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SECRET
£JABI NET
QFFIGL
RECORD C O P Y
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i
COFYNO.JM£
2ND MARCH. 195'
CABINET
GOVERNMENT METHODS OF FINANCING
AND E F F E C T S ON TAXATION
M e m o r a n d u m b y the C h a n c e l l o r of the E x c h e q u e r
I fully s h a r e the c o n c e r n of the Chancellor of the D u c h y of
L a n c a s t e r at the l e v e l of t a x a t i o n in t h i s country and I w e l c o m e s u g g e s t i o n s
a s to how we c a n get out of our d i f f i c u l t i e s .
2.
The underlying t h e s i s in C. (54) 22 f r o m paragraph 13 onwards i s
that a good deal of our trouble c o m e s f r o m ignoring in national finance
sound c o m m e r c i a l p r a c t i c e and in p a r t i c u l a r f r o m making no p r o p e r
d i s t i n c t i o n b e t w e e n r e v e n u e and capital a c c o u n t s .
3.
I fear that the a n a l o g y s u g g e s t e d b e t w e e n national finance and
c o m m e r c i a l accountancy is largely misleading.
Industrial e n t e r p r i s e s
run t h e i r finances a s t h e y do b e c a u s e they want to know how m u c h
But with few e x c e p t i o n s G o v e r n m e n t
c o m m e r c i a l profit t h e y a r e m a k i n g .
s e r v i c e s do not involve t h i s c o n c e p t i o n of profit at a l l . Indeed the fact
that t h e y do not involve c o m m e r c i a l profit i s one of the m a i n r e a s o n s why
they a r e run b y G o v e r n m e n t D e p a r t m e n t s .
T h e r e a r e undoubtedly
"dividends " i n the m e t a p h o r i c a l s e n s e f r o m s u c h things a s the National
Health S e r v i c e and N a t i o n a l D e f e n c e but they do not give c o m m e r c i a l
profits and it would be h o p e l e s s to t r y to d e t e r m i n e how m u c h w e should
Quite
spend on t h e s e s e r v i c e s b y c o m m e r c i a l profit and l o s s a c c o u n t s .
different c o n s i d e r a t i o n s c o m e into play.
4.
T h e r e a r e indeed a s m a l l number of i t e m s of expenditure in the
national a c c o u n t s to which c o m m e r c i a l c o n s i d e r a t i o n s could be a p p l i e d .
But t h e y a r e in total s o s m a l l a s not t o affect the p o s i t i o n s i g n i f i c a n t l y .
The i t e m s the Chancellor of the Duchy h a s in m i n d , a s e v i d e n c e d by the
e x a m p l e s he c i t e s , a r e l a r g e i t e m s , the benefit of which a c c r u e s o v e r a
p e r i o d of y e a r s but a s a dividend only in the m e t a p h o r i c a l s e n s e and h i s
p r o p o s a l i s to s p r e a d the c o s t to the taxpayer o v e r s o m e t h i n g like the
p e r i o d o v e r which the benefit a c c r u e s .
5.
A s a f i r s t point, it should be r e a l i s e d that if this t r e a t m e n t
w e r e introduced a s r e g a r d s expenditure and analogous t r e a t m e n t a p p l i e d ,
a s on sound p r i n c i p l e s it would have to b e , to r e v e n u e , the r e s u l t would
We
be to make the situation on the c u r r e n t Budget w o r s e , not b e t t e r .
could not b o r r o w for the c o s t of building up a s t r a t e g i c r e s e r v e of
m a t e r i a l s and a t the s a m e t i m e c r e d i t to c u r r e n t r e v e n u e , a s we s h a l l
be doing next y e a r , o v e r £100 m i l l i o n s , f r o m the s a l e of food s t o c k s on
the t e r m i n a t i o n of c o n t r o l s .
On the n e w a p p r o a c h , we could not continue
to c r e d i t the p r o c e e d s of death duties (£160 m i l l i o n s a y e a r ) t o c u r r e n t
revenue.
T h e r e a r e other s m a l l e r i t e m s w h e r e w e should have t o
change c u r r e n t p r a c t i c e .
The net r e s u l t , a s I have s a i d , i s t o m a k e
things w o r s e , not b e t t e r , on the c u r r e n t Budget,
^7 6.
The r e a l i s s u e r a i s e d b y the C h a n c e l l o r of the D u c h y ' s paper m u s t , h o w e v e r , be c o n s i d e r e d on b r o a d e r l i n e s than m e r e l y the p l a c e of p a r t i c u l a r i t e m s in our a c c o u n t s .
The l e v e l of the G o v e r n m e n t s total financial n e e d s depends on the extent to which the G o v e r n m e n t r e q u i r e s goods and s e r v i c e s for the a c t i v i t i e s of D e p a r t m e n t s p l u s the e x t e n t to which it r e q u i r e s to a b s t r a c t m o n e y f r o m s o m e c i t i z e n s to pay a l l o w a n c e s , g r a n t s , p e n s i o n s and s o o n t o o t h e r s .
The m o n e y for t h i s expenditure h a s t o be p r o v i d e d b y the c i t i z e n s e i t h e r a s t a x p a y e r s or a s l e n d e r s of their s a v i n g s to the G o v e r n m e n t .
How the n e c e s s a r y finance i s d i s t r i b u t e d b e t w e e n t a x e s and b o r r o w i n g s depends p r i m a r i l y on how far the G o v e r n ­
m e n t c o n s i d e r s it prudent to r e l y on being able to b o r r o w on r e a s o n a b l e t e r m s , in s u i t a b l e f o r m and without c a u s i n g inflation, having r e g a r d to the probable l e v e l of s a v i n g s and the total demands for capital,,
This
q u e s t i o n i s one of the s i z e of the o v e r a l l s u r p l u s or d e f i c i t on the Budget, It is not dependent on the p l a c e which p a r t i c u l a r i t e m s take in the national accounts. 7.
The C h a n c e l l o r of the D u c h y ' s s u g g e s t i o n s , t h e r e f o r e , r e a l l y
c o m e to t h i s , v i z . , if we can identify i t e m s totalling l e t u s s a y ,
£3 00 m i l l i o n s in our expenditure which a r e of the c h a r a c t e r he d e s c r i b e s ,
then we could j u s t i f y a budget deficit £ 3 0 0 m i l l i o n s g r e a t e r than we should
have under p r e s e n t p r a c t i c e , i. e. we could r e d u c e t a x a t i o n by £ 3 0 0 m i l l i o n s
b e l o w what it would be under p r e s e n t p r a c t i c e .
8.
T h i s m e a n s that we should need to b o r r o w £ 3 0 0 m i l l i o n s m o r e .
Where should we find the n e c e s s a r y s a v i n g s ?
We could not e x p e c t t o get
m u c h of the e x t r a i n c o m e s r e s u l t i n g f r o m the r e d u c t i o n of taxation back
in s a v i n g s .
Indeed t h e s e e x t r a i n c o m e s would add to our difficulty b y
i n c r e a s i n g the d e m a n d for c o n s u m p t i o n g o o d s .
We could not hope to
g e n e r a t e adequate i n c r e a s e s of national production to p r o d u c e new s a v i n g s
of the amount r e q u i r e d .
We could, in f a c t , only d r a w into the G o v e r n ­
m e n f s r e s o u r c e s s a v i n g s which would have gone e l s e w h e r e , i. e , we
should a t t r a c t s a v i n g s a w a y f r o m private industry or suffer a w o r s e n i n g
i n our b a l a n c e of p a y m e n t s .
Failing any of t h e s e s o u r c e s for the e x t r a
b o r r o w i n g , the only r e c o u r s e would be i n c r e a s e of the floating debt, i e .
inflation.
0
9.
My c o n c l u s i o n on the Chancellor of the D u c h y ' s p a p e r , t h e r e f o r e ,
i s that it is m y t a s k to continue a s at p r e s e n t and to produce on m y Budget
a s a whole s u c h s u r p l u s or deficit a s I think, taking a l l our c i r c u m s t a n c e s
into a c c o u n t , the e c o n o m y r e q u i r e s .
10.
The r e a l fact i s that t h i s country i s , and h a s for m a n y past y e a r s
b e e n , c a r r y i n g t o o h e a v y a load of Government e x p e n d i t u r e .
I have
i m p r e s s e d t h i s on m y c o l l e a g u e s on m a n y o c c a s i o n s , the l a t e s t b e i n g
in C. (53) 355 a s r e c e n t l y a s 16th D e c e m b e r l a s t , and I have u r g e d the
v i t a l n e c e s s i t y of cutting down G o v e r n m e n t e x p e n d i t u r e .
T h i s m u s t be
our a i m but it i s one t o w a r d s which p r o g r e s s h a s b e e n shown to be s l o w .
U n l e s s w e a r e to s l a s h the s o c i a l s e r v i c e s - and I do not think m y
c o l l e a g u e s want to - then, e x c e p t insofar a s we can r e d u c e the c o s t of
defence and find l e s s e x p e n s i v e m e a n s of giving a fair d e a l to a g r i c u l t u r e ,
the r e d u c t i o n in the burden of G o v e r n m e n t expenditure c a n only c o m e
about s l o w l y .
11.
What we have got to do is to s e e k v e r y p o s s i b l e m e a n s of cutting
down c o s t s , r e s i s t i n g additional s e r v i c e s , simplifying s e r v i c e s w h i c h
e x i s t and, in a v a r i e t y of w a y s , e n s u r i n g that the a c t u a l c o s t of G o v e r n ­
m e n t expenditure i s not a l l o w e d to r i s e .
Then, provided w e can k e e p
the e c o n o m y on an e v e n k e e l and p r o m o t e a s t e a d y i n c r e a s e in productivity,
the r e a l burden of Government expenditure w i l l be r e d u c e d a s productivity
and the national i n c o m e i n c r e a s e s .
This is a long, slow grind.
We have
m a d e a s t a r t but we have got to go on with it for y e a r s and y e a r s .
This
i s not a p l e a s a n t p r o s p e c t , but it i s the only c o u r s e open t o u s .
R
T r e a s u r y C h a m b e r s , S. W. 1.
1ST MARCH, 1954.
0
A
0
J3 .