Public Finance

§ 1. The characteristic features of local finance have already been sufficiently described,
*62 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.
*63 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,
*64 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,
*65 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.
*66 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.
*67 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.
*68 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.
*69 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,
*70 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.