Public Finance

§ 1. Expenditure for directly economic objects has often occupied a large place in public outlay. To foster industry and commerce was long regarded as a leading function of the State. In fact, it is to this conception that we owe the origin of finance and political economy.
*87 The great object of the
Cameralwissenschaft of the eighteenth century was to give instruction as to the right direction of national resources, and most of the earlier economic writers of France and England held that it was very important to encourage economic enterprise.

The complete revolution wrought by the combined labours of the Physiocrats and Adam Smith exonerated the State from this difficult, indeed impossible, task; but it is a vulgar error to suppose that the advocates of industrial liberty did not recognise certain definite duties of the State in economic matters. Apart from the exaggerations inevitable in so violent a change of opinion, we see that the sound sense of Adam Smith and Turgot fully understood that in several directions the Government could beneficially aid the efforts of producers.
*88 The necessities of practice have made it incumbent on States to undertake a series of duties intended for the advantage of industry and commerce.

There is, however, a distinction to be made at the outset. In one sense all state expenditure may be said to be for the benefit of industry. The armies and navies of modern States are productive of the security needed for the full development of industrial effort. The administration of justice and the maintenance of an efficient police have the same effect. A great deal of administrative supervision has, or is supposed to have, considerable influence in increasing production. One of the strongest pleas for aid to education is based on its economic value, and writers of the school of Hume would regard the inculcation of honesty and frugality as the most useful function of the clergy. So close is the consensus of social phenomena, that there is no part of public expenditure that may not aid the progress of economic production.

§ 2. But besides this more general action of the State on industry, there is a special one. Portions of the public revenue are devoted to objects either solely or principally economic; and it is the employment of this part that we have now to consider. It, again, may be divided into expenditure on industry and commerce generally, and that on special trades or employments. Of the former we may notice the following as the most usual: (i) the cost of maintaining a monetary system, as in the case of the English gold coinage; (2) the establishment and preservation of a system of weights and measures; (3) the enactment (as in some countries) of a commercial code, with possibly a special tribunal or tribunals; (4) the maintenance of agencies for facilitating communication and transport, viz., post offices, telegraphic communications, roads, railways, and canals; in the same group may be included lighthouses, surveys of coasts or new countries; (5) consular and diplomatic establishments, chiefly for the benefit of foreign trade, but with an indirect action on home industry.

The slightest glance at the above list at once suggests a criticism. Some of the agencies included, will, under proper management, yield a profit to the State, and seem therefore more fitly to belong to the domain of state industry. The English Post Office and the Prussian railways earn large net revenues for the States to which they belong, and the currency system may, by the imposition of a seignorage, be made to cover its cost, and probably leave a surplus. The answer to this difficulty is not hard to find. Granting the truth of the assertion on which it rests, the fact remains that in many cases the State has to incur còst for the objects mentioned. The gains of post offices and railways will be noticed in their proper place.
*89 There are, however, some that have a recurring deficit,
*90 which has to be met out of the funds derived from other sources. We get but one more illustration of the difficulty of drawing ‘hard and fast lines’ in social inquiry. What is in one country a cause of expenditure is in another a cause of gain as a state industry, while in a third it yields revenue through taxation.

§ 3. State aid to special branches of industry presents much greater opening for objections; but here, too, suitable cases present themselves. Among these are:— (1) The introduction of new and profitable industries In modern times this part of state action has been usually carried out by means of protective duties. The so-called ‘infant industry’ argument is one of the best of the protectionist pleas, and its theoretic force has been recognised by most economists, but the question is really a wider one. The problem before the statesman amounts to this: How far is it expedient to incur a present loss for a future gain? And on the financial side the balance of the different public wants, as also the percentage of the national income absorbed by the State, are elements to be taken into account in the actual solution. In its simplest form, encouragement is given by means of bounties on production, or premiums for the establishment of new industries. A protective duty may be regarded as a tax on the consumption of the protected article, with an equivalent bounty to the home producer; it is, therefore, in reality more complicated than a simple bounty. This aspect of the matter may be reserved for a later stage of our inquiry;
*91 but here we have to note the difficulty of escaping corruption and favouritism in the application of a policy of encouragement. In an undeveloped industrial system, such aids, if applied with wisdom, may afford a beneficial stimulus, as was probably the case with some of the measures of mediæval sovereigns. They, in some degree, occupy in economic policy the place that despotic government holds in political evolution, but appear quite unfitted for a progressive system of industry.
*92 The direct support of special branches of production from the public revenue is sure to be a diminishing item of charge in modern countries. (2) The promotion of inventions, by the inducement of state premiums, or even the encouragement of a higher standard of excellence in production by the same means, has been regarded without disapproval by Adam Smith. Their effect is not to disturb the natural distribution of employments; besides, as he remarks, their cost is insignificant.
*93 A good patent law will, however, be the most effectual way of facilitating invention.
*94 (3) The periodical holding of exhibitions of industrial products under state auspices, and in fact at the State’s expense, is now an established custom, though it is probable that the need of agencies of the kind is at present less than it formerly was.
*95

Other expedients are: (4) model institutions, such as agricultural schools, &c.; (5) state subvention of railways and means of transport for the improvement of the poorer districts of a country; (6) outlay on the administration of forests and drainage;
*96 (7) the support of credit institutions and assistance by loans.
*97

§ 4. Finally, we should remark that the State may find itself called on to act in relation to any economic interest of the society that it regulates. There is no strict and universally binding rule that can mark off the area of its action. The protest of
laissez faire was directed against the policy of continual interference. The intervention of the public power should, however, be only admitted on clear and definite proof of its advantage. The best safeguard against excessive state action is to be found in insistence on a careful calculation of all the elements entering into each case, and more especially of the financial relations that it necessitates.

The actual figures of modern budgets do not indicate much danger from the purely economic action of the State. Some exceptional cases occur where the zeal of politicians has led them to develop the system of public works beyond legitimate limits. Thus the several States of the American Union at one time engaged in a reckless policy of internal improvements that culminated in the repudiations of 1840-50.
*98 The plans of the French minister, De Freycinet, for railway extension were also arranged on too extensive a scale, as their subsequent abandonment proved. The public works of India have furnished a ground for bitter controversy; but the opponents of the policy have hardly made out their case, though under the special circumstances of the country greater moderation might have been advisable.
*99

§ 5. We have kept for the last one of the most essential parts of state expenditure—that incurred for the maintenance of the central organs of the State itself. No matter what be the form of government, the head of the State, ‘the Sovereign,’ in Adam Smith’s phraseology, must be supported. Round this personal head are grouped the various branches of the executive, and in some relation to it the legislative body also exists. In a so-called constitutional or ‘limited’ monarchy—the prevalent European form of the 19th century—the head of the State may possess a private income, but is far more likely to be paid out of the Civil List. The royal or crown lands are generally absorbed in the public domain, and in any case they must in strictness be regarded as a portion of public property, set apart from the general funds for a specific public object. This application of public revenue is necessary, though it often excites an amount of popular irritation that might be more advantageously exerted in other directions.
*100 The head of the State is frequently called on to discharge ornamental functions, requiring a good deal of expenditure, and has, moreover, to hold a higher position than the wealthiest of his subjects.

§ 6. A republican State is partly relieved from this expense; its head, usually elected for a short term, receives the salary of a minister in monarchical States. There is, however, a counterbalancing cost in the expenditure on the numerous members of the corporate sovereign.
*101 Nearly all democratic societies approve of payment to legislators, in order to reduce the chances against poor men being elected. The inevitable result is an increase in the cost of the legislative body; and when the same principle is applied to subordinate legislatures, a further increase has to be faced. The belief that legislative efficiency is improved by reward does not appear well-founded so far as finance is concerned. We must remember, however, that historical conditions, and particularly the way in which wealth is distributed, have considerable effect in determining the wisest course. Thus the English colonies that possess responsible government are perhaps justified in departing from the English method of unpaid legislators. At the same time, there is an unquestionable advantage in the development of public spirit produced by the English system. One point is certain, viz. that the least satisfactory method of all is the granting of small payments which do not attract the best men, while they discourage those who would serve without any salary. The danger of corruption is brought to its highest in the case of ill-paid legislators, who are inclined to supplement their official incomes by less honourable means.

Expenditure on diplomatic agents and ambassadors may perhaps be best placed under the present head. Such outlay is hard to classify. It might be plausibly regarded as incurred for the sake of securing peace, and therefore be added to the cost of the military and naval services. Or, again, it might be regarded as expenditure for economic objects, viz. the promotion of trade, as the consular service undoubtedly is. But on the whole the diplomatic staff is really representative of the sovereign, and is entitled to its present position.

§ 7. In nearly every civilised country the charge of interest on debt has to be considered. We shall have, later on, to examine more closely the theory of public credit and debt, and therefore need only mention it here as an item of outlay.

When dealing with the mechanism of the financial system, we shall find it desirable to distinguish carefully between gross and net revenue, the former being the total receipts, the latter the net result, deducting the cost of collection and the expenses necessary for obtaining the required resources. Here we have simply to note these charges as one of the parts of public expenditure, and to see how large an item they are. In England, the Customs, the Inland Revenue, and the Post Office are mainly earning departments. The mere mention of these establishments will suggest the remarkable differences in the relation of revenue to cost of collecting or earning it. Savings in this respect are as important as those made in connexion with outlay on other state functions, but any reduction of cost which impairs the efficiency of the fiscal service is as imprudent as over-retrenchment in other directions.

The cost of collection, or earning, of revenue in the leading English departments is given in the annexed table.

Having concluded our examination of the forms of state expenditure, we have now to summarise the results, as also to develop some points that could not be properly treated until the several heads of the public services had been duly noticed. There is, however, one topic that must be first discussed, viz. the distribution of state outlay between the central and local powers.

In 1806 a gross revenue of £58,255,000 cost £2,797,000 to collect, or 4.8 per cent., while in 1826 the charge for collecting £54,840,000 was £4,030,000
i.e. 7.3 per cent.

In France the total expense of collection for the ten years 1883-92 averaged about £13,000,000, but of this amount £5,000,000 should be charged to the postal and telegraphic service and nearly £3,000,000 to the expenses of the tobacco monopoly, leaving a balance of £5,000,000 for the cost of collecting the direct and indirect taxes.
*102 The total charge has risen since. It stood at £14,600,000 in 1893, and has advanced to £16,100,000 in 1901.