Front Page Titles (by Subject) CHAPTER II: the budget—its preparation—the collection of revenue - Public Finance
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CHAPTER II: the budget—its preparation—the collection of revenue - Charles F. Bastable, Public Finance 
Public Finance. Third Edition, Revised and Enlarged (London: Macmillan, 1903).
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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.
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.
For the scientific use of the term ‘Budget’ see Stourm's excellent work Le Budget, 1–5.
Stourm, op. cit. ch. 3.
Stourm, 74; Wilson, Congressional Government, 171–2.
As in some of the smaller German States.
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.
Cp. Bk. ii. ch. 5, § 5.
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.
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.
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.
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.
Cp. Wagner, ii. 747.
See as to these rules Bk. iii. ch. 7.
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.