facilities recently announced for the conversion of certificates of the first issue into a new Savings Bond or into 4 per cent. Conversion Loan will, so far as they are accepted, relieve the Treasury from the obligation which would otherwise have arisen to pay in cash the past accumulated interest on those certificates, and the terms offered on the new securities represent a small saving on the real interest charge on certificates of the first issue.

196. It remains to mention one further point of considerable importance in connection with the possible saving of interest through conversions. The reduction in the interest charge, taken by itself, naturally involves a reduction in the income which is assessed to Income Tax and Super-tax, and therefore a reduction on the revenue side of the Budget as well as in the interest on the expenditure side. We have no data for the assessment of this loss of revenue, but if we assume that the loss in tax is 4s. in the £, the net saving in the Budget would be reduced to about £26 millions in the event of conversion to a 4 per cent. basis, or to £41 millions on a 3 per cent. basis. Actually at present rates of Income Tax and Super-tax, the loss of revenue is likely to be considerably more.

THE PRICE LEVEL AND THE DEBT BURDEN.

197. Whatever saving may actually be achieved in the long run by conversion and repayment operations, it has to be borne in mind that there is not necessarily a corresponding relief in the burden of the interest charge on the taxpayer. That charge is fixed in terms of money and unless the fall in the money transfer exceeds the fall in commodity values, the burden is not diminished.

198. The relation of the burden of the repayment of debt to changes in the price level is of particular significance in connection with proposals for a Capital Levy, and we deal with it in the main under that head (para. 737 et seq.). With regard to the interest charge, it is sufficient here to point out that, if prices fall from any cause other than a compensating increase of or economy in production, profits will also fall and the taxable area will be reduced in terms of money. But a fall in prices brings no corresponding reduction in the charge for interest on the debt, except so far as the sympathetic relation of interest and prices. enables conversions to be effected. Thus the proportion of production taken to pay the interest on the debt tends to increase as the prive level falls. In other words the relative as well as the absolute purchasing power of the interest receiver rises. Correspondingly of course an increase in prices, unaccompanied by a compensating fall in production, diminishes the relative purchasing power of the fixed interest receiver.

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199. The following table shows the charge for internal debt interest reduced to the pre-war level of prices on the basis of the Statist index number (an average of the four quarters being taken) :

200. Thus despite a small decrease in the internal interest charge since 1919-20, the absolute burden measured in pre-war prices (wholesale) had increased by nearly 61 per cent. in 1923-24; 51 per cent. in 1924-25; and 61 per cent. in 1925-26. It is, however, important to note that the bulk of the internal borrowings were in fact incurred prior to 1919-20, when the price level was lower than in that year (cf. para. 738). The figures should not therefore be taken as measuring an increase in purchasing power transferred to the interest receiver over that which he transferred to the State at the time of borrowing; in other words in 1919-20 the interest receiver was suffering a reduction of his previous purchasing power.

201. On the evidence given by Mr. Layton, there was, however, an increase of production in the years 1922 and 1923 as compared with 1921. Taking his estimate of the national income (including debt interest and war pensions) we find that the proportion of that taxable income required to meet the internal debt interest is as follows:

202. On this basis the increase in the relative weight of the burden in 1923 as compared with with 1920 was 29 per cent. All the comparisons we have given can, however, in the nature of of things be regarded only as a general indication of the course of the burden. As such they

show that the reduction in the interest charge in the past few years has been insufficient to compensate the fall in prices. For the future, as we indicate in connection with the Capital Levy (para. 742), the evidence before us does not point to any strong or definite movement in general prices. In such circumstances it is to be anticipated that reductions in the interest charge will produce some diminution in the real burden. At the same time we are of opinion that the review which we have made of the possibilities of savings from conversions does not justify the placing of any very great reliance upon such operations as a means of effecting a really appreciable mitigation in the early future.

THE SINKING FUNDS.

203. We have, in the course of reviewing the various debt transactions and in Appendix V, made brief reference to the provision for debt redemption. Before setting out more specifically the present position, it may be of interest to trace shortly the development of the Sinking Funds.

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204. The record of the earliest efforts to establish a fund for the redemption of debt in this country shows one long series of failures. It was not until after the enunciation by Dr. Hamilton in 1814 of the principle that the excess of revenue over expenditure is the only real sinking fund by which public debt can be discharged," and the endorsement of this principle by a Select Committee of the House of Commons in 1828, that any real attempt was made to place the Sinking Fund upon a sound basis. In 1829 all the earlier legislation on the subject was repealed, and it was enacted that the actual surplus revenue should be issued to the National Debt Commissioners to be applied by them to the redemption of debt. This provision came to be known as the Old Sinking Fund, and when in 1875 Sir Stafford Northcote brought forward a new scheme for debt repayment, the Old Sinking Fund was retained with some alteration in machinery, under which it was directed to be issued to the National Debt Commissioners in the course of the year following that in which the surplus arose. The application of the Old Sinking Fund has been modified in recent years by provisions under which accruing surplus revenue may be applied directly by the Treasury during the current year, instead of being issued to the National Debt Commissioners in the following year.

205. It was the opinion of the Select Committee referred to above that an annual surplus of £3,000,000 should be provided, but in fact no serious effort appears to have been made to give effect to this recommendation and the amounts actually realised were generally small. In these circumstances Parliament, at the instance of Sir Stafford Northcote, made provision in 1875 for the acceleration of debt repayment through the establishment of a permanent or fixed annual debt charge. The principle of this

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charge was that it should cover not only the entire service of the debt (that is, the payment of interest, terminable annuities, management, and specific Sinking Funds) but that it should also leave a margin which should be applicable to redeem debt, and which would itself automatically increase as the charge for interest fell owing to the reduction in the debt. This margin was known as the New Sinking Fund.

206. The amount of the fixed debt charge was originally fixed at £27,400,000 for 1875-6, £27,700,000 for 1876-7 and £28,000,000 for every subsequent financial year, and it was directed that all perpetual or terminable annuities charged on the Consolidated Fund by any Act prior to 1875 should be paid out of the permanent annual charge. In the first year of operation, the amount issued in respect of New Sinking Fund and principal of terminable annuities was £4,092,221 or 0·534 upon the total deadweight debt then existing.

207. The amount of the fixed debt charge was altered from time to time, notably in 1887-8 to £26 millions, in 1889-90 to £25 millions and in 1899-1900 to £23 millions. In the year before the war (1913-14) it stood at £24 millions, and the New Sinking Fund then amounted to £5,228,000 or about 0-8 per cent. on the total debt. The principal of terminable annuities amounted to £2,377,880 so that the total issued for debt redemption out of the fixed debt charge was £7,605,880, representing 1.15 per cent. on the total debt.

208. It was proposed in the Budget of 1914-15 to reduce the fixed debt charge to £23 millions. On the outbreak of war, however, the payment of the New Sinking Fund was suspended, with the exception of £1,000,000 applied to the redemption of drawn Exchequer Bonds. The suspension continued up to the end of 1919-20, but the New Sinking Fund was resumed for the two following years. In 1922-23 as a temporary measure the New Sinking Fund was again suspended, and in the following year the basis was (as shown in para. 211) entirely altered.

209. Turning now to the changes in the position brought about by the Great War, it is of consequence to note that the debt then created was never brought within the "fixed debt charge." That charge was consequently an insignificant proportion of the total which had to be provided for the service of the debt. On the other hand certain specific Sinking Funds were attached to loans issued during the War, and other provisions in connexion with certain of those loans, such as the arrangement for their acceptance in payment of death duties, operated in much the same way as a Sinking Fund.

210. The particulars of these specific Sinking Funds are as follows:

(a) 31 per cent. Conversion Loan.-Under Section 45 of the Finance Act, 1921, the Treasury must issue from the Consolidated Fund as soon as may be after the close of each

half year during which the average daily price of the loan certified by the Bank of England has been below £90 per cent., a sum equal to not less than 1 per cent. of the amount of the loan outstanding at the close of that half year to be applied in the purchase of Conversion Loan for cancellation. The amount thus issued in 1925-26 was £14,386,000.

(b) 4 per cent. Victory Bonds and 4 per cent. Funding Loan 1960-90.-Under Section 2 of the War Loan Act, 1919, the Treasury are required to set aside at the close of each half-year a sum equal to 24 per cent. on the nominal amount of any 4 per cent. Victory Bonds or 4 per cent. Funding Loan originally created under the prospectuses dated 12th June, 1919 (together £768,640,000), and, after deducting therefrom the amount required for the payment of interest on those securities for the half year, to issue to the National Debt Commissioners the balance of the sum so set aside to be applied by them to Sinking Fund purposes in accordance with the prospectuses. In the case of Victory Bonds the Sinking Fund is applied to annual drawings at par. In the case of Funding Loan it is applied to purchase and cancellation while the loan is below par, but may be invested if the price is above par. The amount required for these loans in 1925-26 was £4,873,000.

(c) The Life Annuities and Terminable Annuities charged on the Consolidated Fund include capital repayments which amounted in 1925-26 to £1,085,000.

(d) Under the arrangement for the funding of the British debt to the United States of America annual instalments of principal, commencing at $23,000,000 in 1923-24 and increasing to $175,000,000 in 1984-5, are to be paid.

(e) Under the terms of issue of 4 per cent. Victory Bonds, the bonds, which were issued at 85, are accepted at par in payment of death duties, and under Section 3 of the War Loan Act, 1919, bonds so tendered are purchased by the National Debt Commissioners from the Inland Revenue Commissioners and held until drawn. Any sums received by the National Debt Commissioners by way of interest or repayment of principal in respect of securities transferred to them may be applied in payments to the Inland Revenue, any further requirements to meet such payments being met from the Consolidated Fund. The sum required from the Consolidated Fund for this purpose in 1925-26 £6,995,000.

was

A similar provision exists for the acceptance in the payment of death duties of Funding Loan at the issue price (80) but as long as the quotation of this stock exceeds the acceptance value it is obviously unlikely to be tendered in settlement of duties. The same considerations considerations apply generally to certain other securities which may be tendered in payment of death duties or Excess Profits Duty.

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