§3. The greater part, however, of the material provision for the needs of Government has to be obtained annually or from time to time by purchase: and we have now to consider the different sources of the funds for defraying such purchases and also paying the wages and salaries of the paid servants of Government.
Under the first of the four heads above given will come, of course, all rents paid for land or buildings that are completely public property. But besides these, wherever land has only been allowed to pass into private ownership under the condition of a periodical payment being made to the government,---or of services being rendered which have afterwards been commuted for a pecuniary payment---this payment should always be regarded, from the point of view of distribution, as a rent reserved by the community and not as a tax on the owner of the land; since in taking it the State does not take from the landowner wealth that has ever belonged to him, or to which he has any rightful claim. But though this is the true distributional view of the payment, it must be borne in mind that if it be proportioned to the total value or rent of the land, it is liable to have the productional bad effects of a tax in the way of checking agricultural improvement. On the other hand a payment of this kind that is guarded from such effects is a most unobjectionable mode of raising funds for public expenditure.
Interest of any other wealth besides land has hardly a place among the sources of income of modern governments, though it figures importantly among the outgoings. If they lend, it is usually borrowed money; but their borrowings have been vast. In many cases such borrowing is economically quite justifiable; but the limits of prudent indebtedness have been found practically difficult to observe.
We may say generally that the conditions under which it is prudent for a nation to borrow are, to a great extent, analogous to those under which it is prudent for a private person to do so; but there are certain important differences. In the first place, a nation can borrow without incurring any but a very trifling burden, to whatever extent its obligations can be kept permanently current as a national medium of exchange. And secondly in the case of a nation, the matter is complicated by the difference between what we may call the strictly financial and the social points of view: i.e. between the estimates of gain and loss to the national exchequer, and the estimates of gain and loss to the community considered as an aggregate of individuals. There are two chief cases in which private borrowing is recognised as legitimate: first, where the loan is employed productively, so that the additional profit obtained by the use of it supplies a fund from which the interest may be paid, and a certain portion of the principal annually repaid; and secondly where it is employed to meet an occasional necessity for enlarged consumption, which could not be defrayed without inconvenience or even suffering out of the income of a single year, so that it is good economy to spread it over several years. Each of these cases has its counterpart in public finance. Here, however, it is not always easy to decide whether a loan has been employed productively for the nation at large. For the returns on productive outlay by government may take two quite different forms; they may either appear as increased profits on some special business carried on by a governmental department, in which the loan has been employed as capital---as when (e.g.) telegraphs or railways are bought for the State with borrowed money; or they may merely be realized in the increased produce obtained by the labour and capital of the community governed---as when a Swiss canton borrows to make a road without tolls for the use of travellers, for which it is repaid by the increased earnings of its innkeepers, tradesmen, and agricultural producers. This latter kind of outlay, however, even when socially profitable, cannot be regarded as productive from a strictly financial point of view, unless the Government secures a share of the increase of national produce, sufficient to pay something more than the interest on the loan. And it may obviously be sometimes very difficult to say how far any particular increase, either in national produce---or in governmental receipts, is really due to the supposed productive outlay and not to other causes of national prosperity. Borrowing for this latter kind of expenditure therefore, though often highly advantageous, requires to be very carefully watched.
Still, on the whole, the general principle for determining productive outlay is clear, however difficult its application may be in some instances; the increased receipts accruing to the community in consequence of the outlay---whether they are obtained by the community in its corporate capacity or as an aggregate of individuals---ought to be more than sufficient to repay the loan with interest by the close of the period required to exhaust the productive effects of the outlay. It should be added that when such borrowing involves loss from a strictly financial point of view, we have to take into account---as against any advantages that may be expected from it to the community at large---all the disadvantages attaching to the part of the system of taxation that might be dispensed with if the debt were not contracted.
I pass to consider the second case of legitimate borrowing; where the loan is required to meet an occasional need of extra expenditure, not positively productive. In this case the rule to be adopted appears primâ facie very simple; it is plain that the number of years, over which the sacrifice imposed by the emergency may prudently be extended, ought to be limited by the condition of paying off the loan before a similar emergency may be expected to occur again. Practically, no doubt, the exact application of this principle in national finance is a matter of extreme difficulty; since the chief emergencies which necessitate such loans are foreign wars (or menaces of wars) and there are no known sociological laws by which we could forecast the magnitude and frequency of a nation's future wars, in the present stage of civilization. Still, if we simply infer the probability of future wars from past experience, it must be admitted that the above-mentioned principle has been flagrantly transgressed by most of the leading nations of modern Europe. But the alarm which such transgression might reasonably arouse may be to some extent diminished by the consideration that we may equally infer from past experience a probable reduction in the burden of any national debt already contracted---both an absolute reduction, from the decline of the rate of interest, and a relative reduction from the increase of the aggregate wealth of the borrowing nation. At the same time, there is so much uncertainty in all inferences of this kind that I can hardly consider a community to be justified in deliberately disregarding the rule of repayment above laid down; except, perhaps, when the taxation that would be required in order to conform to this rule would entail very serious economic or political inconveniences.
We have already seen that from a social point of view borrowing may be profitable, by increasing the aggregate produce of the community, even though it does not bring in an adequate return to Government, either in the form of profits on a special business in which the loan is employed, or more indirectly by an increase in the yield of certain taxes. In such a case, however, it is most probable that the increase in the total income of the community will not be equally distributed among the incomes of individual members; hence, unless the interest and repayment of the loan can be provided by imposing a rate on the persons who gain by its employment, fairly proportioned to their respective gains, it has a tendency to cause a new inequality in the distribution of wealth which ought to be considered in adjusting the general burden of taxation.
There is another less obvious disturbance of preexisting distribution which borrowing, whether for profitable outlay or to ward off calamities, tends to bring; viz. by raising the rate of interest, and thereby increasing the share of the aggregate produce that falls to capital. Where the outlay is of the profitable kind it is not necessary that this increase should be accompanied by a diminution in the reward of labour; as it is possible that it may be entirely supplied from the increase in the aggregate produce. But in the case of loans for wars or similar purposes, the gain to capitalists from the rise of interest inevitably involves a corresponding loss to labour, supposing that the capital is supplied by the members of the borrowing community, and that it would in any case have been saved and invested in some branch of home industry. These suppositions, however, can rarely altogether correspond to the facts; and so far as the capital borrowed is obtained from abroad, or would otherwise have been sent abroad for investment, it is quite possible that the immediate effect of the borrowing may be pecuniarily advantageous both to capitalists and labourers; both interest and wages within the community being temporarily increased by the loan. Thus the first years of a war supported by borrowing may be generally felt as years of prosperity. The day of reckoning must of course come for this expenditure; and the account must ultimately be paid in part from the share of labour,---unless the interest on the war-loan is supplied by taxes falling entirely on capitalists.
[Back to:][PPE, Book III, Chapter 8, Section 2] Public Finance