CHAPTER V
NATIONAL BUDGETS
British Budget
Throughout the discussion of national debts we were face to face with the question of national expenditures and national revenues. Before the full significance of the present European fiscal situation can be appreciated, we must give careful consideration to the question of government budgets. Mounting public debts result from unbalanced government budgets—from government deficits. If we are to discern the future we must therefore ascertain the extent of the present fiscal deficits in the various European countries, and appreciate the extreme gravity of the taxation problem with which each is confronted. This will constitute the subject for discussion in this chapter.
How difficult, even impossible, is the task of balancing budgets in most European countries—unless correct principles are substituted for the aimless policies that now control the administration of national finances—can only be appreciated by a look at the precise figures of the various European budgets at the present time.
Attention will first be directed to the British budget, by far the most cheerful one to be considered. The figures for the years since the war are as follows:
Revenue Expenditures Deficit
1919-1920 £1,339>S7i,38i £1,665,772,928 £326,201,547
1920-1921 1,425,985,000 1,195,428,000 230,557,000**
1921-1922* 1,058,150,000 974,023,000 84,127,000**
* Estimated.
Surplus.
Real Situation
It would appear from these figures that Great Britain succeeded in 1920-1921 in balancing her budget, and that a surplus of £230,552,000 was available for debt reduction. The estimates for 1921- 1922 indicate a further surplus of £84,127,000. It would seem, therefore, that Great Britain was in a satisfactory financial position, making slow but certain progress toward a reduction of the national indebtedness.
The British financial situation is not, however, so favorable as the above figures indicate. In the first place, the surplus of 1920–1921 is more nominal than real. In all other European countries, as will be seen, sufficient taxes have not been levied to balance the budget, and as a consequence the governments have had to borrow the amount of the deficits. In Great Britain heavy enough taxes have been levied to balance the budget; but it appears that many persons have borrowed funds from the banks in order to pay their taxes. The following quotation from the Right Hon. R. McKenna, formerly Chancellor of the Exchequer and now head of the great London Joint City and Midland Bank, Ltd., indicates what has occurred in Great Britain:
"Our (taxation) experience during the last year has taught us that there is a limit beyond which trade and industry cannot be burdened without grave danger to their strength and permanence. That limit is passed when traders are forced to borrow from their banks in order to meet their liabilities to the tax collector; and it is a fact that no inconsiderable part of the expansion of credit during the year which has just elapsed was due to this cause."1 1London Joint City and Midland Bank, Ltd., Monthly Review, January, 1921, page 5.
The British method of having the taxpayers do the borrowing rather than the government, is doubtless superior to the continental method of government borrowing to make ends meet; for there is less danger of abuse of government power—less incentive to extravagance. But no one should be misled into the conclusion that Great Britain's finances are in an altogether satisfactory condition.
The estimated figures for 1921 also require some consideration. It appears that certain additional liabilities not included in the official budget will convert the £84,000,000 of estimated surplus into a deficit of £82,000,000.2 2Ibid., April 30, page 2. The severe business depression will also affect the budget in a twofold manner: (1) by increasing expenditures, mainly for unemployment insurance; and (2) by greatly reducing the receipts from taxation. Unless the British people borrow tax money much more extensively from the banks than they did last year, there is little doubt that this year will show a substantial deficit. One need not be surprised if it should amount to well over £100,000,000.
French Budgetary Situation
It is a matter of common knowledge that France has not been able since the war to make financial ends meet. That is to say, expenditures have continually been greatly in excess of revenues, the differences being secured through further borrowing—in part from the general public through the sale of bonds and in part from the Bank of France. The following figures reveal the general situation:
(In francs)
Receipts* Expenditures Deficit
1919 11,480,000,000 49,132,000,000 37,652,000,000
1920 19,735,022,000 45,987,358,000 26,252,336,000
1921** 23,262,969,977 46,321,413,889 23,558,443,912
* From taxes and miscellaneous sources, not including loans.
Estimated.
The figures given in this table are not guaranteed to be accurate. There has been so much manipulation of figures and so much loose accounting in the presentation of French budgetary information that it is impossible for any outsider to ascertain the exact situation. No one who has not examined the detailed figures can have any conception of the extraordinary nature of the accounting legerdemain that is found in the Budget General. The French budget has always been very difficult of precise interpretation; since the war it has been impossible. Only one conclusion may with safety be drawn from the figures as presented, namely, that they do not exaggerate the amount of the deficits. Moreover, the original estimates are usually greatly exceeded in the final reckoning, as the amount of the increase of the French debt indicates.
Extraordinary Budget
In order to gain a clear understanding of the French financial situation at present, it will be necessary to consider the figures of the French budget for 1921 in some detail. There are divers and sundry parts of the French budget, named in such a way as easily to lead to quite erroneous conclusions. For the 1921 expenditures they were as follows:3 3Data taken from Budget General de V Exercise, 1921; and Journal Official de la Republique Francaise, Lois et Decrets, 1921.
(In francs)
Ordinary budget 33,294,376,787
Extraordinary budget 3ยป253,209,39i
Special "recoverable" budget 15,317,184,790
Special budget 595,527,763
(639,753,400 Budgets annexes i 2,621,361,758
(600,000,000
Total 46,321413,889
These numerous budgets require explanation. It is often insisted that France really balances her budget since the revenue is equal to the ordinary budget; it is only the extraordinary and other budgets on which France is in arrears. But the fact is that the true definition of the ordinary expenditure is such expenditure as it is believed can be balanced with revenues. Whatever the estimated revenues are in any year, that is (approximately) the ordinary expenditure. If one's income is $10,000 per year and his expenditures are $12,000, let him comfort himself by saying that his ordinary expenditures are only $10,000—that the additional $2,000 is extraordinary.
There might be some point to this method of budgetary accounting if the so-called extraordinary expenditures were in any sense special or temporary. The truth is they are not temporary; they are distributed among all the regular departments of government and there is not the slightest evidence that most of them are not of steadily recurring kind. Indeed, the evidence that this extraordinary budget is a mere subterfuge is found in the fact already mentioned—that the ordinary budget is always made to coincide with the volume of estimated revenues.
It must, therefore, be concluded that for the current year the French budget—exclusive of the special and annex budgets, which will be considered presently—fails to balance by at least the amount of the extraordinary expenditures, namely, 3,253,209,391 francs. We say by at least this amount, since it is possible that the revenues will fall short of the estimates and that the expenditures will exceed the mates. The present estimates of revenue were made before it was clear how serious would be the effects of the business depression and the declining price level upon monetary profits and incomes. As a matter of fact it is already acknowledged in France that the revenues will fall much below the original estimates. The sales tax has been most disappointing, yielding less than 50 per cent of the estimates; and there is the greatest difficulty in collecting other taxes. Last year's tax revenues amounted to 17,387,390,100 francs; and there is certainly no present reason for believing that this year's totals will exceed this amount. If this proves to be the case, the deficit for the ordinary and extraordinary accounts will total about 9 billion francs.
Other Budgets
Still postponing consideration of the special "recoverable" budget, we find three budget annexes, amounting to a total of 3,861,115,158 francs. The first of these, 639,753,400 francs, represents advances of the Treasury for the operation of the state railways. The second, 2,621,361,758 francs, is for administrative expenses in connection with the manufacture of moneys and medals, government printing, the legion of honor, etc. The third, 600,000,000 francs, is for material ceded to foreign countries. This presumably includes munitions and supplies to be furnished to Poland. These annex budgets increase the total deficit to more than 12,500,000,000 francs.
Of much greater importance are the "special" budgets. The second of the two, for 595,527,763 francs, is for the "maintenance of troops of occupation in foreign countries." The first, for 15,317,184,790 francs, is supposed to be recoverable from Germany under the terms of the Peace Treaty. It includes appropriations for war pensions and for the reconstruction of the devastated areas, including administrative expenses incident thereto. If these deficits be added to the others already discussed, the total for this year becomes more than 28 billion francs.
Since the Armistice, deficits in connection with reconstruction activities have been rapidly accumulating. Funds for reconstruction, as well as for the payment of pensions, etc., are advanced by the French government on the theory that reparation receipts will eventually suffice to wipe out these accounts; hence the terms "special" and "recoverable." It will later be shown, however, that very little of the money expended by France for the reconstruction purposes or for pensions will ever be recovered.4 4See Part II on reparations.
But if one prefers to give France the benefit of an unreasonable doubt and to assume for the moment that the "recoverable" budget will ultimately be recovered, the French deficit for the year still stands at about 13 billion francs.
Additional Obligations
Indeed, it appears certain that even this stupendous figure will not tell the whole tale. According to an eminent American financier, who has devoted several months to a study of the French economic and financial situation, the Senate Commission of France estimates that in addition to the ordinary and extraordinary and recoverable budgets "the Treasury must find 18 billions more to provide for supplementary credits, stipulated repayments of external debt, arrears of payment on previous budgets, deficits on special services, reduction of advances from the Bank of France, and a billion francs of advances on the railways."
Some of these items apparently duplicate those in the budget annexes already mentioned, and some of them represent new obligations created for the reduction of old ones. But they are not all duplicate items; and if we may judge from the experience of the last two years, they will constitute very heavy additions to the deficit for the year. The financier in question estimates the total French deficit for the year 1921 at 35 billion francs, less whatever may be recovered from Germany, These figures are, moreover, based on the assumption that the estimated revenues for the year are not exaggerated.
It is, however, impossible to arrive at any very precise estimate of the probable extent of the French deficit this year. Twenty billion francs, exclusive of the 15 billions "recoverable," does not, however, appear to be an excessive figure. This would add 20 billion francs to the French debt in the third year after the war; and if Germany does not pay, it would add 35 billion francs.
It should be remembered also that the French budget figures do not include interest charges on the huge foreign debt of France, incurred during the war. Payment of interest on inter-Allied debts has been indefinitely postponed.
Belgian Finances
The condition of the Belgian budget is very similar to that of France. In the year 1920 the total expenditures were 8,578,454,000 francs and the revenues 3,020,702,000 francs, leaving a deficit of 5,557,752,000 francs.5 5League of Nations International Financial Conference, Brussels, 1920, Vol. Ill, page XI. The estimates for 1921 call for expenditure of 9,689,742,307 francs and revenue of 5,108,053,222 francs, giving a deficit of 4,581,689,085 francs. The detailed figures are:6 6For the year 1921 the figures are estimates. Data taken from The Economic Review, April 8, 1921, page 395.
(In francs) I. Ordinary: Deficit
Expenditures 3,802,840,692
Revenue 3,1 19,227,222 683,613,470
2. Extraordinary:
Expenditures 3.127,695,765
Revenue 1,692,074,000 1,435,621,765
3. Under Treaties of Peace:
Expenditure recoverable 2,759,565,850
Reparations paid 296,752,000 2,462,813,850
Total 4,582,049,085
Here is the same major classification of expenditures as in France, the same effort to make things appear better than they are. It will be noted, however, that in this case even the ordinary budget does not balance.
The German Budget
In view of the widespread expectation that the budgets of Allied nations are to find relief from the receipt of German reparations, much importance attaches to what has transpired in Germany since the Armistice in the matter of government finances. Attention may, therefore, be called to the following figures:
(In paper marks)
Expenditures Receipts Deficit
19207 7League of Nations International Financial Conference, Brussels, 1920, Paper III, page XI. 51,892,363,000 27,770,000,000 24,122,363,000
19218 8General Report on the Industrial and Financial Situation in Germany in December, 1920, Department of Overseas Trade of Great Britain, 1921, page 58. 110,200,000,000 40,000,000,000 71,200,000,000
Discouraging as these figures are, they do not tell the worst of the story. They are but preliminary estimates of expenditures and revenues; and in consequence of the disordered economic life of Germany, the estimates have to be radically changed almost from month to month. The final figures, therefore, always greatly exceed the estimates, as the statistics of mounting indebtedness clearly show. For example, between September 20, 1920, and October 27, 1920, the "floating" debt increased by 5 billion marks, an increase at the rate of more than 50 billion marks per annum.9 9Ibid., page 57. This compares with the estimated deficit for the entire year of only 24 billion marks. From April 1, 1920, to April 1, 1921, the floating debt appears to have actually increased by the staggering sum of 74 billion marks.10 10 Federal Reserve Bulletin, July, 1921, page 808.
Moreover, these budgetary figures do not include all the items of government expenditure. For example, they do not include 131 billion marks expended for compensation to German citizens arising out of the Peace Treaty, i.e., for the ships of the mercantile marine, the liquidation of German property abroad, the delivery of war material, etc.11 11 General Report on the Industrial and Economic Situation in Germany in December, 1920, Department of Overseas Trade of Great Britain, 1921. Compare also with the statistics of Germany indebtedness given on page 45 above. Nor do they include reparation payments that Germany has agreed to make, which, on the basis of exchange rates in June, 1921, would add 60 or 70 billion paper marks to the annual budgetary requirements of Germany.
Other Countries
Other European budgets in 1920 were as follows:
(000 omitted)
Ratio of Receipts to
Expenditures Receipts Deficit
Expenditures
Italy 28,450,000 dire) 9,520,000 18,930,000
Austria 33,194,000 (kronen) 20,655,000 12,539,000
Hungary 20,210,748 (kronen) 10,539,947 9,670,801
Greece 1,874,003 (drachma) 636,325 1,237,678
Portugal 235,525 (milreis) 110,414 125,111
Bulgaria 2,994,903 diva) 1,803,000 1,191,903
Czechoslovakia 10,416,771 (kronen) 7,750,771 2,666,000
Finland 1,163,968 (marks) 778,717 385,251
Poland 15,189,679 (marks) 3,127,625 12,062,054
Holland 724,192 (guilders) 615,183 109,009
Norway 584,085 (kroner) 529-937 54.148
Sweden 890,888 (kronor) 852,027 38,861
Spain 2,403,730 (pesetas) 1,842,721 561,009
Switzerland 604,066 (francs) 385.400 2x8.666 64 These figures are all taken from Proceedings of the League of Nations International Financial Conference, Brussels, 1920, Vol. Ill, page XI.
These are the figures for every country of any consequence in Europe for which relatively complete data are available. It will be seen that not a single nation outside of Great Britain even nominally balanced its budget in 1920. Even the neutrals are not making ends meet. It should be added that these figures are estimates only; and that in many cases, especially in central and eastern Europe, the final returns will show very much larger deficits than these preliminary figures would indicate.
In the year 1921, moreover, the deficits will doubtless be larger than in 1920, with scarcely an exception.13 13 An exception may perhaps be made for Italy, where inflation has been continued. This means, merely, that Italy has yet to face the music. As in the case of Great Britain and France, the finances of almost all European nations are this year suffering severely because of the business depression. Receipts from taxation will fall below the estimates; and in most nations expenditures will be enlarged in consequence of the increased volume of unemployment insurance that must be paid.
The Burden of Taxation
One of the simple formulas which one hears advanced as a solution for the European fiscal problem is that nations must raise their taxes and courageously shoulder the burdens of war cost. It will be instructive, in the light of this suggestion, to consider just how heavy a taxation burden would be required in some of the leading European countries if budgets were to be balanced by the process of raising taxes.
In the United Kingdom, according to recent estimates made by Edgar Crammond,14 14 In an address before the British Institute of Bankers, in June, 1921; published in the London Times, June 28, 1921. For further discussion of Crammond's analysis, see page 132. a British statistician, the cost of national government in Great Britain in 1920 absorbed approximately 23 per cent of the national income. That is to say, out of every $100 earned by the British people, $23 went to the government in taxes, Mr. Crammond further calculates that in view of the great shrinkage in national income in consequence of declining values and the business depression, it will require this year approximately 32 per cent of the national income to pay the cost of government. He adds that "no great industrial nation which has such urgent need of capital as Great Britain and whose capital reserves have been so severely weakened by a great war could possibly afford anything approaching 32 per cent of the entire national income for national services without endangering the whole economic fabric. For four months of the year we should all be working simply for the purpose of paying the cost of government and imperial defense." As we have already seen. Great Britain will probably not be able to make ends meet this year.
In France the total expenditures, including those for pensions and reconstruction, will this year exceed 40 per cent of the national income. Exclusive of the supposedly "recoverable" expenses, the expenditures will be at least 30 per cent of the national income. Present French tax receipts equal only 18 per cent of the national income.15 15 League of Nations International Financial Conference, Brussels. 1920, Paper IV, page 15. *fn*16 Ibid., pages 15, 16. The Italian situation is similar to that of France. In 1920 the expenditures equaled 30 per cent of the national income; while the revenues were only 13 per cent.
As regards Germany, and the countries of eastern Europe generally, because of the paucity of reliable data, it is impossible to compute with any degree of accuracy the percentage of national income that would be required to meet the present expenditures. The League of Nations Financial
1990. Paper
Conference puts the 1920 expenditures of the national government in Germany at 23 per cent of the national income and the revenues at 12 per cent.17 17 Ibid. But as we have seen in the analysis above (page 55), the German budget figures are by no means inclusive, even apart from reparations. Including reparations, there is little doubt that more than 50 per cent of the national income of the German people would be absorbed to meet the present expenditures of the German national government alone. The various state and municipal expenditures—which are more important under the federal governmental systems of Germany and the United States than they are under the more highly centralized systems of France and England—constitute a heavy additional burden.
Question of Further Tax Increase
In contemplating these figures of taxation burden, it is important to remember that the less the national income per capita in any country, the more heavily weighs the load of taxes. Wealthy nations like the United States and Great Britain might bear a taxation burden equal to 25 per cent of the national income, while such a ratio might prove impossible in poorer countries like France and Italy. The extent of the variation in tax-paying power in different countries may be seen from the following estimates of per capita national income in 1920:18 18 The figures are all taken from League of Nations International Financial Conference, Brussels, 1920, Paper IV, page 15. Later (authoritative) estimates for the United States show only a little over $600 per capita. Because of the shrinkage in values, 1921 figures will here be greatly reduced. the United States $700; the United Kingdom $445; France $265; Italy $130; and Germany $103.
The taxes collected by the federal government in the United States in 1920 equaled only about 8 per cent of the national income. Notwithstanding our relative affluence as a nation, our business and financial interests regarded this load as utterly ruinous, destructive to all initiative, and promotive of rapid economic deterioration. While our business community has probably somewhat exaggerated the magnitude of the existing taxation burden, contemplation of the American agitation for fiscal relief helps one to understand how the impoverished peoples of Europe must regard their taxation problems. It makes one question whether any further increase of taxation is politically, or economically, possible. Indeed we shall find in subsequent discussions that doubt of European ability to increase taxes—at least to anything like the extent that would be required to meet present expenditures—is well-founded.
Now if budgets cannot be balanced by raising taxes, the only other alternative is to reduce expenditures. This method has, of course, also been urged upon the statesmen of Europe. Indeed, the full formula for fiscal reform is usually to increase taxes and decrease expenditures simultaneously, so as to bring income and outgo into the necessary equilibrium. How difficult, nay how impossible, it is to reduce governmental expenditures materially so long as present conditions, both political and economic, exist, will also be revealed in a subsequent discussion. For the moment we must be content with a mere statement of the two-horned dilemma.
Burden of Domestic Debts
There is a widespread impression, however, that the internal or domestic debts of a country do not constitute a real burden on the people. Is not the money that is turned over to the government in the form of taxes paid back to the See Chapter X on economic and social disintegration. people themselves in the form of interest on the public debt, in pensions, etc.? Now it is undoubtedly true that the interest on the domestic debt and other domestic expenditures accrue to the people of any given country in the form of revenue. But the trouble with the foregoing impression is that the particular individuals who pay taxes do not usually receive back in interest, pensions, etc., anything like the precise amount of funds that they have parted with in the form of taxes. Some receive a great deal more from the government than they pay to the government; others receive a great deal less. It thus involves a wholesale redistribution of wealth. This is, no doubt, particularly the case in a country such as Great Britain where the tax burden on the well-to-do classes is extremely heavy and on the poorer classes relatively light.
What happens under such circumstances is that one class of the community furnishes the means whereby another class is enabled to live in idleness—partial or complete. A very large percentage of government expenditures goes for past services, in the form of pensions, or as interest on funds loaned to the government. Those who receive the funds are no longer rendering a quid pro quo.
In a country such as France where the national income is more evenly distributed and where the tax burden is more equitably laid, this effect of a huge domestic debt is not so great. But if France were to undertake the task of increasing taxes sufficiently to balance her budget, even there the burden on the well-to-do class would have to be tremendously increased. Even there, moreover, no small percentages of the government expenditure goes to reward past services and thus to permit people to live without exerting present economic effort.
The most serious result of unbalanced budgets and mounting national indebtedness is the effect upon the banking and monetary systems of nations, and thence upon the whole economic organization. National budgets, persistently unbalanced, will ultimately wreck the entire financial and economic system. Just why and how must, however, be left for elucidation in subsequent chapters.20 20 See Chapter VI for a general discussion of European banking and monetary systems; Chapter VII for the effects of unbalanced budgets upon the German financial system; and Chapter X for a discussion of the difficulties involved in balancing budgets and of the effects thereof upon the whole social and economic fabric.