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Published online by Cambridge University Press: 07 November 2014
While the war lasts most decisions and policies can only be provisional. It has now become apparent that the view that the conflict had settled down into siege warfare, supported by the Allied blockade of Germany, has been belied by events. In the last war the long military stalemate in France gave the Allies time to organize their superior economic strength, and in the end this superiority tipped the scales. The economic strategy so far would seem to have been based upon the assumption of much the same kind of military development. If, however, the military situation is as critical as it appears to be, the economic strategy will have to alter. Our economic and financial measures are then likely to undergo a series of improvisations which will defy all attempts at precise calculations. Germany's blitzkrieg will certainly warrant new forms of economic mobilization in the United Kingdom, and probably in Canada too. In this situation careful attempts to minimize costs, involving a widespread reliance on private-initiative and the free pricing system, must and will be thrown overboard. And with them will go the framework and modes of thought of much of our traditional economic theory.
Discussion of the finance of war is also complicated by the fact that public finance—or the larger problem of war economics—is as much a problem of politics as it is of economics. And it is the political aspect of the subject which surrounds war finance with most of the controversy which it possesses. Whether a particular form of taxation, or the decision to do by government decree what is normally done by taxation, is desirable or not, turns more and more on the state of political sentiment, and less and less on questions of economic analysis. In this domain of politics the economist has no particular jurisdiction; and for the politician himself the condition of public opinion changes so rapidly during war that measures deemed impolitic today may be universally demanded tomorrow.
At the time when this paper was read at the Annual Meeting of the Political Science Association in May last, the German break-through into France had just begun. Since that time the military situation has led to a considerable re-casting and an enormous extension of Canada's war effort, which is reflected in the Budget proposals just announced. Although the paper is published virtually unchanged, I have called attention in the foot-notes to such recent official announcements as may relate to the problems discussed in this paper, and to such additional statistical information as has since become available (July 1, 1940).
2 For example, it seemed reasonable last winter to try to ensure that the war effort should not unduly jeopardize our prospective post-war trade. In the light of an inevitable and easy victory this concern may have been proper, but not so today.
3 See, for example, the admirable and detailed calculations of Plumptre, A. F. W. in Brown, F. H., Gibson, J. D., and Plumptre, A. F. W., War Finance in Canada (Toronto, 1940).Google Scholar It should be added that these writers are not unaware of the difficulties referred to above.
4 From subsequent discussions in Parliament it appears that the delay in sending blueprints and specifications from Great Britain has constituted an important bottleneck in certain war industries in Canada. On June 27, the Minister of Labour told the House of Commons of government plans to speed up the training of skilled machinists by the use of 4,000 to 4,500 instructors in summer schools. “We have already made a survey of the amount of labour immediately required, not only in each plant but in each portion of each plant. We are endeavouring in every possible way to speed up the training in order to meet the demand.”
5 Professor C. S. Richards writes: “It seems clear, therefore, that the utilization of the price structure is, even under war conditions, likely to give a truer measure of new relative marginal utilities or of the relative rates of substitution which should take place.” “Some Factors in the Economy of War” (South African Journal of Economics, Sept., 1939).Google Scholar
6 The expenditures for the fiscal year ending March, 1940, were estimated in the Budget at $681 million, of which $118 million were described as war expenditures. The actual amount of war expenses incurred, of course, was much greater than the latter figure suggests. Thus, up to June 11, orders placed by the Department of Munitions and Supply and its predecessors totalled $234 million, covering more than 19,000 contracts (release of the Director of Public Information). For the current fiscal year the Minister of Finance has now budgeted for $448 million of normal expenditures, plus the war expenditures. The estimates for the latter are necessarily provisional and Mr. Ralston gave only the following indication of what the expenditures might be: “Parliament has already approved a war appropriation amounting to the sum of $700,000,000. … Combining these two figures gives us a total of $1,148,000,000. But even this huge sum may not, and almost certainly will not, represent the total of our expenditures for the current fiscal year. Since the War Appropriation Act was passed with its grant of $700,000,000 for war purposes, we have made heavy additional commitments and these are constantly having to be added to. … I would think that we are already committed to another $150,000,000 to $200,000,000 for the fiscal year and that such reductions as may take place in our original estimates due to changes in plans will probably be more than offset by further undertakings.”
7 Assuming total federal expenditures of $1,200 million and a national income in the current fiscal year of not less than $4,500 million (estimate given in the Budget) the proportion would be nearly 27 per cent; the inclusion of normal provincial and municipal expenditures would raise the proportion to nearly 40 per cent of the national income. It is reported that the Italian Central Government alone was spending almost half the national income previous to Italy's entry into the war ( Economist, June 8, 1940, p. 1008).Google Scholar
8 Alternately—or in addition—some of the resultant increase in domestic incomes will tend to be saved and invested abroad, or used to retire foreign debt, as in recent years. That is, it is not all spent in Canada. See Parkinson, J. F., “The Foreign Exchange Rate and the Mechanism of International Adjustment,” in Canadian Investment and Foreign Exchange Problems (Toronto, 1940).Google Scholar
9 When $92 million, part of a loan of $200 million arranged by the Canadian Government with the chartered banks, was placed to the credit of the British Government in return for the repatriation of securities. In his budget address the Minister of Finance assumed that the Government would require another $200 million for this purpose during the current fiscal year.
10 The prevention of “unnecessary imports” from Canada is already being practised by the United Kingdom and by other British Dominions, but this is unlikely to affect the bulk of Canadian exports.
11 Not all of the export-surplus with the United Kingdom will need to be settled by the repatriation of securities. The cost of maintaining Canadian forces in the United Kingdom, or elsewhere in Europe, will be an offset to this.
12 Owing partly to the fact that exports of gold to the United States were only half the normal figure, a large amount being sold to the United Kingdom in that year.
13 If the economic aspect of the Canadian war effort involved mainly an increase in agricultural production and export (as in 1914-18) both the fiscal problem and the balance of payments problem would be less accute. Thus it would doubtless be possible to double the output of agricultural products generally, by more intensive cultivation, without calling upon outside resources very heavily, and without a great increase in domestic costs.
14 The Budget proposes a War Exchange Tax of 10 per cent on the value of all imports, free and dutiable, from non-Empire countries, subject to the usual drawback for export. The Minister stated that though the purpose of this tax is primarily to conserve exchange, it is expected to produce $65 million of revenue in a full year of operation. Further: “As this is intended as an exchange tax and not a protective duty, power will be taken to prevent unjustified increases in prices as a result of this tax. The policing of price increases will be under the Wartime Prices and Trade Board and any attempt to take advantage of the tax to increase prices, other than to the extent justified by an increase, resulting from the tax, in the cost of raw materials or parts entering into the product, can be dealt with by appropriate measures applicable to the industry or the individual as the case may be. It would merely add to the post-war problems of adjustment if industry made plans for permanent production in Canada on the assumption that this special exchange tax would be permanent.” The War Exchange Tax was declared by the Minister to be of the type provided for in the Canadian-American Trade Agreement, signed November 17,1938. Article XII of the Agreement runs: “Nothing in this Agreement shall be construed to prevent the enforcement of such measures as the Government of either country may see fit to adopt … (d) should that country be engaged in hostilities or war. …” The operation of this measure is therefore intended to cease with the end of the war. It seems fair to comment that this tax is in large measure a tax on consumption, and, in many cases (e.g. coal) a tax on necessities.
15 According to the Budget this principle is now accepted with respect to the manufacture or importation of new cars and automobile parts. The intention of the Government is to place a heavier and steeply graduated tax on all automobiles, which is to be virtually prohibitive of the purchase of higher priced cars. This type of car accounts for the major part of the importation of finished automobiles and, where they are made in Canada, these cars require the importation of a larger proportion of parts and material than do the cheaper types. However, the purpose of the tax is not solely to conserve foreign exchange. “Productive capacity in Canada, and I believe also in the United States, will be more and more taken up with work on war equipment. Our production of automobiles will necessarily, therefore, be restricted if war work is to have priority. While not at the moment cutting off all production of passenger cars, this tax will, it is believed, restrain the demand and tend to keep it in balance with lower production, without causing the increase in price which might result from curtailed productive capacity and unrestrained demand. It is expected that any surplus of labour either in manufacturing establishments or in garages occasioned by this tax will be absorbed by war needs for the production and servicing of mechanical transport and other equipment.”
16 The principal ones affected by the budget are phonographs, cameras, radios, and radio tubes. New excise taxes of 10 per cent are proposed (in addition to the War Exchange Tax) on such imports from non-Empire countries.
17 “In the initial period of the war in which business was expected to be hesitant, if not actually depressed, the appropriate financial policy was declared to be one which would facilitate the expansion of national income and the drawing into employment of our full man-power. … In accordance with the declared policies, the Government made its first financing in the form of a short-term banking operation which was definitely expansionist in character. This was a loan of $200,000,000 arranged with the banks in November, 1939, on the security of two-year notes at a rate of 2 per cent. … This borrowing from the chartered banks was facilitated by appropriate monetary policy. Between August and November the Bank of Canada's assets increased by approximately $107,000,000 as a result of the purchase of securities and the increase in the value of its gold and foreign exchange reserves. This provided cash to meet the enlarged public demand for notes in circulation and to increase the cash reserves of the chartered banks by $33,000,000. With this increase in cash reserves, the chartered banks were enabled to increase their total Canadian deposits by approximately $306,000,000. In the same period, they increased their current loans by approximately $147,000,000, mainly to finance the large wheat crop, and added to their net holdings of securities by $158,000,000. By the middle of January it became apparent that business had acquired sufficient momentum to justify going to the public for a loan out of savings” (Budget address).
18 “There is every likelihood that the expenditure of $700,000,000, and more, for war purposes, plus the very large amounts which the United Kingdom is spending in this country will bring us before long to the point where everyone able and willing to work and not needed for military service will find an opportunity for productive employment” (Budget address).
19 Needless to say the inequality of burdens involved in inflation is made worse by the fact that those who profit from it can turn their profits into government bonds, at a time when commodity prices are high, and may well be repaid in dollars of a higher purchasing power, when the post-war deflation comes. This happened to Great Britain after the last war, and we cannot guarantee that history will not repeat itself. The greater the reliance on loan finance, the stronger will be the necessity for a capital levy to deal with the debt problem when the war is over.
20 The 1940 Budget has now reduced the exemptions from $1000 and $2000 for single and married persons respectively to $750 and $1500, and increased the rates payable on taxable income. In addition to this tax all persons receiving an income above $600 (if single) or $1200 (if married) will pay a National Defence Tax of at least 2 per cent on the entire income (3 per cent for single persons with incomes above $1200), subject to certain minor provisos and exemptions. So far as possible the administration of the latter tax will be simplified by collection at the source. In effect, this is mainly a wage and salary tax and is estimated to produce $35 million of additional revenue in a full year, or about as much as was raised annually by the entire personal income tax in the period 1935-38.
21 With the new budget this is no longer correct. Under the proposed new rates the taxpayer will pay 6 per cent on the first $250 of taxable income (the exemptions also being lowered) instead of the former initial rate of 3 per cent on the first $1000 of taxable income. On the next $750 of income the proposed new rate is 8 per cent, and on the next $1000 of taxable income 12 per cent, and so on. Taking account also of the National Defence Tax some typical increases are as follows (basis, married persons without dependants): Total income $3,000, tax increased from $36 to $195; $5,000, tax increased from $144 to $555; $10,000, tax increased from $781 to $2,170; $20,000, tax increased from $3,112 to $6,530. For incomes below $10,000 the direct tax payments in Canada now vary from 20 to 60 per cent of the comparable British amounts; for incomes above $20,000 Canadian levies will be 80 to 85 per cent as great.
22 “The total assessed income of all persons liable to income tax in the year 1938-39 was only $730 million, and if we took from all these people the whole of their incomes in excess of $2,000 a year we should obtain only $144½ million more than we would get on these incomes at existing tax rates” (Budget address).
23 I.e. relatively to the United Kingdom, for example, where the amounts left to individuals after payment of income tax is smaller.
24 See War Finance in Canada, p. 79.
25 Estimate of Currie, Laughlin, Hearings Before the Temporary National Economic Committee, Part 9 (Washington, 1940), p. 4122.Google Scholar
26 See Stollery, C. W., “Canadian Corporate Savings,” in Canadian Investment and Foreign Exchange Problems.Google Scholar
27 See Watson, Graeme, “Mining Finance in Canada,” in Canadian Investment and Foreign Exchange Problems.Google Scholar
28 The excess profits tax of September, 1939, is to be revised and increased. According to the Budget proposals, corporations will pay 75 per cent of any profits in excess of those earned in the base period, and in no case will the excess profits tax, when combined with the corporate income tax, be less than 30 per cent of the total profits, whether or not these exceed pre-war profits.
29 After providing for revenues from new taxation the Minister of Finance has estimated that the expenditures now planned will require the government to raise $550-$600 million by the issue of long term loans. It would seem that this will stretch the real saving capacity of the economy to the limit, to say the least.
30 A measure requesting the British Parliament to amend the British North America Act so as to give the federal Government power to enact such legislation has now been passed by both Houses at Ottawa. No details of the actual plan—which may be introduced during the present session—have been released as yet.
