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neighbourhood of 2000l. millions, without taking into account loss of profits, etc.; but against this must be set the increased power of production.

If we should finish the war with a net National Debt of 70007. millions, what is our National Budget likely to be? We should have first to provide, say, 5 per cent. for interest and sinking fund, which would mean an annual charge of 3851. millions. Before the war the Civil Government cost 971. millions per annum. We are committed to a large and expensive scheme of educational reform; we know that old-age pensions will cost 18,000,000, instead of 12,000,000l.; and the recent increases in salaries in the Government Departments will involve a large annual sum. It would be prudent to reckon that in the first years of peace the cost of Civil Government will not be less than 150l. millions, while pensions will form an annual charge of at least 501. millions.

In the year before the war the Army cost 28,300,000l. It is my belief that, notwithstanding the proposed League of Nations, the British Empire will find it very difficult for many years to come to reduce its standing Army below 500,000 men, and its annual expenditure on the Army below 801. millions. In the year before the war the expenditure on the Navy amounted to 48,800,000Z. Naval shipbuilding costs 70 per cent. more than it did before the war. The development of the submarine may alter the whole conception of sea-power, and we shall get off lightly if we can keep our expenditure on the Navy below 70l. millions per annum. The third arm, Aircraft, is yet only in its infancy, and an annual expenditure of 201. millions on this service would not be an excessive estimate.

Summarising the conclusions arrived at, we may estimate our post-bellum expenditure as follows:

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The pecuniary cost of defending the Empire has naturally fallen mainly upon the United Kingdom. Our burden of war debt will be about 150l. per head, while that of the Overseas Dominions will probably be very much less.

We may apparently, then, look forward to an annual expenditure of about 750l. millions. How is this vast sum to be provided? The Labour Party propose 'a special capital levy to pay off a very substantial part of the National Debt, chargeable, like the death duties, on all property.' This appears to me to be wholly impracticable in the form in which it is suggested by the Labour Party. What the Government requires is income, not capital. The capital of the Government is the national production.

There are many alternative methods of meeting the charge for the National Government after the war, but it is of vital importance that we should adopt a course which will impose the minimum of hardship and will not check our industrial development. We have already gone much further than America or Germany in the matter of direct taxation; and it would be unfortunate if the treatment accorded to capital should be so much more unfavourable in this country as to divert both home and foreign capital from London.

We might continue the Excess Profits Duty, but this is open to the grave objections: (1) that it constitutes a restraint upon the development of trade and tends to standardise production at the low level of 1913; (2) that it will probably cease to yield any substantial amount of revenue in a few years after the war. Of course, this duty cannot be suddenly dropped, but I think it should be fixed for a period of, say, five years ahead on a descending scale, say 50 per cent. in the first year of. peace, declining to 10 per cent. in the fifth year after peace. Another course would be to increase the Income Tax and Super-tax; but the Income Tax is already at an oppressive level, and any further substantial advances. would impose a check upon individual enterprise at a time when it should be most actively encouraged, and would probably result in a diminished yield. The Death Duties will doubtless be further increased, and they might possibly be advanced considerably without causing

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undue damage to the economic system. a further increase in indirect taxation. adoption of such a policy is very strong. classes are getting a much greater share of the gross income of the country than they have had in the past, and they are not contributing their fair proportion of the cost of government. The wages bill has gone up by at least 6007. millions since 1914, but indirect taxation has only advanced by about 351. millions. In 1913-14 indirect taxation was 43 per cent. of the total revenue; in 1917-18 it amounted to only 175 per cent. The Chancellor of the Exchequer appears to have realised the necessity of placing the burden more fully upon the indirect taxpayer, because the new taxation imposed under the Budget for the current year is estimated to produce in a full year 617. millions from direct taxation and 48.61. millions from indirect taxation apart from the Luxury Tax.

Until the Budget of 1918-19 very favourable treatment was accorded to farmers in the matter of Income Tax. For the year 1913-14 farmers were assessed to Schedule B on the basis that their profits equalled one-third of the rent. Farms under 450 acres paid no income tax at all. A few farmers were assessed under Schedule D, but even those assessed under Schedule B had the right, if their profits fell below the statutory one-third, to get a special reduction to the actual profits of the year. The method of assessment for the financial year 1917-18 was similar, save for the fact that the Schedule B assessment, instead of being one-third of the rent (plus tithe), was the full rental value. Under the Budget for 1918-19 the charge under Schedule B has been increased to double the rental value; but, even with this addition, it would be difficult to maintain that farmers were contributing their fair proportion to the Income Tax. They are also exempt from the Excess Profits Duty. The gross production of farmers before the war was valued at about 2007. millions. For the current year I estimate it to amount to 400l. millions. In 1913-14 farmers' profits were probably not less than 50l. millions, and they were only assessed at 177. millions. As a result of this exemption from Excess Profits Duty, the partial exemption from Income Tax, and the special treatment which has been

accorded to them in other directions, it may be safely affirmed that the capital of farmers has been more than doubled during the war.

Even if effect were given to the proposals outlined above, it would not produce sufficient revenue for the purposes of the Government; and the best course appears to me to be the institution of a small annual tax on capital, graduated so as to yield an average return of 1 per cent. per annum on the capital wealth of the country, and to be strictly limited to a term of ten years. An exemption limit of, say, 20007., might be adopted. If such a tax were imposed, it should yield a revenue of not less than 1207. millions per annum in the United Kingdom. The method of assessment should be comparatively simple and inexpensive. Each taxpayer, when making his return to Income Tax, should be required to include a valuation of his capital. In case of dispute the valuation should bear a certain specified ratio to the gross income assessed to Income Tax, the ratios varying in relation to the nature and state of development of the property. The Income Tax returns would provide an annual check; but, if there should be found to have been evasion, the arrears could be recovered when the estate ultimately came to valuation for probate purposes. If effect were given to the above proposals, the post-war revenue might be as follows (the actual revenue for 1913-14 and 1917-18 are included for cómparison):

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It should, therefore, be possible, by increasing indirect

* Average for, say, ten years.

taxation to 2007. millions, by advancing the Death Duties and by instituting a small annual tax on capital, to meet our post-war charges, to abolish the Excess Profits Duty in five years' time, and reduce the Income Tax to the standard rate of 5s. in the £. In 1929 the Government will have the option of paying off the 5 per cent. War Loan; and many of the other Government obligations will become liable to redemption. It is probable that we shall then be in a position to reduce the rate of interest and consolidate the war debt; and, if the monetary conditions are suitable, we might issue a Consolidation Loan at the rate of 3 per cent. Of course, due consideration must be given to the condition of the money markets, the cost of living, and the rate of income tax. A reduction of 14 per cent. interest on 70001. millions would mean an annual saving of 1057, millions per annum to the Exchequer. I think, therefore, that for the next decade we should adopt what may be termed transitional methods in national finance, and at the end of that time reconsider our national economic policy.

Expenditure must always be considered in relation to income; and we must remember that in 1914, when the Imperial expenditure was 2007. millions per annum, the national income was about 2400l. millions per annum. That is to say, the cost of Government represented about 8 per cent. of the entire national income. What is the national income at the present time? The following table gives an estimate of the income and expenditure of the United Kingdom for the years 1907 and 1917:

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