REPORT OF THE AGENT GENERAL
FOR REPARATION PAYMENTS
BERLIN, June 10, 1927

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IV. The German Budget.

During the six months that have passed since the last Report, the Reichstag has adopted the budget for the financial year 1927-28, as well as a large supplementary budget applying. to the financial year 1926-27, which ended March 31, 192 7. More recently, the provisional figures have become available for the actual revenues and expenditures of the financial year 1926-27. These figures, with the new budgets that have been adopted, make it possible to survey the budgets of the Reich for a period of four consecutive years, and make it desirable at this time to review the relations between the German budget and the operation of the Experts' Plan.

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a. The Interest of the Experts' Plan in the German Budget.

Germany is regularly and punctually making the payments required of her under the Plan. and in these circumstances it may be asked why it is that the German budget should be a matter of concern in the administration of the Plan. The Plan did not establish any general control of Germany's revenue and expenditure, and it gave the Agent General for Reparation Payments no general powers of supervision over the German budget. The German Government, on the contrary, is left free under the Plan to prepare and administer its budgets, and it acts throughout on its own responsibility. It must, of course, have due regard to the, obligations which it has undertaken, but so long as it makes the payments called for by the Plan no question of external budgetary control arises.

The Experts' Plan is nevertheless interested at all times in the position of the German budget, and its interest may be stated on at least three main grounds.

First of all, the Plan has an interest in the German budget on the general ground that budget stability is essential to the economic recovery of Germany and to her ability to make the reparation payments called for by the Plan. The purpose for which the First Committee of Experts was appointed was to "consider the means of balancing the budget and the measures to be taken to stabilize the currency" of Germany. The Experts recognized that these two problems were interdependent, and they considered each of them with great care, "without ever losing sight of the fact that the stabilization of the currency and the balancing of the budget are means designed to enable Germany to satisfy her own essential requirements and to meet her Treaty commitments, the fulfilment of which is so vital to the reconstruction of Western Europe." In discussing the necessity and the means of balancing the budget, the Experts said:

"It will be obvious that the balancing of the budget is, like the stabilisation of the currency, of little value unless it can be maintained. It is not enough to be satisfied that one or even several budgets will be balanced. It is necessary to consider under what conditions, assuming sound administration financial as well as currency stability can be continuously ensured, or rather under what conditions such stability once gained is likely to be endangered. It is inevitable therefore that we should look forward, not indeed in the same detail but with proper regard to the chief determinating factors, to those later years during which Germany will have gradually to liquidate her external Treaty obligations."

These quotations emphasize the interest of the Plan in the continued stability of the German budget. The duty of maintaining this stability and of guarding in every possible way against developments that might lead to budget instability, is a duty which rests primarily on the German Government itself and which in its own interest it may be expected to perform. But the Plan must none the less be concerned over any tendencies which seem likely to threaten the stability of the budget.

Secondly, the Plan has a direct interest in the German budget because it provides for budgetary contributions to be paid each year by the German Government to the Agent General for Reparation Payments. These contributions began in the second Annuity year, and may be summarized in general terms in the table appearing on page 25 [immediately below], which gives the figures by Annuity years, ending August 31st, as well as by budget years, ending March 31st.

The budget contribution proper, which rises to 1,250 million gold marks in the standard year, is specifically secured by the pledged revenues, consisting of the customs, the taxes on tobacco, beer and sugar, and the net return from the alcohol monopoly. These revenues are assigned to the Commissioner of Controlled Revenues, under the Control Protocol that formed part of the London Agreement, and the budget contribution is paid each month by the Commissioner of Controlled Revenues to the Agent General for Reparation Payments out of the yield of the controlled revenues. As appears elsewhere in this Report, and from the report of the Commissioner, the yield of the controlled revenues in the financial year 1926-27 amounted to slightly over 2,400 million reichsmarks, and the current budget envisages substantially the same yield for the financial year 1927-28. At this figure, the pledged revenues provide a margin of security amounting to nearly 100 per cent over the budgetary contribution proper in the standard year. The payments from the yield of the transport tax are secured by the transport tax collections, and by virtue of the provisions of the Plan and of the Railway Law, are payable direct to the Agent General for Reparation Payments each month by the German Railway Company.

The Plan has thus defined the prior obligation of the German Government to make reparation payments out of the German budget and has provided specific securities for its discharge, including the pledged or assigned revenues. At the same time, the fact that the budgetary contributions are secured does not in any way lessen the interest of the Plan in the stability of the budget. However well the budgetary contributions themselves may be secured, a balanced budget is the foundation stone of the Plan and of the reconstruction of Germany.

Third, the Plan has a general interest in the German budget because of the relationship between budgetary stability and the transfer of reparation payments. As the Experts said, "The currency of a country cannot remain stable unless its budget is normally balanced and if expenditure continually exceeds receipts there will in time be no alternative but the printing of new notes to meet the excess; and the inflation will inevitably involve depreciation."

There is certainly a relationship between budgetary stability and currency stability, and anything which affects, or may affect, the stability of the currency has its repercussion on the transfer problem.

It is necessary, therefore, in view of the manifest interest of the Plan in the German budget, to study with care the development of the budget over the four years for which figures are now available. An examination of this character will be useful in discovering what, if any, unsound tendencies have thus far developed, and it may be expected at the same time to throw much light on the basic resources of the German budget and their ability, after providing for reparation payments, to meet the essential requirements of the country in future.

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b. The Budget of the Reich.

The budget of the Reich constitutes, of course, the principal element in the German budget situation, though the budgets of the States and communes must also be taken into account.

Previous Reports have traced the budgets of the Reich through the successive years of the operation of the Plan, and the last Report endeavoured, on the basis of the figures then available, to make a comparative study of revenues and expenditures for the three financial years since the stabilization of the currency. Shortly afterward, on December 17, 1926, the supplementary budget for the financial year 1926-97 passed the Reichstag, carrying items that meant substantial changes in the figures for both revenues and expenditures. It authorized additional expenditures for the year to the amount of about 1,000 million reichsmark, and at the same time added nearly 430 millions to the estimated receipts. The rest of the increased expenditures it covered, for the most part, by giving authority for additional borrowing.

A few weeks later the draft budget for the financial year 1927-28 was presented to the Reichstag, with provision for total expenditures in almost exactly the same amount as the increased totals for 1926-27. In the succeeding three months, while the budget was under discussion, the authorizations of expenditure were still further increased by more than 600 million reichsmarks. The budget for the year, as finally adopted on April 13, 1927, was brought into balance only by increasing the revenue estimates by 270 million reichsmarks, by carrying over an estimated surplus of 200 millions from 1926-27, by taking 190 millions from the so-called reserve or working fund of the Reich, and by authorizing the borrowing of 466 million reichsmarks in place of 528 millions in the original draft. In the discussion which preceded its adoption, the Finance Minister spoke frequently of the difficulties the Government was experiencing in keeping the budget in balance, and even before adoption he gave notice that supplementary appropriations would soon be required to provide increased salaries for Government officials and employees, additional grants to -war victims, and compensation to German nationals for damages incurred in connection with the liquidation of private property in foreign countries as a result of the war. Up to this time, however no supplementary budget for 1927-28 has been presented.

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1. Comparative Budget Statements.

The comparative statement on page 27 [immediately above] summarizes available figures of the budget of the Reich for the financial years 1924-25, 1925-26, 1926-27, and 1927-28. For the first two years the figures given are those of the actual accounts. For 1926-27 the receipts for the most part are actual and the expenditures provisional. For the year 1927-28 the figures are those of the budget estimates recently adopted. In all cases, the figures are given without distinction as between the so-called ordinary and extraordinary budgets.

Of the four years covered by the foregoing statement, only the first, the year 1924-25, shows an excess of revenues over expenditures. The revenue surplus in this year was increased by 355.3 million reichsmarks, representing the balance of proceeds of loans from the Rentenbank and from special gold loans in connection with the stabilization of the currency. In each of the other three years the statement shows an excess of expenditures over revenues, ranging from 109.9 million reichsmarks in 1925-26 to 853.5 million reichsmarks in 1926-27, and an estimated deficit of 856.4 million reichsmarks in 1927-28. These deficits have been largely covered by the transfers of the exceptional balances remaining over from the year 1924-25, but in 1926-27, for the first time since the Plan went into effect, it became necessary to issue a loan of the Reich in order to cover part of the excess of expenditures over receipts. The 1927-28 budget carries authority for further borrowing to the amount of 466.4 million reichsmarks, for the purpose of covering the budget deficit.

A transfer of 190 million gold marks from the so-called reserve or working fund of the Reich is also included in the 1927-28 estimates as a balancing item. It is difficult to determine the source of this item in any of the previous budgets, but apparently it arises from net profits from seigniorage that were made by the Reich in the year 1924-25. An annex to the 1924-25 accounts indicates that the seigniorage profits in that year amounted, in fact, to about 342 million reichsmarks. The final accounts for the year, on the other hand, show only about 99 millions of seigniorage gross profits less 9 millions expenses, and there remained 251.9 millions of profits that were not introduced into the accounts but were set aside as a special reserve or working fund entirely outside of the accounts. This is the place from which the 190 millions were drawn to help balance the 1927-28 budget, leaving an apparent balance of 61.9 millions in the reserve or working fund.

The revenues and expenditure of the four years covered by the comparative statement, excluding the proceeds of loans as well as all transfers of balances from year to year and transfers from reserve funds. are shown graphically in the following diagram:

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2. Explanation of the Budget Statements.

The foregoing comparative statement of the budgets of the Reich aims to summarize the budget situation in the simplest possible terms, and for that reason it disregards the distinctions which the budget itself draws between the ordinary and extraordinary budgets and between recurrent and non-recurrent expenditures. The budgets of the Reich also present other complications, the most important of which arise from the system of transfers from year to year and from the various methods of showing transactions in the public debt, whether receipts from the proceeds of loans or expenditures for the reduction of debt.

It is necessary, in the interests of simplicity, to exclude these complications, as far as possible, from the comparative studies of the budgets of the Reich which are given in this Report. The complications, however, have some importance in themselves, and it is desirable, in the interest of a clear understanding of the budget statements, that they should be briefly stated and explained.

(a) The division between the ordinary and extraordinary budget

The most important division in the budget of the Reich is that between the ordinary and extraordinary budgets. The main principles which are followed in drawing up the extraordinary budget are set forth in the so-called fundamental Budget Law of December 31, 1922. This law provides that the Reich budget shall be divided into the ordinary and extraordinary budgets. In the ordinary budget are to be included the regular, or ordinary, receipts of the Reich and the expenditures to be met from them. In the extraordinary budget, on the income side, are to be included the proceeds of loans and of the sale of Reich property, surpluses from the ordinary budget, contributions to the amortization of debt, and any other income which is "extraordinary in respect of its amount or its origin." The expenditures to be met from these extraordinary receipts must be extraordinary in their nature, and are subject to the limitations of paragraph 1 of Article 87 of the German Constitution, which provides that "Funds may be obtained by means of credits only in case of extraordinary need, and as a rule only for expenditures made for productive purposes."

The table which appears below gives a comparative statement of the extraordinary budgets of the Reich for the four-year period. For convenience of presentation the table divides the extraordinary budgets into two parts, the first showing revenues and expenditures of the extraordinary budget proper, and the second covering expenditures met out of revenues transferred from the ordinary budget, including the special amortization of the debt, the transport tax, and the budgetary contribution under the Experts' Plan after the second Annuity year. It will be observed that in 1926-27 and 1927-28 all items in the extraordinary budget proper are covered, with insignificant exceptions, by loans authorized or issued.

The budgetary contribution under the Experts' Plan is carried in the extraordinary budget, but beginning with the third Annuity year it is covered by transfers of revenue from the ordinary budget. The same is true of the payments from the yield of the transport tax, as from the beginning of the second Annuity year. The budgetary contribution in the second Annuity year, amounting to 250 million gold marks, appears to have been carried in the extraordinary budget proper. The reason for this is not clear. As a matter of fact both the budgetary contribution and the transport tax payment in the second Annuity year were supposed to be covered, according to the terms of the Plan, by the proceeds of sale of the 500 million gold marks, nominal amount, of preference shares of the German Railway Company that were set aside for the Government of the Reich. During the course of the second Annuity year the Government elected to receive the shares themselves rather than their possible proceeds, and accordingly took over the shares as an investment, subject to the right of the Railway Company to repurchase them on certain agreed conditions, Subsequent budgets carry dividends on these shares among the administrative and other revenues of the Reich, but so far as can be ascertained the original transaction by which the shares themselves were acquired is not reflected anywhere in the budget accounts of the Reich.

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(b) Transfers from year to year.

According to German budget practice, revenues not received and expenditures not made during the year for which they are budgeted are not carried forward into the budget estimates of succeeding years. Such items, however, are included in the final accounts of the year in which they are received or paid and the excess of such payments over such receipts is met by the transfer of sums reserved in the preceding years for this purpose.

The revenues budgeted for and not received consist in recent years partly of outstanding administrative revenues but principally of the proceeds of loans authorized but not issued. A feature of budgetary practice during the period under review for which final accounts are available, is the marked increase in the figures of revenues outstanding. In 1924-25 the amount was 29.7 million reichsmarks, none of which consisted of loans to be issued. In 1925-26, the amount was 115.1 millions, of which 100 millions were loans to be issued. In 1926-27 the amount was 646.1 millions, of which 571.6 millions were loans to be issued. For 1927-28, of course, these items cannot be known until the accounts for the year are published.

Present authorizations to borrow comprise not merely the 466.4 million reichsmarks required to balance the 1927-28 budget but also 487.3 millions authorized for the years 1925-26 and 1926-27 but not yet used. In addition to these authorizations to borrow, totalling 953.7 millions, there remains an amount of 123.1 millions representing that part of the proceeds of the Reich loan of February, 1927, not received in the financial year 1926-27. This sum is carried forward into the succeeding year. The total amount of authorizations available for 1927-28 is thus 1,076.8 millions, of which 571.6 millions are reserved to cover outstanding extraordinary expenditures for 1926-27, and 466.4 millions for the extraordinary expenditures of 1927-28. The balance of the authorizations to borrow in this year, amounting to 38.8 millions, does not now appear to be required and will lapse if not eventually needed in accordance with § 2 of the Budget Law of April 14, 1927.

The effect of all this procedure is to present the financial position of the Reich in a most artificial light. These outstanding revenues, consisting principally of loans to be issued, do not represent effective revenues whereas the outstanding expenditures represent actual authorizations to spend, which in large part are already committed. This system of accounting, in other words, permits budget surpluses to be shown which do not actually exist and which will only come into existence in the future to the extent that loans are actually placed. Expressed in another manner, the budget surpluses shown can often be realized only through borrowing.

One other aspect of the problem deserves attention. The system of carrying forward authorizations of expenditure from year to year appreciably reduces the opportunity for effective control of governmental spending. This is especially true at a, time when conditions and needs are changing so rapidly as in Germany. For instance, the total authorizations to spend in the year 1926-7 which are carried forward into 1927-28 amount to 704.6 millions which means that the Government has authority to spend up to this amount in 1927-28 without the need of again going to Parliament . The lack of control under such a system is obvious.

Sufficient has been said to make clear the necessity of keeping in mind these transfers from year to year when analyzing the budget statements. They are especially important in explaining the balancing items carried at the foot of the comparative statement of the budgets of the Reich that appears above on page 27

The following statement shows the disposition of the balance carried in the comparative statement for the financial years 1924-25, 1925-26 and 1926-27, expressed in millions of reichsmarks:

BALANCE OF FINANCIAL YEAR 1924-25:

BALANCE OF FINANCIAL YEAR 1925-26:

BALANCE OF FINANCIAL YEAR 1926-27 (PROVISIONAL):

The detailed composition of the foregoing item of 395.6 million reichsmarks, representing the reserve to meet the liabilities of 1924-25 not paid in that year, has already been given in the Report of June 15, 1926. The item of 382 million reichsmarks, shown above as having been transferred to the accounts of 1926-27 to meet liabilities belonging to 1925-26 which were not paid in that year, is made up as follows:

It is not yet possible to give the details that go to make up the item of 58.5 million reichsmarks, representing the excess of liabilities of 1926-27 not paid in that year over revenues of 1926-27 not received in that year. The following information, however, may be given with regard to its general composition:

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(c) Non-recurrent expenditures.

The budget statements given in this Report make no distinction as between recurrent and non-recurrent expenditures. Such a distinction, however, is made in the German budget figures, apparently as a result of the provisions of the fundamental Budget Law of December 31, 1922. Article 4 of this Law defines "nonrecurrent expenditure" as " expenditure which by its nature does not recur or recurs only at long intervals, or whose recurrence in subsequent years is uncertain. " These expenditures appear in the ordinary budget under a separate heading, and like other ordinary expenditures are supposed to be covered by ordinary resources. In 1924-25 the estimates for such expenditures amounted altogether to 264 million reichsmarks; in 1925-26, to 655 millions; in 1926-27, to 509 millions; and in 1927-28, to 927 millions.

Non-recurrent expenditures are carried in the budget estimates under a great variety of titles, and frequently in very small items. It would not be possible, within the limits of this Report, to attempt any general analysis of expenditures on the basis of the distinction between the recurrent and non-recurrent items, but it is none the less interesting, for purposes of illustration, to present the following table showing in summary form the expenditures carried in the budget estimates for the present financial year that are described as non-recurrent:

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(d) Transactions in the public debt.

The German budget estimates are unfortunately obscure in their method of stating transactions in the principal of the public debt. Items of expenditure providing for the retirement of debt are carried, for example, in many different accounts, and sometimes without any clear separation as between principal and interest. This difficulty arises principally in connection with the payments in respect of the revalorized debt. The expenditures for this purpose amounted to 240.8 million reichsmarks in 1926-27, and the estimates for 1927-28 to 356.8 millions, but in neither case is there any division between principal and interest. It is, therefore, impossible at this time to show the total reduction of debt that has been covered by the budgets for the four years under review. Expenditures of 936.7 million reichsmarks have been made or are provided for to redeem Treasury bonds of Series " E " and " K," and sundry gold loans during the four-year period, but the definite statement of total debt reduction accomplished must in any case await the ascertainment of the :figures for the revalorized debt.

The items on the revenue side of the budget, entitled " proceeds of loans," are also difficult to follow in the budget statements. To some extent these items seem to serve as balancing items, and they are particularly confusing in so far as they enter into the items transferred from year to year.

Section IV, cont'd: b3. Detailed Analysis of the Budget Statements

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