Public Finance

Examples of this diversity in usage are abundant. The transfer of the English prisons from local to central management has been already mentioned.
*103 The older system of poor-relief in England was purely local. The great reform of 1834, though it did not go the length of making the aid of the indigent a national charge, yet accepted, and was based on, the recommendations of the Poor-law Commission in favour of complete and efficient regulation of local administration by a specially formed central board. The treatment of primary education affords another example; in England and Wales it is largely under local management, while in Ireland the national school system is strictly centralised. The police systems of the United Kingdom also show like differences in administration.

On extending our view to other nations, we find a similar absence of uniformity. The powers of a Swiss Canton or an American State are far greater than those of an English County or a French Department. Even limiting the comparison to countries with constitutions of the same type, there is still much variety in the actual division of duties.

§ 2. Such remarkable differences have arisen from more than a single cause, but undoubtedly the most powerful reason is to be found in the peculiar historical conditions under which States have been formed and developed.
*104 To explain,
e.g. the diversities in the distribution of public duties in France and Germany, we must see how the governments of those countries have been formed. In no other way is a full interpretation possible. The centralised system of French administration goes back further than the Revolution of 1789; it is a product of the absolute monarchy and of the consequent impossibility of developing local authorities.
*105 The greater division of state power in Germany is one result of the unhappy conflicts that prevented its attaining to national unity till the present century. In order to comprehend it, we must know the history of the Holy Roman Empire, and its many changes. Exactly similar are the cases of Switzerland and the United States; each is the product of special conditions. The nature of American state and local governments is effected by the circumstances of the colonial institutions from which they have sprung. At all stages of formation this influence is powerful. It is due to the particular events of the time that Italy, at almost a single step, reached the full unity of France or England, while Germany as yet retains so many traces of the process by which it has been formed. There is nothing of rigorous necessity in the course of development; circumstances that may be regarded as accidental have had most effect in deciding the result, and there seems, consequently, little place for the employment of scientific explanation in so purely empirical a matter.

Historical conditions are, however, often the result of deeper forces; the political destiny of a nation is not altogether at the mercy of events. The physical features of its territory, the character and sentiments of its members, go a ong way in determining its constitution. We cannot doubt that the mountains of Switzerland, and the enthusiasm of its citizens for independence, have contributed towards the great vitality of its local institutions; but then it is also true that circumstances somewhat analogous have not hindered Holland from becoming a centralised State.

§ 3. The most complete recognition of the preponderating influence of historical and physical agencies in determining the actual division of state duties between the central body and the local ones, ought not to prevent us from endeavouring—as far as possible—to disentangle from the mass of material any ascertainable general principles. There seem to be—quite apart from national peculiarities—some tendencies, operative in all societies, which assign particular duties to the central agency and place others under local supervision. An examination of the several public wants will, we believe, confirm this view, showing that some of them can be best satisfied by local management, and that others should, in order to attain the desired object, be supplied through the central organisation of the State.

In making this distribution by reference to general principles, it is necessary to take into account the historical influences that we have previously noticed. They partly determine, not only what are, but what should be general, and what should be local tasks. What has been for a long time confided to local administration ought not without good reason to be transferred to the general government, as, on the other hand, where, from any cause, little has been left to local action, the devolution of tasks by the central administration should be gradual and cautious.

§ 4. Additional light is thrown on the leading principles and present position of the distribution of powers between local and central organs, by consideration of the fact that two different tendencies have been in operation during the course of history. Political evolution is not a direct movement towards a definite goal; it is rather a series of efforts following the line of least resistance at any given time. Early societies do not exhibit the opposition or distinction between central and local powers. All government is local either in the tribal system as found in Germany, or in the city states of Greece and Italy. War—and its result, conquest—is the introducer of centralisation. The smaller groups are unable to withstand the successful military chief and have to submit to his rule. The municipal governments of the classical age—for such they were in fact—passed at last under the dominion of Rome, which gives us the picture of a vast administrative organisation employing local authorities as the instruments of its working. The originally autonomous city was ultimately reduced to take commands, even as to the smallest details, from the Emperor and his officials.
*106 Some place for local co-operation was allowed under the earlier Empire, and up to the last the expenditure of towns was distinct and separate from that of the Imperial government.
*107

Mediæval society shows a movement towards the revival of local privileges. In all European countries the cities succeeded in acquiring a large amount of freedom in dealing with their own affairs. In some countries—as Italy—they ultimately attained independence, and in all they were enabled to apply their resources for purposes of local interest. One of the principal features of the steadily growing consolidation of States in modern times has been the reduction in power of the various semi-independent bodies within the State.
*108 Provincial liberties have been curtailed, and particular immunities, whether of towns, districts, or associations, have had to give way to the rule of uniform rights and duties. With great varieties in the process in different countries, the same general result has been reached by the absorption of all independent political forces in the single organ of the State. This point was sooner attained in England than in France, and in France than in other Continental States, but except where a federal system has preserved the authority of one group of bodies, it is now accomplished in all civilised societies.

The establishment of a controlling and legally omnipotent government, though it marks an important stage in political growth, is nevertheless accompanied by some disadvantages. However desirable it may be that the powers of a nation should not be weakened by the existence in its midst of powerful bodies in a position to frustrate the attempts of its rulers to act with vigour and decision in a given way, and however much society may suffer from the absence of political cohesion, it is not conducive to the interest of the nation to concentrate all administrative authority in a single centre. The gains from centralisation may be great, but to obviate the evils that accompany it a wise decentralisation is also requisite. Having secured political unity, it becomes the task of the statesman to so distribute the functions of government as to obtain the best political and financial results. The earlier historical movement that has led to combination needs to be supplemented and corrected by the rational process of division of duties. All modern societies have to see whether their present institutions strike the mean in this respect, and if not, how they can best attain it.

§ 5. The relations of the administrative organs become more complex as States increase in size. A small society has no need of intermediate political forms between the lowest unit and the State, but in countries with the area and population of the great European powers or the United States something more is wanting. Between the ‘parish’ or ‘township’—the ‘primitive cell’ of the political organism—and the central government there are found one or more bodies essentially subordinate to the latter, but of greater range and larger resources than the former. Thus France has the canton, arrondissement, and department; Prussia the district, the circle, and the province; England, the union and the county; the United States, the county and the state or ‘commonwealth’; and in each nation a different class of duties is assigned in proportion to the size and importance of the particular body.

The complexities of local government and finance have in some countries been increased by the irregular and almost haphazard method of expansion adopted. Instead of following a definite and orderly plan, each special need has been met by a special creation. This natural but unfortunate method of procedure is characteristic of English and, in some degree, American legislation. Where a new local duty has been marked out, a new area with a separate board has been formed, ideas of uniformity or co-ordination being almost ostentatiously disregarded. The outcome in England has been, according to Mr. Goschen’s often-quoted phrase, ‘a chaos as regards authorities, a chaos as regards rates, and a worse chaos than all as regards areas.’
*109 Something similar is the case in a few American States. ‘In many of our commonwealths,’ says Professor Seligman, ‘there are separate local taxes for almost every purpose of local expenditure. In New Jersey,
e.g., we find no less than forty such separate taxes.’
*110 The reason for this confusion is only discoverable by considering the usual conception of local governing bodies; they were regarded rather as associations for a particular end than as delegations of the public power, and it is in fact true that the smaller subdivisions do approximate more closely to private groups in proportion as their sphere of action is reduced. The generally unsystematic character of English legislation also favoured this extreme multiplication of local functions arranged on no definite plan.

Political organisation, developed on perfectly logical principles, would offer a decided contrast to the multiplicity of arrangements just described. It would be symmetrical and convenient to a degree that no country—not even France—can lay claim to at present. In actual political life, perfectly adjusted plans of the kind are inapplicable. Constructive legislation is hindered by the nature of the materials that are at hand. The correct and well-fitted plan will not work by reason, first of all, of the varying circumstances of different districts. Rural areas are suited for a simple kind of local government that would utterly fail if applied to towns or cities. The latter require a more elaborate and careful system; new administrative problems are constantly arising;
*111 their expenditure is sure to be much greater, and even if part of it be what is called ‘productive,’ and likely to afford counterbalancing receipts, there is still a greater amount of energy and toil required in working their finances, and special provisions are needed in order to guard against abuses.
*112 In many countries, however, backward agricultural districts are often transformed in a few years into seats of manufactures and commerce, making alterations in the form of local government essential.
*113 Some particular interests are also so important as to need special treatment. The management of harbours, river navigation, and drainage, or great public works created at the cost of the State, may have to be placed under bodies formed to represent the interests chiefly concerned, and they must be kept apart from the general system, and so far mar its completeness.
*114

The necessity for attending to geographical boundaries tends to prevent even an approximation to divisions with equal areas or population, and special local habits and customs act in the same direction. But the greatest check in this direction arises from constitutional restraints. Perfectly unified governments, such as those of France and England, are seemingly free from this defect. There is nothing in English law to prevent Parliament from abolishing the division into counties and parishes, and substituting a new one in its place. The whole machinery of municipal administration might at the same time be handed over to a central board with an official staff.
*115 The federal countries—Germany, Switzerland, the United States—are differently situated. In their case the power of constitutional legislation is distributed in a more complex manner, with the intention and result of checking its frequent exercise. Such ‘rigid’ constitutions—as they have been happily called—give a permanence to particular local divisions that prevents the powers of administration being divided in accordance with theoretical conceptions. A Swiss Canton or American State holds a legal position essentially different from that of a County or Department. It is prior in order of time to the central government, towards whose creation it may be said to have contributed, and it is entitled to object to measures affecting its existence.
*116 Whatever be the reasons in favour of this system—and we need not undervalue them—it is a fatal barrier to orderly and proportionate distribution of functions. Delaware and Rhode Island, insignificant both in population and area, hold the same place as the great States of New York, Pennsylvania, and Texas; Bern, with more than half a million of people, is only equal to Uri, with less than one-thirtieth of that number.

Difficulties of the kind just noticed are not in reality so serious as they at first appear. To begin with, the intractableness is found in one only of the minor groups or subdivisions; the others can be easily adjusted. Congress cannot, indeed, redistribute the areas of New York and New Jersey without the consent of both of those States, but either State can rearrange its counties and municipalities as it pleases; the important cities of New York and Brooklyn have been consolidated into greater New York by the legislature of the State. Therefore, within each State a reorganisation of local government is possible. Again, by taking extreme cases an unfair impression is produced. The average State or Canton (say Wisconsin or Freiburg) is a convenient body to interpose between the national government and the smaller local groups. There is, besides, a tendency towards adjustment between the habits of a people and its indigenous institutions. The Americans and Swiss have by usage become fitted for their particular systems, which therefore work with greater ease. The distribution of the several German States is more irregular, and illustrates, as noticed before, the powerful influence of historical conditions. The principal anomaly is due to the preponderance of Prussia, compared with the very small States that form part of the empire. The internal local government of Prussia is, however, based on a well-proportioned system.
*117

§ 6. Applying our results to the financial question of expenditure, and its proper division, we commence with the central government. Its claims to disburse the larger part of the total public revenue are unquestionably strong. It is the representative of the nation. Other bodies exist under it, and to relieve it of undue toil, but ‘the State,’ in the popular sense of the term, is
prima facie the agent in charge of all public duties. It is at once clear that all general interests ought to belong to its province. What concerns the whole community may indeed, for other valid reasons, be delegated to localities, but the fact that a public function concerns all is a weighty reason for entrusting it to the central government. A smaller body, no matter how liberal its constitution may be, cannot take the same ground. Even an absolute ruler is more likely to regard the welfare of the whole society than the representative assembly of one part of the nation’s territory, while the highest security for due attention is obtained by the representation of all districts in a national legislature. This attitude of the central government is partly the consequence of the wider view that it is almost compelled to take, but it is also partly due to the higher intelligence and skill that it has at its disposal. For tasks in which these elements are of importance, the superiority of the central administration is generally apparent. A third circumstance in many cases favours the centralisation of certain classes of state duties—those namely in which unity and co-ordination are required. Though division of labour is beneficial, its combination is no less so, and public duties that need combination will naturally be placed under a single control. It would be too much to assert that these conditions have completely determined the actual sphere of the national government in modern countries; it would be a gross exaggeration to say that they have done so consciously. There is, however, much truth in the doctrine that the actual forces which they describe have generally had a powerful effect.

The sphere of local agencies in directing expenditure can be indicated by reference to conditions strongly contrasting with those just described, which make it expedient to call into play the administrative energies of the smaller territorial bodies. As the central power guards the general interest, so do the representatives of localities best attend to their particular interests. ‘That people manage their own affairs best’ is not universally true, but it has sufficient truth to justify the entrusting of local matters to the several localities affected. A second case in which local is superior to central administration occurs wherever minute supervision is required. Central authorities, though possessed of superior skill and intelligence, often fail through the difficulty of regulating from a distance operations that need unfailing attention and watchfulness. It is to this circumstance that we must attribute the almost universal devolution of the smaller parts of economic administration, as it is to it that we probably owe the origin of the attempts at decentralisation on the part of the general government. Finally, it is expedient to place the charge of public duties in the hands of the smaller bodies, when diversity rather than unity is needed. Some of the forms of state action are not suitable for being conducted on a uniform pattern. Special conditions and habits have to be taken into account, so that the very tendency to adopt different methods becomes a benefit instead of an injury. We thus reach the result, that if attention to the general welfare, the command of higher intelligence and skill, and the power of unity in action are advantages possessed by the central government, regard to local interests, attention to details, and possibilities of judicious variety in practice will be best secured by local management.

Like conditions help to determine the functions of the intermediate public organs. A county administration has the same superiority over a parochial one that the national one has over it, and it is inferior in the same respects. An American State holds a similar position in respect to the smaller local divisions. Its sphere of action has to be limited in both directions by reference to the general principles already noticed. When we come to such important divisions as the State of New York or the administrative county of London, restrictions on their functions are dictated rather by considerations of national unity than by defects of organisation. The position of the larger German States—Baden and Saxony, and still more Bavaria and Würtemberg—in the distribution of power can hardly be settled by reference to principle. It will rather depend on a compromise between their claims to complete self government and the need for greater unity of the empire.

§ 7. Taking up in order the different forms of public expenditure, we find it easy to understand the reasons for making the military and naval forces a national charge Security is the greatest general interest of a society; the appliances and organisation necessary for successful defence tax severely the highest powers of human intelligence; and unity of management is of great advantage in warfare. Consequently the cost of war and preparation for it always comes from the national budget. Germany and Switzerland still preserve some traces of the older independence of their component parts, but the German forces are in fact completely under imperial control, and their cost is defrayed from imperial funds.
*118 One of the most decisive marks of union between hitherto independent States is the formation of a common army.

The cost of Justice also seems most fitly to belong to the general expenditure. It figures in all national budgets, but some of the charge may be thrown on localities. In a Federal State the subordinate courts are usually reserved by the separate units, but the Judiciary of the union becomes a general charge. The reason of this division is plainly historical, and as there is no pressing necessity for complete unity in the judicial organisation, it is allowed to continue. The importance of distinguishing between federal and state law is a further ground for separating the central and local courts. Uniformity in law and in its administration is such a benefit to a society that, unless under special circumstances, it is advisable to place it in the hands of the national government. Efficiency, too, is increased by removing the judges from the distracting influence of local feeling that is sure to affect them when they are appointed and paid by the district in which they act.

Police, and the treatment of criminals, cannot be definitely assigned to either department. On the one hand, it is certainly advantageous to have these matters arranged on general principles. All members of the nation are interested in the preservation of internal order in every part of their country. No district should be allowed so to relax its prison administration as to offer inducements to a criminal class to congregate within it;
*119 but on the other hand, the benefits in closer supervision and greater economy when the duty is entrusted to localities are a considerable set-off; besides, the principal interest of good order is found in the case of those resident in the district. A practical solution is generally discovered in a division of the duties, combined with regulations as to the distribution of the burdens imposed.

Administrative duties have also been divided, and though, in most countries, no attempt has been made to settle the partition on intelligible principles, usually in conformity to the guiding conditions indicated above. Where wide general interests, requiring a high degree of skill from those who control them, are involved, the central government has been the acting body. In smaller and more detailed matters the local governments have undertaken the task.

The relief of distress was primarily a local duty. During the development of the English Poor Law, previous to 1834, the whole system of management was left to the small unit of the parish, and though this arrangement led to much irregularity, it afforded examples of the best method of administration, which were utilised by the reformed system.
*120 Local administration and charge do, however, give rise to difficulties; in particular the question of the domicile or ‘settlement’ of those relieved becomes a constant subject of dispute. ‘The birthplace and dwelling of the foremost peer,’ says Mr. McNeil-Caird, ‘the birthplace and dwelling of Newton, Shakespeare, Milton, or Burns were never investigated with half the eagerness, or a tenth of the expense, that is freely spent as to the birth and residence of a pauper.’
*121 The injustices attending the distribution of the cost are always perplexing, but local direction and management under central regulation presents, on the whole, the least objectionable method.

In dealing with education, it is at once obvious that elementary teaching has a closer relation to separate localities, resembling, in this respect, poor-relief. Particular circumstances so far affect it that there is reason for making it, at least in part, a local charge; but it is also a general interest affecting the well-being of the whole society, and requiring for its proper working a great amount of trained intelligence, which can be best supplied by the central government. The higher grades of education do not admit of the same degree of localisation. Universities in especial bear a distinctly national character, and are therefore, so far as they receive public aid, rightly a national charge. Other appliances for instruction and the promotion of culture are provided both from general and local sources, though it is hard to determine what should be the exact position of each in the matter.

Wherever the support of religion is a public function, it is met from the national budget, or at least by national endowments, the cases where local bodies pay for religious services being simply compensation for work done, as in the case of union chaplains, &c.

The principle of general or particular interest explains the division of the economic duties of the State. What affects the whole society is done by the central government; what is specially needed by a locality or minor division is usually done by it. Here, however, there are exceptions. Works too extensive for the resources of a district are undertaken by the central administration, or aid is given to the subordinate authorities that direct and manage them. In this department of expenditure the smaller bodies are more likely to become embarrassed than is the central state authority. Their available funds are not of such vast extent, and change more speedily in amount owing to their limited area. Local administration, besides, in reference to public works is more liable to suffer from the private interests that affect all public ceremony.
*122 The modern credit system, however, affords facilities for expenditure based on a pledge of the property of the district that will not be felt at once, but will prove a continuous charge. It is in respect of this so-called ‘reproductive’ outlay that the difficulties of local finance are at present most serious.

Finally, with regard to what we have called constitutional expenditure, the boundary line is plain and simple. Each part generally pays for its own outlay. Members of the central executive and legislature are paid from the central budget. The officials and subordinate legislators of states, cantons, or municipalities are paid from the budget with which they are connected. As an exception, the charge of all elections is sometimes a local one, but it is so on the ground that it is really a local interest.

§ 8. It thus appears that on a broad view, and with full allowance for the influence of previous history and special circumstances in each case, there is a tendency to distribute functions, and therefore expenditure, in accordance with the principles that we have seen in operation. Some additional reasons for particular forms of distribution may be noted here: they are really expansions of those already pointed out.

First, particular duties are often given to, or withheld from, local bodies on the ground that they are well or ill suited, as the case may be, to bring the cost of the service home to those who benefit by it. This, however, is merely an application of the principle that particular interests belong to those concerned in them, and a further reason for that policy. The division of control over outlay, so as to secure justice in the apportionment of the burden, can be realised in another way, viz. by a readjustment of receipts between the central and local governments. A further ground for limiting local duties is sometimes found in the existing division of general and local taxation. Where, as in some countries, local revenues are rigidly restricted in amount, it is evidently impossible to place duties involving much extra cost on them. Here, too, the true explanation is found in the narrowness of the local interest that has led to the limitation on its taxing power, and it can be remedied, either by removing the restraint, or, as in recent English legislation, by a transfer of part of the general revenue. By dexterous use of the latter method it is possible to combine the great aim in expenditure—the maximum return for outlay with that in the collection of revenue—a just distribution of burdens.
*123

§ 9. Some further characteristics of local finance in relation to expenditure require attention. We have seen the classes of duties that local bodies deal with, and that they are mainly of an economic character, at least in so far that advantage and cost can be somewhat definitely measured. This feature suggests, as we saw, a comparison with private economic associations; and though the resemblance is closest in the industrial domain,
*124 it also appears with regard to expenditure. There is, however, one essential difference. The private company is formed on a voluntary basis. No one is compelled to enter it against his will; a local governmental body has compulsory powers, and is therefore more particularly in need of being kept within bounds in its action, and of being compelled to act when circumstances require it. Some of the duties in its charge are general state tasks, delegated for motives of convenience. These it cannot be allowed to neglect. Otherwise provisions for poor relief, education, or police of the highest value might be rendered utterly useless by hostility on the part of the local administrators. In other cases, where the task is of purely local interest, as
e.g. water-supply, a minority of the inhabitants may suffer from the ignorance or carelessness of the majority, when also there is ground for interference by the central power. Such cases make supervision and regulation of the various divisions a necessity of good government. To insist on the discharge of certain functions, to prevent an undue extension of others, and, finally, to protect the interests of individuals against encroachments by local authorities, becomes an important state work.
*125 An organisation connecting the local and central bodies is needed, and has been developed in most countries. The English Poor Law Board—becoming later on the Local Government Board—is a good example. So are the many Commissions in the American States; while similar results are attained in another way by the bureaucratic systems of France, Germany, and Italy. The need of securing due discharge of duties imposed, avoidance of expenses in directions not allowed by law, and moderation in the exercise of expenditure, even on lawful objects, has brought about a system that shows in the clearest way how all expenditure, local as well as general, is really one, and has to be combined in order to judge correctly of the pressure of the State and its organisation on the national resources.

The value of this conception of the unity of state services in helping to form a more accurate idea of the amount of public expenditure will be better realised by reference to the following table:—

Some writers on finance have included in their discussions an examination of the finance of ‘State Confederations’ (
Staatenbünde) and also of Colonies,
*127 but neither seems entitled to a distinct place. There is a decided difference between a federal State and a confederation of a group of States. The former is a true political unit, and one of the points of unity is financial; the latter can be resolved into its component parts, each with a separate financial system. The resources of a confederacy are always derivative, and are obtained from the separate States. The old German Bund (1815-1866) may be contrasted with the existing German Empire as effectively illustrating this essential distinction.

But though in general the line of division is a clear one, some difficulty occurs—as is so often the case in political and social inquiries—in respect to societies in a transitional condition. The American Confederation in the period 1776-89, and the Swiss Confederation, 1816-1848, may be taken as examples. In such instances we find a new financial organisation in course of development, the older bodies being gradually merged in a new and larger whole. The best method of treatment is to start from the consideration of the separate parts and show how they become effectively combined in the natural course of events.

The financial position of such a composite State as Austria-Hungary is another difficult question; but here, again, the parts take precedence of the combination, which is strictly dependent for its revenue on the contributions of its components. The revenue of Austria-Hungary is formed from expenditure by Austria or Hungary. A further consideration to be borne in mind is the determination of the amount of contribution on the basis of treaty or contract, which will presumably be calculated in proportion to the benefit received by each portion. The whole arrangement is therefore one of international rather than public law.

Like considerations are applicable to Colonial finance. It is perfectly correct to combine the central and local finance of the United Kingdom into a single whole. A similar attempt with the British, Canadian, and Indian financial systems would be absurd.
*128 The conditions of unity do not exist. The very conception of a financial system depends on the existence of the single State which has created it. Any departure from this fundamental principle must produce confusion.