic receipts, such as they were. The State, as its organisation gradually developed, dealt with its taxes on the private or ‘contract’ system. Thus both in Greece and Rome the great mass of the public revenue was collected by farmers, or paid in directly by the dependent cities as tribute. This method, so characteristic of an ill-managed economy, continued in regard to the Roman indirect taxes to the last, and was revived in the absolutist monarchies of the sixteenth and seventeenth centuries. The other mode, viz. that of apportioning taxation to the several cities or districts, is evidently due to the establishment of contributions after conquest, and it also is an inheritance from an earlier stage.

The use of direct taxation and the increasing power of the State brought the special tax officials into more prominence. At first the supervisors of the state domain collected whatever taxes were not let out by contract. In England this duty fell to the sheriff, who, however, often obtained his office by purchase; the count discharged the same function in the Carolingian Empire. But the great source of a special official organisation is found in the customs revenue, which was more peculiarly in the King's hands. The unfortunate policy of letting out the indirect taxes was widely adhered to, as e.g. in France, where the Fermiers généraux were a power in the State. The older system of separate and privileged districts and towns continued to a great extent up to the end of the eighteenth century, so that many public levies were apportioned among the contributing groups, to be afterwards subdivided between the members of each. The farming of taxes and the method of apportionment are the most decisive marks of an imperfect fiscal system. The former puts the payment of taxes on the same footing as a private debt, while the latter interposes a distinct authority between the citizen and the State. It is not necessary here to dwell on the grievances that the farming out of revenue has produced. The Roman ‘publican’ and the French ‘fermier’ were both proverbial instances of rapacity, and the loss to the revenue was only exceeded by the sufferings of the poorer contributors. Apportioned taxes are plainly inelastic in yield, and are generally defective in distribution. Both are, however, justifiable under certain conditions. Where tax-collectors are easily corrupted and organisation is backward, farming may be the only way of making duties productive, and of meeting the expenses of collection. In like manner it is expedient to adopt the apportioned tax, where the statistical data for correct assessment are wanting, or where evasion is a serious danger.1

The recognition of the relative use of these more primitive forms does not in the least show that the collection of revenue by public officials, for the benefit solely of the public powers, is not now the right one. Fiscal practice supports this view. Every modern government has its customs department for that branch of revenue, while the internal receipts are obtained by one or more official agencies. In England the Inland Revenue Department has absorbed the several Boards that preceded it, but the Post Office necessarily preserves a separate existence. Three different departments collect the French internal revenue under the heads of direct, indirect, and stamp duties, the public industries being also separately dealt with. The Prussian finance department undertakes the main work of revenue collection, but the Ministries of Agriculture and Public Works have the management of the quasi-private receipts.

In all countries, however, the tax-system must at last come in contact with the individual citizen, and it is very prudent to make this unpleasant relation as little irksome as possible. Hence have originated Adam Smith's rules as to the ‘certainty’ and ‘convenience’ of taxation,1 as also the very general preference shown by administrators for indirect taxation, since by it the number of persons dealt with is reduced to a more manageable figure. Where direct taxation is largely used, the local authorities or their officials may be utilised for the purpose of collection, but it appears that, on the whole, central management is more effective, though the same person may conveniently be the agent of both administrations. Simplicity and rapid action are not the most conspicuous qualities of ‘self-government,’ but they are those most needed in the collection of revenue.

§ 6. The actual process by which the funds find their way from the taxpayer's pocket to the central treasury of the State must depend on the economic condition of the society. In earlier times contributions in kind would be moved by the collectors to the places where they were needed. Taxes paid in money have to be brought to the public treasure-house, and stored up for future use. The development of credit enables the whole proceeding to be carried out by the agency of banks. Thus the old English Treasury has been superseded by the Bank of England, into which the receipts flow from the various points of collection. The French system of ‘sub-treasuries,’ keeping separate accounts and transmitting their surpluses, either in coin or by the aid of the Bank of France, is more complicated and costly. There can be no doubt that centralisation, not merely of the staff but of the receipts, so easily accomplished by the aid of credit, is the best course. Backward countries must, however, make use of branch treasuries, and provide for the storing of coin at convenient points in order to reduce the expenses of its transmission;1 but whatever be the treatment of the actual material of revenue, its combination in the public accounts into a single body to be dealt with at the pleasure of the sovereign is one of the processes needful for the establishment of a proper budget.

CHAPTER III

the vote of the budget—control and audit

§ 1. The first stage in the life-history of the budget is finished when the administration has laid its proposals before the legislature. It is highly desirable that the scheme of finance so presented should possess the several qualities indicated in the preceding chapter, which may be concisely summed up as consisting in economy, timeliness, intelligibility, completeness, unity, and accuracy. In other words, the estimates of expenditure should be carefully framed, and kept down to the smallest amount consistent with efficiency; the period dealt with should be that about to commence; the arrangement and grouping of the items should be logical and easily followed; the full amounts to be received and expended, not merely the probable balances, should appear; the several sections should be brought together and treated as a whole; while the valuations should be real, and based on the best evidence attainable.

But though the observance of these rules will materially assist the deliberations of the chambers, they will not of themselves suffice to secure a good result. The parliamentary treatment of the budget, which apparently belongs to the subject of public, and especially constitutional, law and usage, has important financial bearings. The method by which expenses and taxes are voted will often account for the good or bad working of a particular system, since the checks imposed on governmental action may either be insufficient, or too severe, as, on the other hand, the legislature may be too careless, or unduly active, in regulating financial matters.

§ 2. The consideration of the budget is one of the principal tasks of a legislative session. It involves the study of a great number of detailed points which must occupy a good deal of time, and in certain cases may give rise to keen political controversy. The way in which it is approached will have something to do with the merits of the final result. In most countries the ministerial estimates are submitted to preliminary examination by a committee supposed to be specially suited for the work, and this body reports on—in effect very often recasts—the proposals of the executive. The United States system goes the farthest in this direction by placing the initiative in the hands of distinct committees. Financial measures, in fact, come from the legislature itself, though they are partly conditioned by the requirements of the public departments. The necessary consequence is the loss of all unity of plan, and a failure in almost every year to even approach equilibrium.1 England is in the other extreme: the ‘estimates’ and the proposed annual taxes are placed at once before the whole House sitting as a committee, and examined without any previous inquiry.2 Ministerial responsibility is thereby increased, as the measures that make up the ensemble of the budget are altogether the work of the Cabinet, whose liability is undivided. The committees of Continental countries, though they appear to secure fuller deliberation, are really a screen for the original preparers of the financial proposals, and divide that liability which should be definitely fastened on the administration.

Another peculiarity of the English system goes far to explain its strictness as to outlay, viz. the ancient rule that all proposals for expenditure must come from the Crown, i.e. at present from the Ministry. No addition can be made to the estimates submitted, and anything that even indirectly violates this rule is opposed to the stricter constitutional doctrine.1 All expenditure therefore originates with those who have an evident interest in keeping it within bounds, as they will have to propose the taxation required to meet it. A stronger check on the natural tendency towards increased expenditure could hardly be devised, and it is at once curious and characteristic that it should be the result of a now departed condition of things.2

The evil effect of the absence of such a rule is seen in the increased expenditure often proposed by the French Commission on the budget, and also in the Australian colonies, where, though the limitation exists, it is evaded.3 It is particularly noticeable in the United States, where members of Congress are more interested in securing expenditure desired by their constituents than in maintaining the due balance of the national finances, and therefore indulge in the operation known as ‘log-rolling,’ in which representatives agree to support each other's schemes.

§ 3. Serious constitutional disputes have arisen respecting the rights of the different chambers with respect to the budget, which, however, seem to have very little financial importance. Usage in England has given to the Commons what is practically the sole power in this department, but in other countries the Upper House retains the right to reject or amend financial legislation, and the American Senate avails itself extensively of this privilege, chiefly in the direction of increasing the appropriations of ‘the House’ for the public service. Regarded as a question of technique, it would seem that if the two Houses are to consider the budget, the discussion should be a joint one, as otherwise the work of detailed examination has to be done twice over, and unless there is some restraining rule, the ultimate outcome will be greater confusion and less conformity to any settled plan. If the legislative authority of the second chamber must be recognised, it may best be secured by confining its action to the laws necessary for sanctioning the budget, leaving the examination of the separate items to the popular chamber where they are first presented.

But whether the discussion be principally conducted in one House or separately carried on in each, the grouping of the several heads to be considered deserves attention. In this respect the general course of progress has been towards greater specialisation. From the early period in which the supplies were voted en masse, to be applied at the ruler's will to the public services, we have come to a time in which the separate heads may be numbered by hundreds. Thus the French budget, which in 1831 had only 164 chapters, has been steadily subdivided until that for 1890 has come to contain 807; and since 1831 each chapter has been separately voted.1 The English Civil Service ‘votes’ have at times reached 150, to which must be added the smaller number for the army and navy. A thorough sifting and rearrangement, especially of the former, would be a great improvement.2 The votes for each civil department might be taken in a group, with further discussion of the leading items by a grand committee. No large assembly can possibly control each of the branches with effect, though its criticisms on the larger heads may be most useful. It is even possible that each group of votes might be thoroughly examined by a separate committee, and afterwards discussed on general grounds in the House.1

From the method of separate votes or chapters, together with the principle of legislative control, follows the rule that no transfer can take place from one vote to another. A surplus on the votes for justice cannot be transferred to meet a deficit on those for education, or vice versâ. Moreover, in England each of the Civil Service votes is separate and cannot be transferred, while those for the army or navy may be used for other votes in the same department, subject to re-examination in the next budget. As the votes for these departments are few in number, and the total amount is usually very nearly spent, the possibilities of excessive outlay under this rule are not great. By a better arrangement the same method could, if needed, be applied in other departments, but rigid limitation to the amount voted under each head is doubtless a check on useless expenditure.2 A reserve fund to be employed only on the responsibility of the government, and to be replaced in the next financial period, is perhaps a better arrangement, as it draws more attention to over-expenditure.3

§ 4. The difficulty of exact adjustment and the occasional necessity for meeting unexpected demands tend to impair that unity of the budget which is one of its good qualities. In the actual arrangement of so complicated an organisation as that of any modern State, mistakes in calculation and sudden calls that no prudence could anticipate will from time to time occur. English usage has provided the agency of ‘supplementary estimates,’ by which additional amounts are voted to meet the extra requirements. This process, which has been made more frequent by the prompt closing of each year's accounts and the stoppage of transfers, is nevertheless, according to competent opinion, ‘one of the greatest financial evils.’ ‘To render parliamentary control effectual it is necessary that the House of Commons should have the money transactions of the year presented to it in one mass and in one account.’1 A system of applying for frequent additional votes would completely destroy the single budget, or at least deprive it of any value. This expedient should therefore be confined within the narrowest limits consistent with efficiency, and such is the established English policy.

In some cases, however, the amount required may exceed the funds at the disposal of the government or be wholly indefinite, as in the case of actual or threatened war, when the recognised expedient is a ‘vote of credit,’ which amounts to an authorisation of expenditure, and secures the control of Parliament, though it breaks the unity of the budget, but in the least dangerous way. The technical rules of financial management ought to be sufficiently flexible to meet such emergencies, and a special vote at once satisfies this condition, while it indicates that the proceeding is irregular and exceptional.

In other countries a like restraint has not been observed. ‘As regularly as the annual session opens there is a Deficiency Bill to be considered’ is what we hear from the United States.2 The additional credits in France for the seven years 1879–85 came to £66,200,000, or, deducting savings on other heads, to £43,400,000, an average net excess of £6,200,000.3 Belgium, Prussia, and Italy, under the form of a qualifying budget, also transgress the normal bounds of additional votes. It would seem as if a long constitutional discipline were needed to secure due attention to this point, as well as a proper budgetary system. The unity of the budget may apparently be infringed in another way. It might seem that all the expenditure and revenue should be annually voted in order to preserve complete legislative control. In fact, however, this course is neither necessary nor desirable. So long as a substantial part of the outlay is subject to the discretion of Parliament, and the mode of paying out the funds is under strict legal arrangement, there is no danger in making permanent provision for the greater bulk of the public demands.1 Certain heads of expenditure—particularly the interest on debt, and the salaries of the judiciary—are best removed from the field of party disputes. The general revenue system will not be annually changed, and it can be most conveniently fixed by permanent legislation. Such is the rationale of the English ‘Consolidated Fund,’ into which by far the largest part of the revenue comes by virtue of permanent Acts, and out of which one-third of the annual expenditure is drawn by the same authority.

This distinction between ‘permanent’ and ‘annual’ outlay and income is useful in more ways than one. It reduces the already too heavy work of voting supplies, which might indeed be further reduced by placing all absolutely needful expenditure on the Consolidated Fund. It also helps to separate the stable from the movable taxes. The income-tax performs, as we have more than once stated, a useful function in supplying unexpected demands, and it is therefore rightly an annual tax of varying amount. So, too, are some of the customs, e.g. the tea duty. The separation between the two classes of taxes might be even more strongly emphasised, though the position of the income-tax is probably sufficient for the purpose. There is, besides, an advantage in retaining the greater part of the public expenditure under the annual scrutiny of Parliament, so that until an item is unquestionable, and its amount very definitely settled, it should not be transferred to the ‘Consolidated Fund’ charges.

For a very different reason German military expenditure is voted for a period of seven years, and is therefore removed from annual debate, by which arrangement the Imperial Government is relieved from dependence on the Reichstag. Some of the smaller German States have biennial or even (as in Hesse) triennial budgets, an impossible system in any country with active constitutional life, and one which will be abandoned as the popular element becomes stronger.

The permanent settlement of some sections of income and expenditure does not really infringe on the principle of unity. For England the annual financial statement—‘the Budget’ in the English sense—brings together all the heads of expense and receipt, as well as the movement of national debt. The Consolidated Fund charges are definitely known, and ‘the Estimates’ supply information as to the remaining expenditure. The votes in committee either of ‘supply’ or ‘ways and means’ give the basis or the budgetary legislation of the year, which is in a sense supplementary to the existing laws, and, combined with them, makes up ‘the budget’ in the wider use of the term.1

In other countries the adoption of the English system has led to greater formal strictness and stronger emphasis on ‘the law of the Budget.’ Convention and usage have, however, been on the whole more successful in keeping up a high standard than definite constitutional enactments, as a comparison of English with Continental finance will amply prove.

§ 5. The general efficiency of English management is largely due to a feature of its budgetary system already referred to—viz. that which prescribes the closing of accounts at the end of each financial year. Only the actual money paid out is included in the expenses: all balances on votes lapse on each 31st of March, and if required, must be voted afresh. Only the taxes actually received are credited to the year, unpaid arrears going to the next budget. The system secures an accuracy and facility in dealing with the accounts which make their presentation soon after the close of each year a feasible measure. The consequence is that in his financial statement the Chancellor of the Exchequer is able to deal with the results of the year just closed or closing, and the prospects of the opening one. The position of the finances is distinctly known, and no need for amended returns can arise.

The French method, in which the financial year is invested with a kind of personality, and its arrears of receipt and expense come to its account at any later time, has an appearance of completeness, since it assigns to a given period all the consequences due to it. Delays in collecting taxes or postponement of expenditure may affect the English accounts,1 but by separating to each year what is really to be attributed to it this danger is avoided. On the other hand, there is the fatal objection of delay. To make criticism valuable it must be speedy. The French budget of 1880 could hardly excite much interest in March, 1883—the date of the presentation of the final law relating to it—when the Chamber was more interested in that of 1884, which had been just laid before it for the first time. It is hopeless to expect that long past transactions will be carefully examined, and therefore the adoption of a quick, even if less precise, method is preferable. But even the superior accuracy of the French system is somewhat doubtful. The arrears both of outlay and income will normally be about the same from one year to another, so that what is lost at the opening will be made up at the close. Besides, it must be remembered that the arrears are at best a small part of the total amounts.1 To gain somewhat greater precision in the small balance of a small proportion, the whole mass of accounts is surrounded by the obscurity that lapse of time must produce. Accordingly we are not surprised to find that Germany has on this point followed English rather than French example. Italy, while adopting the English method, has supplemented it by a further account of the normal position of the national finances.2

Professor Adams, who has carefully investigated this point, makes the important suggestion that the French system is an imperfect attempt to realise the principle of accruals, which is, he remarks, used in ‘the best corporation accounting.’ Instead of considering the mere cash receipts and expenditures, liabilities are ‘balanced against assets.’ The various liabilities and receipts are regarded as growing in the course of time. This system, amongst other advantages, possesses that of allowing ‘a true statement of the operations of the period’ to be made. It is difficult, he adds, ‘to say why government accounting cannot be carried on successfully on the basis of accruals,’3 though in the case of the United States inferior discipline and the absence of centralisation in the administration of accounts may be suggested as reasons.

The real explanation lies somewhat deeper. It is to be found in the character of ordinary governmental finance which deals solely with a running revenue account that can be fairly represented by payments and receipts. In the case of an industrial company, it is necessary to show not merely the incomings and outgoings, but the ‘earnings and expenses,’ for on this depends the assignment of income between the different classes of shareholders. No such difficulty exists in the case of the State. Its ‘earnings’ are only tax claims, and its liabilities are incurred for services and commodities actually used in the period. The trifling amount that runs from one period to the next may be neglected,1 and thus the superior simplicity of the cash account is not counterbalanced by any serious want of accuracy.2

Consideration of the different methods suggests that a development of the Italian system, providing a true ‘capital’ account for state finance, might be usefully employed in addition to the ordinary budget statement. This is specially important wherever there is a large industrial domain. The finances of Russia and Prussia cannot be properly understood without such an account, which is also requisite for the proper interpretation of Indian and Australian finance. But this is supplemental, and need not even be annual; a triennial or quinquennial valuation would in practice be found sufficient.

§ 6. From the legislative methods of dealing with the financial condition we have now to pass to the regulations under which the outlay of public funds is authorised and verified. The most admirable provisions respecting the preparation and vote of the budget will be useless unless there is adequate machinery to secure conformity to the determinations of the legislature. The mechanism by which the revenues are drawn from the contributors to the Treasury of the State has been already noticed;1 it remains to see how the collected public income is applied to the proper objects. The supervision of issues in England originally belonged to the Exchequer, which kept a careful but rather clumsy system in operation. With the growth of expenditure and income its methods proved defective. The accounts were many years in arrears, and a great deal of the expenditure was misapplied. The final audit of accounts was in a still more backward condition, and large sums were held by the Exchequer officials, while the different spending departments had unapplied balances in their possession. The first reforms of this evil were prepared by Burke, and carried into effect by Pitt in 1785, when he created the Board of Audit.2

Fresh abuses could not fail to arise during the long war period, and these in turn led to the reforms by which the Exchequer as a substantive institution was abolished and a better system of accounts adopted.3 Various committees of inquiry disclosed further weaknesses in the machinery of control and audit, particularly in the influence of Parliament over the testing of the accounts. The final reforms consisted in the appointment of the Committee of Public Accounts (1862), and in the combination of Control and Audit in 1866 by the appointment of a Comptroller and Auditor-General.4

The system in use at present affords valuable guarantees for the legal issue and due application of the revenue that the earning departments bring into the Treasury, i.e. the Bank of England, where it lies to the account of the Comptroller and Auditor-General. For every payment there must be the following steps: (1) a requisition by the Treasury to the Comptroller-General, having as its ground an Act of Parliament; (2) a grant of credit by the Comptroller-General, who is bound to satisfy himself as to its accordance with the terms of the law on the faith of which it is issued, and which lasts only for the current year; (3) a Treasury order to the Bank to transfer the specified sum from the Comptroller's account to that of the Paymaster-General for the particular service. There must therefore be the clearest legal sanction for both the object and amount of every grant. The Bank of England is the sole receptacle for the collected revenue, and the Comptroller-General's order the only key that unlocks its coffers.1

In France the modes of disbursement are affected by the existence of the subordinate local treasuries, from which payments are made, and whose heads profit by the public funds that they hold. The responsibility for grants rests on the particular department requiring them and on the Ministry of Finance; but though a number of distinguished financiers have laboured to made the system of control effectual,2 it is as yet defective in the absence of any external preventive authority over issues.

The Italian system has here followed the English one by requiring an authorisation from the ‘Court of Accounts’ before any payments can be made from the Treasury;3 and the Prussian ‘Curators of the Treasury’ discharge a like function in that country.

In the United States the issues are regulated by the auditors and comptrollers in accordance with a series of Acts dating from 1789, the latest of which was passed in 1894. The original idea that the Treasury was to be the sole department concerned with outlay has been gradually modified. Disbursing officers have been found necessary, and the investigation of claims has required the establishment of a special court.1

§ 7. Distinct from the control over issue and quite as necessary is the audit of accounts. There is little advantage in preventing unauthorised payments to departments if they afterwards misapply the funds received for specific purposes. To guard against this danger another duty has been placed on the Comptroller- and Auditor-General, who in this second capacity is bound to discharge the duties of the Board of Audit whose place he has taken, just as it superseded the inefficient audit of the ancient Exchequer. The work consists of two distinct parts—viz. (1) the verification of the accounts in order to see that no improper expenditure in the ordinary sense has been incurred, and (2) the appropriation audit, which inquires into the application of the funds and its conformity with the directions of Parliament.

This latter check, first applied to the navy expenses in 1832, was extended to the army accounts in 1846, and became general in 1866.2 The Auditor-General is bound within a limited period to report to Parliament on the results of his inquiry, noting any irregularities that he has discovered, and as a final barrier to misappropriation the Committee of Public Accounts goes over the expenditure again in a close and critical manner. Under such conditions no great departure from the line of expenditure marked out by the budget can escape notice, though petty errors and small illegal payments are not unknown. The weakest points of the system are (1) the fact that the Auditor-General is only an administrative official, and (2) the absence of any sufficient sanction to support the rulings of the auditing bodies, who can only report to Parliament the outcome of their investigations and the errors that they have discovered.

The United States Congress had long preceded England in this line by appointing in 1814 a Committee on Public Expenditure, to which other committees for separate departments were from time to time added.1 Owing to inefficient bookkeeping and undue extension of credits the detection of erroneous applications of funds was not easy, and a good deal of entirely illegal expenditure escaped notice. Absence of unity in the financial administration shows its effects even in this apparently mechanical part of the system, by complicating the forms of the public accounts.2

The control of the finances in France is assigned to an independent body, the Cour des Comptes, which examines the accounts judicially, and also reports to the legislature on any infractions of the law of the budget. The former power was bestowed on it by Napoleon I. at its creation in 1807; the latter was given in 1831. The two functions broadly correspond to the two duties of the Comptroller- and Auditor-General, but the French court differs in being a judicial body, not an administrative official, though its independence is perhaps less solidly guaranteed. When combined with the internal audits of the several ministries and the legislative control that the final law of the budget gives to the assembly, it would seem that the mechanism of the French system is hardly susceptible of much substantial improvement.3

Other Continental countries have followed the French model, but with certain useful modifications due to English example. The Prussian ‘Court of Accounts’ holds inquiries on the spot, and is not limited (as in France) to the examination of documents submitted to it. The position of its President nearly resembles that of the Auditor-General, and its procedure is often administrative. Several countries give their ‘Courts of Account’ a preventive control over issues of money and greater latitude in dealing with cases. Such variations do not at all affect the general truth that the conditions of a proper audit have been established in all civilised countries, and only require the existence of a sound constitutional sentiment in the legislature to make them effective.

§ 8. With the verification of the public accounts and the establishment of their conformity to the law concludes the cycle of processes relating to a financial period. In this and the preceding chapter we have shortly noted the working of the financial machine without entering into questions of constitutional law or administrative practice, and regarding simply its effect in securing the best application of revenue to expenditure. It but remains to again lay emphasis on the fact that good finance cannot be attained without intelligent care on the part of the citizens. The rules of budgetary legislation are serviceable in keeping administration within limits; but prudent expenditure, productive and equitable taxation, and due equilibrium between income and outlay will only be found where responsibility is enforced by the public opinion of an active and enlightened community.

CHAPTER IV

administration and control in local finance

§ 1. The characteristic features of local finance have already been sufficiently described,1 but, owing to the increased importance of municipal administration and the greater activity of the smaller governing bodies, it is desirable to consider briefly the financial mechanism most appropriate for their efficient working, as well as the way in which actually existing systems have been developed. In this connexion the chief distinguishing circumstance as regards local government is its subordinate position. The rules of the budget are, so to speak, set by the State to itself. Just as the sovereign can arbitrarily determine his expenditure, use compulsory power for the levy of any taxes that he desires, and decline to pay either the principal or interest of the wealth he has borrowed, so is he legally free in respect to the mechanism that he employs and the accounts that he renders. Necker's Compte Rendu was regarded as an act of grace on the part of the King, and, indeed, it is only the gradual recognition of society as a force behind, and superior to, the actual government that has supported the constitutional rules of modern States on the subject of financial procedure.

It is evident that the municipality or district is in a different position. Its powers are, legally, the result of a delegation, and it may be compelled by due process of law to account for its proceedings in regard to expenditure, levy of taxation, or borrowing. The preponderating weight of the economic element in local government also tends to assimilate its financial mechanism to that of an industrial company. The corporation of a city might almost be described as a ‘Paving, Drainage, Water-supply, Lighting, Health, and Police-protection Co.’ As a necessary consequence, there are certain general forms in which the finance of local bodies will, usually speaking, be moulded, and certain limitations will naturally be imposed by the central authority. It is this side of local finance that is just now in most urgent need of attention.

§ 2. In the course of historical development, we find the free cities of Italy and Greece brought under the centralising power of Rome, and, in particular, we notice the financial restraints imposed by imperial authority.1 Expenditure and taxation were both rigidly controlled by the officials of the State. Feudalism presents a very different picture. The absence of a strong official body and the general disintegration of authority led to the comparative freedom of local governments from financial control. Such action as was taken by the King was occasional and spasmodic, so that the towns really developed a particular kind of quasi-private economy, and managed their finances as substantially independent corporations. Even the establishment of the centralised monarchies towards the close of the fifteenth century did not at once produce a decided change. It took a long time to build up an effective administrative organisation, able to deal thoroughly with local privileges.

In England the establishment of the Elizabethan Poor Law gave new power to the smallest local unit, the parish, which had the duty of maintaining highways, as also the support of the Church, placed on it by common law. But the only controlling force was the action of the Courts, proceeding by indictment or by the issue of particular writs. The town corporations were similarly placed, and thus the financial arrangements were allowed to fall into a condition of confusion and extreme irregularity. A first step in reform was the great Poor Law measure of 1834, which gave the Poor Law Commission control over Union finance. Other measures, e.g. the Public Health Act (1875), have introduced regulations for the limitation of local debt and the presentation of proper accounts. The latest steps are those made by the Local Government Acts for England (1894) and Ireland (1898).

The regulations of the Ancien Régime were replaced in France by the Napoleonic system, with its rigorous supervision of the Communes and Departments. Though somewhat mitigated by later legislation,1 the French system is still one of administrative tutelage. Italy, Spain, and Portugal follow the same method which applies directly to financial administration.

Germany (and Prussia in particular) is somewhat differently placed. The older bureaucracy has yielded part of its power to the local bodies, and further development in this direction may be expected.

In the United States the treatment of local government on its financial side is necessarily varied, owing to the distinct types of local institutions,2 and to the fact that each State has full power in dealing with its local governments. There is, however, a pronounced general tendency towards restricting the financial power of municipalities by legislative regulation, to be enforced on application by the courts. America, like England, has only the rudiments of an administrative law, and has therefore to trust to judicial remedies.

§ 3. The several problems of the national budget ought—so it would seem—to present themselves in respect to each local body, but it must be remembered that the work of these small units is much more administrative than legislative, or, more accurately speaking, that the principle of the separation of powers does not apply in local, as it does in central, government. Hence, the first step of the budget—the estimate of expenditure and receipts for the financial period will be made by a responsible subordinate official and placed before the members of the governing body. Such is the usual course in the Poor Law Unions of the United Kingdom and the smaller municipalities. When the duties are more considerable, and the funds handled of large amount, a special finance committee is formed, and the estimates of expenditure made by other committees consolidated by it, and also an equivalent amount of revenue provided by a duly calculated rate. In fact, the most developed local budget is, so far as its establishment is concerned, somewhat like the rather crude system of the United States.1 The chief reason is, of course, the just-mentioned administrative character of local government, but it is also due to its more limited field of work and the overshadowing power of the State. A local body has only to deal with certain definite lines of expenditure, and must keep its taxation within limits both of form and amount. Another influence which prevents the full development of the local budget is the specialisation of the funds with which it deals. The State can insist on unity in its budget system, but the locality has to present different accounts for distinct branches of expenditure. Its highway rate may be different from its water rate, as a general improvement rate may be distinct from either. In England there is the further probability that separate bodies may administer different services. The Corporation, described above (§ 1), may have beside it a ‘Poor Relief Co.,’ and a ‘Free Education Co.,’ in the shape of ‘Guardians’ and a ‘school Board.’ A true budget could be secured only by combining these several heads of expense with the parallel receipts.

Recent legislation has done much for the United Kingdom in the direction of greater simplicity and uniformity as well as in securing fuller publication of financial arrangements. The general Borough rate for towns and the Poor-rate (very improperly named) for counties are the principal charges, and they both admit of definite statement and simple explanation. Thus it may be said that, when properly co-ordinated, local government can have its series of budgets, each arranged for the suitable body and prepared in correct form.

This result is attained in France by the regulating hand of the central government, and is being gradually accomplished in Great Britain. Specialisation of funds has to be retained in order to secure just distribution, but this need not hinder the establishment of a formal unity in the presentation of accounts.

The proper financial period is beyond doubt the same as that selected by the State. This has the immense advantage of permitting the combination of the national and local budgets for statistical and administrative purposes.1 It also facilitates criticism of the course of local finance, and calls attention to any decided change that may have taken place.

§ 4. The voting of the budget, which is so important a matter in the national legislature, necessarily occupies a minor part in local finance. Assuming that expenditure has been properly incurred, provision must be made to meet it, and generally speaking, this has to be done from a prearranged fund. The local body that refuses to levy a requisite rate may be forced to do so by legal penalties, or be superseded by administrative action, while the political effects that follow from a refusal of the central budget are wholly absent. Thus this part of finance is apparently a piece of ordinary routine. It would nevertheless, be dangerous to press this conclusion too far. Wise criticism of the local finances is most effective as a check on future rash expenditure, or as a hindrance to undue borrowing. When a local body has some discretion as to objects of imposition the budget needs more careful inspection in order to secure the best selection of taxes, but in any case it is only through discussion of the accounts as a whole that the body of taxpayers can be brought to consider the financial position of the local government in which they are interested.

Similar considerations apply to the separation of the items and the assignment of the charges peculiar to the period. Though not so important as in national finance, they should not be neglected. More particularly is this the case with regard to the division between ‘capital’ and ‘revenue.’ It is so easy to place expenditure to the account of capital, while receipts of the same kind are treated as revenue, that vigilance in this respect, though unobtrusive, is most serviceable. This caution is more needed when a local government possesses large economic revenue.1 Here the temptation to exaggerate the receipts and to limit allowances for depreciation and renewals of capital is so great, that the accounts demand the most vigilant scrutiny.2 Perhaps the best safeguard would be the insistence on a separate capital account for each head of trading business, but even this could in practice be evaded by charging expenses to other heads.

§ 5. Whatever be the safeguards that enlightened local opinion may provide through its examination of finance, there remains the absolute necessity for control and audit by external authority. The most elementary step in this direction is that of making members of the local government liable for any illegal expenditure that they have sanctioned. This method of ‘surcharge’ applied by the Courts or by official auditors hinders the grossest misapplication of funds. It is analogous to proceedings against company directors or agents for fraud on shareholders or principals.

This check is, however, much increased in efficiency when special provisions are made as to the amount of funds to be raised and their application. Thus rules directing that the annual rate shall not exceed a certain amount in the pound, that borrowing shall not exceed so many years’ valuation of the area charged, that expenditure for a given purpose shall not exceed a specified amount, have the effect of tightening the control of the Court or auditor who has to deal with the matter. In this respect there has been a decided improvement in the last twenty-five years. The rules prescribing and limiting local expenditure have been improved in form and substance, while the machinery of audit has been strengthened. Though defects undoubtedly still exist,1 they are being gradually removed.

§ 6. There remains, however, the great difficulty of dealing with discretionary outlay. So far as the tasks of local government are assigned, the administrators may be regarded as ‘harnessed’—to employ Gneist's conception—for the public work. It is when the element of choice comes in that the problem begins to be serious. If local government is to be a reality there must be opportunity given for mistakes, and these mistakes will injuriously affect the taxpayers concerned. If a town authority takes up the waterworks, tramways, electric lighting, and telephone service of its district; if it, in addition, provides parks, libraries, and baths, and, further, supplies public amusements on a liberal scale, the financial results may not always prove satisfactory, and it then becomes a practical question to determine whether those who actively dissented from the policy in question should be sufferers in consequence of its failure. Mere rules as to audit are quite ineffective in such a case. The only adequate safeguard is a peremptory limitation of the sphere of local activity, coupled with such regulations as will provide against the more extreme forms of mismanagement. The fact that the loss in such a case as that suggested would fall on a few is, in a sense, an aggravation of the evil, since it is, in Bentham's language, ‘concentrated.’ There is here accordingly need for a special form of control, which may perhaps be called ‘political,’ as it is to be used at its discretion by the central power, which would, after inquiry, readjust the burdens incurred.

Finally, for local as for central finance it is essential to dwell on the need for intelligence and vigilant activity on the part of those concerned. The ratepayer must watch the proceedings of those who direct his affairs, and if he is wanting in this respect, he must blame himself, in part at least, for any unfortunate result. It is only by pressure diligently used by the better citizens that the finances of town and country districts can be kept up to a high standard.

INDEX

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[1]The literature for this part of the subject has received important additions since the last edition of this work. Stourm's valuable treatise is now in its 4th edition and is paralleled by the German work of Heckel, Das Budget. Masè-Dari's Bilancio dello Stato, is specially useful for Italy. A fuller recognition of the necessity for studying budgetary legislation as a part of finance is evidenced in the space—one-fifth of the whole treatise—allotted to it in Adam's Science of Finance, and the smaller works of Plehn and Daniels also devote separate sections to this topic.

[1]For the attitude in this respect of the mediæval writers, the Germans of the seventeenth century, and Montesquien, cp. Intr. ch. 2, §§ 3, 5.

[1]See the Dialogus de Scaccario (attributed to Richard, Bishop of London), printed by Madox in his History of the Exchequer; also by Stubbs, Select Charters, 168–248. Hall's Antiquities of the Exchequer gives a more popular account of the working of the system.

[2]See Bouchard, Système Financier, 21 sq., on this point.

[1]Cp. Bk. iii. ch. 7. The condition of the French finances just before the Revolution affords an admirable illustration of this statement.

[2]The case of France under the Ancien Régime referred to in the preceding note is also instructive in regard to the evils that result from concealment and the absence of responsibility. At present the Russian and Indian finances show by their contrast the advantage that publication of vouched accounts and the power of opinion may be, even to a subject country.

[1]Hallam, Middle Ages, iii. 84–86; Stubbs, Const. History, ii. 543–601. For the development of parliamentary taxation see Gneist, History of the English Constitution (2nd ed.), 388–93.

[2]Hallam, Const. History, iii. 27–32.

[1]Dicey, Law of the Constitution, 328–9. See, for a fuller account of the actual regulations, Anson, Law and Custom of the Constitution, ii. ch. 7.

[2]In the colonial period there had been frequent disputes with the governors as to the granting of supplies and the preparing of estimates.

[3]‘The Congress shall have the power to lay and collect taxes.’ Art. i. § 6. ‘All bills for raising revenue shall originate in the House of Representatives.’ Ib. § 7. ‘No money shall be drawn from the Treasury but in consequence of appropriations made by law; and a regular statement and account of the receipts and the expenditures of all public money shall be published from time to time.’ Ib. § 9.

[1]Le Budget, 40 sq.

[2]Stourm, op. cit. 23–5.

[3]Cp. Bk. vi. ch. 3, § 7, for further explanation.

[1]Derived from the French bougette, the bag in which the minister carried the papers and accounts necessary for his statement. The term seems to have come into use about 1760. Dowell, ii. 139.

[2]For the scientific use of the term ‘Budget’ see Stourm's excellent work Le Budget, 1–5.

[1]Stourm, op. cit. ch. 3.

[1]Stourm, 74; Wilson, Congressional Government, 171–2.

[2]As in some of the smaller German States.

[1]Stourm, 77. The alteration of the French financial year has been often suggested. See the discussion of the matter by Léon Say, Finances de la France, iii. 315–59.

[1]Cp. Bk. ii. ch. 5, § 5.

[1]It seems plain that the head of a great industrial department, such as the English Post Office has become, should have the same weight as the heads of the Army and Admiralty admittedly possess. The difficulty of applying the strict administrative control necessary in the case of public expenditure to industrial undertakings is one very weighty argument against extension of the state domain. The Treasury could hardly keep a Railway Department within bounds.

[1]The French method of adding smaller budgets to the ordinary one is therefore a violation of principle and injurious in practice. Stourm, 187. It may, however, be said that the Budget sur Ressources spéciales is really a statement of one part of local finance. But it is incomplete as regards the communes, and in fact of no service as a mode of control.

[2]The respective merits of the French compte d'exercice and the English compte par gestion are carefully considered by Stourm (ch. 5), who is perhaps too favourable to the former.

[1]The estimates of expenditure in England for the three years April 1, 1889, to March 31, 1892, as compared with results, show an error of only £137,000 in a total of £264,000,000, or a little over 1s. per £100.

[1]Cp. Wagner, ii. 747.

[1]See as to these rules Bk. iii. ch. 7.

[1]The system adopted in India, where 266 district treasuries are established. By the use of bills the transmission of funds, so far from being an expense, is made to yield a slight profit.

[1]Wilson, Congressional Government, ch. 3.

[2]M. Stourm supposes that the attendance in Committee of Supply is smaller than in the case of ordinary sittings. Le Budget, 273. He has been followed by Masé Dari (Bilancio, 112) and Adams (Finance, 147–8). The latter asserts that ‘as a matter of fact none but the leaders commonly attend.’ This view is altogether erroneous.

[1]Todd, Parliamentary Government in England, i. 690 sq.

[2]‘This principle is commonly involved in mediæval metaphysics as to the prerogative of the Crown, but it is as useful in the nineteenth century as in the fourteenth, and rests on as sure a principle.’ Bagehot, English Constitution, 146.

[3]Hearn, Government of England, 378. Cp. Leroy-Beaulieu, ii. 113.

[1]Stourm, 295. In the United States the separate appropriations amount to about two thousand.

[2]In 1900 the votes were rearranged by the government, but the opposition at once objected to the change.

[1]The ‘committees’ of the American system have this advantage, but in their case there is no real unity.

[2]It has, however, been pointed out that this limitation may lead to extravagance by inducing a department to spend rather than surrender surplus funds. The official feeling is ‘let us use up our balance.’

[3]As in the case of the two English funds of the ‘Treasury Chest’ and ‘Civil Contingencies.’

[1]Gladstone, quoted by Todd, Parliamentary Government, i. 740–2.

[2]Wilson, Congressional Government, 159. Prof. Adams approves, though with hesitation, of deficiency bills as a necessity. Finance, 184–5.

[3]Stourm, 369–73. His figures do not quite agree with those given by Leroy-Beaulieu, ii. 104.

[1]The proper mode of providing for increased naval expenditure has been a subject of hot debate between the two great English parties. Lord Goschen preferred the permanent method; Sir W. Harcourt advocated the annual one. So long as a consistent scheme is adopted and maintained there seems to be really no important difference. The control of the House of Commons over expenditure is in either case effective.

[1]Thus the tedious process of ‘supply,’ which used to take thirty-five working days of the session, is, in the French sense, a part of the budget. By the existing rules of the House of Commons twenty days are set apart for supply, and on the last of these days all the votes that remain are put to the vote without debate. This has the effect of unduly extending discussion on the earlier and destroying it on the later votes.

[1]Peel, for example, miscalculated the yield of the income-tax for 1842 by not taking into account the fact that only one half of the tax would come in during the financial year. Northcote, Financial Policy, 41. Lowe increased some of his surpluses by manipulating the collection of the income-tax. More generally, there is no doubt that a surplus could be manufactured by starving the permanent part of the public services and throwing the additional cost of replacement on succeeding years.

[1]In France, for each of the years 1883, 1884, 1885, the uncollected receipts were about 2½ per cent. and the unpaid expenditure 11 per cent. of the total figures. Stourm, 123–4.

[2]See Masé Dari, Bilancio, 57–8.

[3]Finance, 206–7.

[1]The case given by Prof. Adams (Finance, 207), of interest for the three months ending July 31st, when the fiscal year ends on June 30th, illustrates this. The two months will run on for each year. If, e.g., the year for 1901–2 gains at the end, it loses at the beginning.

[2]In respect to semi-sovereign States, e.g., Egypt, the method of accruals might be applied with advantage in order to separate the amount available for improvements from that assigned for creditors.

[1]Bk. vi. ch. 2, §§ 5, 6.

[2]Cp. Burke's great speech on ‘Economical Reform,’ particularly Works, ii. 81 sq.

[3]Sir H. Parnell vigorously attacked the methods of control existing when he wrote (1830). Financial Reform, ch. 11.

[4]The occasional ‘committees on finance’ became the annual Committee of Accounts in 1862. The Act reorganising the control and audit department is 29 and 30 Vict. c. 39.

[1]The Bank of England by its management of the debt and its practical custody of the revenue is, in a sense, a government bank, but not a state one. Cp. Bk. ii. ch. 4, § 2.

[2]Mollien, Baron Louis, and Audriffe may be mentioned.

[3]So have also Belgium and Holland.

[1]For an admirably clear account of the U.S. system see Adams, Finance, 193–200. See also the articles on ‘The Control of National Expenditures,’ by E. I. Renick and N. H. Thompson. Political Science Quarterly, vi. 248–281, and vii. 468–482.

[2]Todd, Parliamentary Government, ii. 57 sq.

[1]According to Adams, ‘The House of Representatives has not seen fit to continue its experiment with what perhaps may be termed a legislative auditing committee.’ Finance, 200.

[2]Wilson, Congressional Government, 175; also Bolles, Financial History (1861–1885), 523 sq.

[3]Stourm, Le Budget, chs. 28 and 29.

[1]See supra, Bk. i. ch. 7; Bk. iii. ch. 6; Bk. v. ch. 8.

[1]Supra, Bk. i. ch. 7, § 4, and Bury, Student's Roman Empire, 440–2.

[1]Goodnow, Comparative Administrative Law, i. 271.

[2]See Bryce, American Commonwealth, ch. 48.

[1]Supra, ch. 2, § 2, and Adams, Finance, 125–9.

[1]British local finance has become much more intelligible since the financial year has been arranged.

[1]See Bk. ii. especially ch. 2, §§ 5, 6, 18.

[2]The movement in England towards what is called ‘municipal trading’ has greatly increased this danger. See Row-Fogo, ‘The Statistics of Municipal Trading,’ Economic Journal, xi. 12–22.

[1]The audit of the accounts of English boroughs is unsatisfactory as it is conducted by elected auditors. See Report on ‘Municipal Trading’ [305, 1900], 137–141. The Irish system is, in this respect, better.