By Charles F. Bastable
In preparing this edition (which has been seriously delayed owing to pressure of other work) it has been my aim, while preserving the general character of the book, to give due place to the various recent contributions to financial theory and to the latest developments of fiscal policy in the leading countries of the world…. [From the Preface to the Third Edition]
First Pub. Date
London: Macmillan and Co., Limited
The text of this edition is in the public domain
THE VOTE OF THE BUDGET—CONTROL AND AUDIT
BOOK VI, CHAPTER III
§ 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.
*29 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.
*30 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.
*31 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.
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.
*33 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.
*34 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.
*35 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.
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.
*37 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.
§ 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.’
*39 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.
*40 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.
*41 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.
*42 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.
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,
*44 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.
*45 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.
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,’
*47 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,
*48 and thus the superior simplicity of the cash account is not counterbalanced by any serious want of accuracy.
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;
*50 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.
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.
*52 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.
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.
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,
*55 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;
*56 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.
§ 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.
*58 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.
*59 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.
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.
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.
Congressional Government, ch. 3.
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.
Parliamentary Government in England, i. 690 sq.
English Constitution, 146.
Government of England, 378. Cp. Leroy-Beaulieu, ii. 113.
Parliamentary Government, i. 740-2.
Congressional Government, 159. Prof. Adams approves, though with hesitation, of deficiency bills as a necessity.
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.
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.
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.
Works, ii. 81 sq.
Financial Reform, ch. 11.
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.
Parliamentary Government, ii. 57 sq.
Congressional Government, 175; also Bolles,
Financial History (1861-1885), 523 sq.
Le Budget, chs. 28 and 29.
Book VI, Chapter IV