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THE TWO PARTS OF A BUDGET

Now a national budget may consist of two parts, one of which I will call the "responsive" and the other the

"non−responsive" portion. The responsive portion is the part that may be expected to answer sooner or

later−−later perhaps rather than sooner−−to alterations in general conditions, and particularly to price

alterations. If there is a very marked difference in general price level, the salaries−−both by the addition or

remission of bonuses and the general alteration in scales for new entrants−−may be expected to alter, at any

rate, in the same direction, and that part of the expense which consists of the purchase of materials will also be

responsive. The second, or non−responsive part, is the part that has a fixed expression in currency, and does

not alter with changed conditions. This, for the most part, is the capital and interest for the public debt.

Now the nature and gravity of the "long distance" problem is almost entirely a question of the proportions

which these two sections bear to each other. If the non−responsive portion is a small percentage of the total

the problem will not be important, but if it is larger, then the question must be faced seriously. Suppose, for

example, that you have now a total budget of 900 million pounds, and that, in the course of time, all values are

expressed at half the present currency figure. Imagine that the national income in this instance is 3600 million

pounds. Then the burden, on a first approximation, is 25 per cent. Now, if the whole budget is responsive, we

may find it ultimately at 450 million pounds out of a national income of 1800 million pounds, i.e. still 25 per

cent. But let the non−responsive portion be 400 million pounds, then your total budget will be 650 million

pounds out of a national income of about 2000 million pounds, or 33−1/3 per cent., and every alteration in

prices−−or what we call "improvement" in the cost of living−−becomes an extraordinarily serious matter as a

burden upon new enterprise in the future.

Let me give you a homely and familiar illustration. During the war the nation has borrowed something that is

equivalent to a pair of boots. When the time comes for paying back the loan it repays something which is

equivalent to two pairs or, possibly, even to three pairs. If the total number of boots produced has not altered,

you will see what an increasing "pull" this is upon production. There are, of course, two ways in which this

increasing pull−−while a great boon to the person who is being repaid−−must be an increased burden to the

individual. Firstly, if the number of people making boots increases substantially, it may still be only one pair

of boots for the same volume of production, if the burden is spread over that larger volume. Secondly, even

supposing that the number of individuals is not increased, if the arts of production have so improved that two

pairs can be produced with the same effort as was formerly necessary for one, then the debt may be repaid by

them without the burden being actually heavier than before.

Now, coming back to the general problem. The two ways in which the alteration in price level can be

prevented from resulting in a heavier individual burden than existed at the time when the transaction was

begun, are a large increase in the population with no lower average wealth, or a large increase in wealth with

the same population−−which involves a greatly increased dividend from our complex modern social organism

with all its mechanical, financial, and other differentiated functions. Of course, some of the debt burden is

responsive, so far as the annual charge is concerned, on that part of the floating debt which is reborrowed continually at rates of interest which follow current money rates, but, even so, the burden of capital repayment

remains. An opportunity occurs for putting sections of the debt upon a lower annual charge basis whenever

particular loans come to maturity, and there may be some considerable relief in the annual charge in the

course of time by this method.

What are the prospects of the two methods that I have mentioned coming to our rescue in this "long distance"

problem? It is a problem to which our present "short distance" contribution is, you will admit, a very poor one,

for we have not so far really made any substantial contribution from current revenue towards the repayment of

the debt.