have been the case. Conv ersely, borrowing by government was believed
to tend to raise interest rates in the country as a whole, to the detriment
of trade and industry. The conventio n of balanced budgets ensured that
normally an attempt by a minister to increase the expenditure of his
department by a substantial amount would either reduce the funds
available to other ministers, or lead to an increase in taxation. Conse-
quently, the chancellor could usually find support among his Cabinet
colleagues when he resisted a minister’s demands. The Admiralty and
the War Office tried to get round the discipli ne of the balanced budget
by charging non-recurrent expenditure, such as dockyards or fortifica-
tions, to loans raised under successive Naval and Military Works Acts,
but the Treasury maintained accountability by insisting that any such
loan, except in wartime, must be kept apart from the rest of the national
debt, with the interest on, and annual repayments of, the loan charged
to the department concerned. In 1906 Asquith, in his budget speech,
declared that this practice would stop, as it encouraged ‘crude, pre-
cipitate and wasteful’ expenditure.
47
Unfortunately for the Admiralty,
this change in budgetary practice came at a time when new dockyards
and defended bases were required in Scotland as a result of the need to
match Germany in the North Sea.
The system of public financ e meant that the level of defence expen-
diture was determined by how much revenue could be raised by taxa-
tion. Taxes could either be direct, as with income tax or death duties, or
indirect, as with excise duties on items of expenditure, such as tobacco
or alcohol, or, more controversially, customs duties on imports. Britain
had adopted free trade in the middle of the nineteenth century, but
Joseph Chamberlain resigned from Balfour’s government in 1903 to
campaign for ‘tariff reform’, by which he intended to ‘broaden the basis
of taxation’ by raising more revenue from customs dut ies; to protect
British industry from foreign competition; and to strengthen links with
the self-governing colonies of the Empire by a sy stem of imperial pre-
ference whereby goods traded within the Empire would be liable to
lower customs duties than foreign goods. Eventually Chamberlain’s
campaign split his party, and Balfour resigned in December 1905. The
issue of free trade or protection was a gift to the Liberals, who won the
1906 election largely because they could portray the Conservatives as
the party of dear bread (‘broadening the basis of taxation’ and imperial
47
Parliamentary Debates, 4th series, 1906, vol. 156, col. 290. For political economy and
public finance, see G. C. Peden, ‘From cheap government to efficient government: the
political economy of public expenditure in the United Kingdom, 1832–1914’, in
Donald Winch and Patrick O’Brien (eds.), The Political Economy of British Historical
Experience, 1688–1914 (Oxford University Press, 2002), pp. 351–78.
Arms, economics and British strategy36