£1,000 millions; and Scale III, £2,000 millions. If the rates of Scale I were increased by 20 per cent. throughout so as to yield £3,000 millions, the net saving in interest might approximate to £60 millions. 733. Although all the reactions of a levy would have to be known in order to determine its true financial results, the amount of the immediate net saving is obviously of great importance. It largely influenced the attitude of several witnesses. Mr. Pethick-Lawrence thought that a levy had to be on a considerable scale or not at all, and he regarded a net saving of £50 millions a year as a minimum. If a levy were watered down to a point bringing in less than this figure, he did not think it would be worth going to the trouble of imposing it. (Q. 6274.) Both Professor Pigou and Mr. Keynes, who in the period immediately following the War expressed themselves in favour of a levy, informed us that they had come to a different view largely owing to the realisation that the inroads on ordinary revenue would make the net saving very much smaller than they had at first anticipated. Dr. Dalton, while emphasizing the view that there were other solid advantages to be gained from a levy, said: "Clearly, unless we can get some appreciable net saving it would not be worth while." (Q. 6995.) His first inclination would, however, be to adjust the scale so as to make the net saving larger. The Co-operative Congress alone maintained that a levy would be worth while, even if it were an exact anticipation of future revenue from Income Tax, Super-tax and death duties. In oral examination, however, Mr. Alexander expressed his personal opinion that there was, perhaps, a limit below which it would not be worth while to go. (Q. 8108.) 734. Conclusions on scale and yield.-The Board of Inland Revenue state that the scale of the levy would have an important bearing on the administrative task, and that Scale II, which they estimate to yield £1,000 millions, with a net saving of £17 millions interest, would present far less difficulty than Scales I and III. (Appendix XXII, para. 9.) Professor Macgregor, who favoured a levy yielding £1,000 millions, did so largely on account of administrative problems. (Ev. Appendix VIII, paras. 5-9.) 735. We recognise that a levy on this scale would be a less difficult and also a less disturbing operation than one designed to raise a larger sum. It would still, however, be a very big task, and the effect on the debt burden (capital and interest) would not appear to be commensurate. It is apparent that it would be far from satisfying the majority of levy advocates. It is probable that owners of wealth would suffer a more acute and better-founded fear of the levy being repeated, than if it were on a bigger scale. Indeed, Dr. Dalton suggested that it should be a condition of any pledge not to repeat a levy that the levy should be "of reasonably drastic dimensions." (Ev. p. 493; E. in C. 6.) that a levy of We think that the 736. We conclude, then, at once, £1,000 millions would not justify itself. levy having the largest claim on our consideration is one designed to effect a net annual saving of interest of something over £50 millions, and to raise a sum approximating as nearly as possible to £3,000 millions. This would involve a scale more severe than that of the Labour Party (Scale I). For the purpose of our discussion we need not bind ourselves, in detail, to any particular scale. If a levy were enacted, the exact steps in the graduation would no doubt receive expert consideration, but it is unlikely that the scale adopted would differ essentially from the Labour Party's in general character. III. THE LEVY AND THE PRICE LEVEL. 737. If prices fell without a compensating increase in production, and led, as would normally happen, to a reduction of profits and wages, the money yield of existing taxes at their present rates would also fall. While Government expenditure on current services would tend to shrink, expenditure for interest on the debt would not be affected in money terms at all. Therefore, the real annual burden of the interest charge would increase, and, similarly, repayment of debt at lower price levels than those prevailing when the money was borrowed would transfer to the debt holder a greater command over commodities than he transferred to the State at the time of lending. If, therefore, a heavy fall in prices is anticipated, there is a strong argument for repaying as much debt as possible before the fall occurs. It is true that there would very likely be some set off. For, if the heavy fall in prices were followed by a drop in the general rate of interest, it might make valuable conversions of debt possible. In this aspect a levy might forfeit a material advantage, as regards the part of the debt which it redeemed. On the other hand, the levy might itself exert some favourable influence on the Government rate of borrowing (cf. para. 768). 738. From the statement handed in by the Treasury (Appendix XXV) showing the price levels, according to the Statist index number, at which the debt was raised, it appears that a little over two-thirds of the debt may be regarded as having been raised when prices were above the present level. (This approximation can only be rough, since the cash figures given are net borrowings, or net repayments, in the year.) The largest borrowings were in the years 1916-17 to 1918-19, when a net sum of £3,145 millions was raised, with an average price level (1913 being taken as the base year) of 170-0 in 1916-17, 212.3 in 1917-18, and 226-1 in 1918-19. These borrowings included the 5 per cent. War Loan and the bulk of the issues of National War Bonds, securities which have comparatively short lives, compulsory or optional. 739. At the time when the levy was first brought into prominence, the price level was, of course, much higher than at present. In 1919-20 and 1920-21 it was 261·1 and 270-6, respectively, or above the level at which borrowing in the three years. preceding had taken place. The level for 1923-24 was 1543, for 1924-25, 166-1 and for 1925-26, 155.1. (cf. para. 199.) The extent of the fall proves how strong was the case for a Capital Levy after the War, so far as it rested on the high price level then ruling. It is clear that in present circumstances the argument is no longer the same. 740. As might be expected, the evidence tendered on the question of the future price level was, for the most part, very indefinite. Professor Scott, who dealt with it in some detail, guarded himself by saying that, as we were concerned with prices over a period of about a century, it was merely a question of making the best guess. He considered that the conditions of gold production and the probability of the economy of the use of gold for currency were the more relevant questions in relation to the metal, and the general technique of industry and commerce in reference to commodities. There seemed to be some grounds for a fairly confident expectation of a very considerable development of methods of production within a generation from now, with a consequent tendency towards greater plentifulness of commodities. Taking account of all factors, he thought that ultimately prices would be lower than the present level, but that the fall would be rather protracted and it would be some time before it became definitely established. The increased production of commodities was likely to be greater during, say, 1940-50 than the increase in the production of gold. His anticipation tended in the general direction that the maximum strain for interest on the debt had been already passed; that prices were likely to oscillate rather more in the next few years than in the immediate past; and that during that period a fall on balance was unlikely. After that it was possible that a considerable interval would elapse before the ultimate fall would establish itself, and finally, unless there was an almost unique combination of circumstances, the price level at the end of the 19th century was unlikely to be repeated. In view of the uncertainty of price movements, he considered that there was no special reason on this ground for an early repayment of a large amount of debt (E. in C., 2). Mr. Hobson did not anticipate any early change in the level. Mr. Paine also thought that, with wages at their present level, there would be no considerable reduction. The Association of British Chambers of Commerce held similar views. Dr. Dalton considered that the risk of a fall was an additional argument for a levy; no one could estimate the risk, but there could be no doubt that it existed. Mr. Pethick-Lawrence thought the question depended almost entirely on currency policy, and, until 65184 I that was decided, only baseless conjectures could be made. The Trades Union Congress attached little importance to any estimate in view of the scanty data. In their view, the case for debt repayment is, and must be, established upon the known facts of the case. 741. Mr. McKenna said that, if the course of history were any guide, prices were certain to rise over a considerable period of time, so that postponed repayment would benefit the debtor, in this case the nation (Ev., p. 480; E. in C., 10). Professor Pigou, however, pointed out that the appeal to history furnished no proof that the tendency to rise would continue, and added that adequate data for prophecy were lacking (Ev., p. 436; E. in C., 4). The Federation of British Industries, who thought that the only fall in the price level likely to take place in the future would be a very gradual process caused by cheaper methods of production and new inventions, suggested that, with the return of this and other countries to a gold standard, the price level would in the future become a world price level. If and so far as there were control by a conference of the central banks of the world, indications seemed to point to a notable influence in favour of a rising rather than a falling level. The Federation added a reference to the growing body of opinion in favour of stability, and to the possibility of a compromise stabilising world prices at somewhere above the present level. "As far as can be judged, therefore, the probability seems to be that the future level of prices, if it differs at all from the present level, will be higher. Immediate heavy repayment of debt, therefore, which might be justified in circumstances when a rapid and substantial fall in prices was to be anticipated, would merely result in unnecessary sacrifice and effort, since the debt could be repaid more cheaply at a later date." (Ev., Appendix VI). 742. It would be necessary to weigh other difficult economic questions, not covered by the evidence, in order to attempt any nice balance of probability as to the future trend of prices. We think, however, that the evidence is sufficient to indicate that present conditions do not point to any very strong or definite movement in general prices such as would be required to affect in any important degree the case for or against a levy. depends on the direction of banking policy in this country and also abroad, a most important matter, as indicated by the Federation of British Industries, but one which we have not been asked to examine. Much 743. We consider in a separate section (para. 786 et seq.) the possibility that a levy might itself induce deflation and a fall in the price level; if it did so, it would of course add to the annual burden of the unredeemed part of the debt. IV. THE QUESTION OF A GUARANTEE AGAINST REPETITION. 744. We have referred above (para. 735) to the fear that a Capital Levy might inspire of its being followed up by a second. All the economic effects of a levy would depend a great deal on psychological reactions. It would, therefore, be important that a Government introducing a levy should consider every means of making it as acceptable as possible to the taxpayer, and particularly to the trading community. 745. The general opinion of witnesses has been that a levy, unless it were accompanied by some kind of guarantee, would give rise in greater or less degree to the fear of repetition. Mr. Hobson was exceptional in not believing that owners of capital would feel any real apprehension, short of the emergency of another war (Ev., Appendix VII, para. 6). 746. Without exception, witnesses have agreed that it would be impossible under our constitution to give any absolutely secure and effective pledge that a levy would not be repeated. While, however, some witnesses have expressed the view that no guarantee could be convincing or effective, others have thought that a limited guarantee would serve the purpose. Dr. Dalton suggested that the present generation of politicians could pledge themselves against repetition and, if a levy of reasonably drastic dimensions were agreed upon, ought to do so (Ev. p. 493; E. in C., 6). The Co-operative Congress suggested an assurance --participated in by all parties-that the levy was exceptional and would not be repeated within any conditions that could now be foreseen (Ev., p. 566, E. in C., 17). Mr. Pethick-Lawrence also suggested a conditional assurance by those bringing in the levy (E. in C., 13). The Trades Union Congress, who thought a guarantee should be given, were of opinion that the form suggested as possible by Sir Josiah Stamp in "Current Problems in Finance and Government" would in practice be accepted as effective by the taxpayer (Ev., p. 587, E. in C., 10); the suggestion referred to is that every levy receipt might on the face of it contain a Government undertaking that the " corpus of wealth" brought under the tax represented by the receipt is franked for a minimum period of 25 years from any tax of a similar kind. 747. We agree that an absolute guarantee against the repetition of a levy would be constitutionally impossible in this country. Even were it otherwise, we should question the wisdom of an unqualified pledge. Mr. McKenna, while strongly opposed to a levy, argued that, if it were a beneficial proceeding, there was no reason why it should not be repeated, and in these circumstances a guarantee would be a self-denying ordinance (Q. 6620). Up to a point we agree. The success of a levy would, within limits, be a consideration in favour of repeating it, though only after some interval of time; again, even if a levy were found not to be 65184 I 2 |