The growth and present situation of the public finances of Italy

«The Economic Journal», Dicembre 1915, pp. 493-511

I

Introductory and Book keeping Explanations

If we wish to obtain a birds eye view of the history and present situation of Public Finance in Italy we must take note of certain fundamental principles regulating their system of Public Accounts. But the Italian Budget is a complex one, and it will be impossible to unravel all its mysteries in a necessarily brief study. For our purpose let it suffice to say that there are two fundamental accounts. The first is the «Annual Income and Expenditure Account», which from 1862 to June 30th, 1884, ran from January 1st to December 31st, and from July 1st, 1884 – though there was an exceptional Budget for the first six months of that year – from July 1st to June 30th of the following year.

This account comprises all the receipts and all the expenditure which affect the final Balance Sheet of the Treasury, such as the income from taxes, public services, public lands, Government loans, excepting ordinary Treasury Bills, and the current and extraordinary expenditure. The second is the «Treasury Account», which shows the Treasury balances at any single moment, by giving the figures of the Treasury credits to all administrative departments, public bodies, and private debtors, and all the Treasury debts, among which are comprised Treasury Bills. The «Income and Expenditure Account» may be said in a general way to give a dynamic view of all the sums which are handled by the Treasury, either as income or expenditure. The «Treasury Account», on the other hand, gives a static view of all the credits and debts, out of which at any single moment arises the existing Exchequer balance. Of the two, the more important account is the first.

When I say that the «Income and Expenditure Account» comprises all public receipts and expenditure, one must allow for some exceptions. Of these the most important since July 1st, 1905, have been the accounts of the State Railway Administration, which are stated separately, only the net profit being entered as income into – or the net loss charged against – the general Income and Expenditure Account.

There are, it is true, other minor exceptions to the rule of one Budget, such as the Ecclesiastical Fund and the Emigration Fund; but these are of small consequence. Of greater weight is the division of the general «Income and Expenditure Account» into four categories: –

1. Effective income and expenditure.

1. Receipts and expenditure for Railway Construction.

1. Receipts and expenditure for Capital Investments.

1. Receipts and expenditure which cancel each other (partite di giro).

Of the last category we need say but little. It includes those sums which are paid into the Exchequer, not for its own use, but to be handed over to other public bodies, such, for instance, as Local Governments. These payments do not leave the Exchequer any better or worse off, and may in consequence be ignored.

The distinction between the first category on the one hand and the second and third on the other is important, for the first comprises the ordinary current income and expenditure, the other two the extraordinary capital accounts. These last, in fact, include any capital expenditure, such as that on railway construction, which may be covered by loans or sales of State property. There are, however, frequent exceptions to the general principle.

Most public works expenditure is met by current income, and it has frequently happened, especially in affluent years, that a certain part of what is, in fact, capital expenditure has been charged against the national income; and, vice versa, in stringent years expenses of a current nature have been charged against the capital account. But in theory the rule is that the effective income must suffice to pay for ordinary and extraordinary economically unproductive expenditure, while debts may be incurred when the object is to construct railways, or ports, or generally to invest capital in a remunerative way, so that the net financial results may be sufficient to pay interest and amortisation on the capital sunk. The war expenditure, therefore, as it does not increase the State revenue, is to be charged to the effective expenditure account.

From the above it follows that a deficit or a surplus has a wholly different meaning for the different categories. In the first category a surplus is a good and a deficit a bad thing, as a surplus arises from an excess of receipts over expenditure, and a deficit from the opposite cause. In the second and third categories a surplus is, «»prima facie«», a bad thing, as it indicates that the debts created exceed the increase in the capital value of the State property (expenditure on railway construction, & c.), while a deficit is a good thing, as it shows that the State property (as per expenditure side) has increased in value more rapidly than the new public debts (as per income side) have grown.

The first and the two other categories are, of course, interdependent, as a deficit in the first (current income and expenditure) category must be covered by a surplus in the other two, mainly in the third, which is the more important. That is, an excess of current annual expenditure over income must obviously be covered by a debt, which means a surplus in the third category. On the other hand, the Minister of the Treasury may avoid the creation of a new debt if further capital expenditure prove necessary by employing any surplus or excess of current income over current expenditure there may be in the first category. Therefore the last two categories must, under such circumstances, close with an apparent deficit.

II

Past history

Hoping that these explanations will suffice to make clear the meaning of our Budget figures, I beg leave to present a few historical tables. I will give first figures of current income and expenditure, and, for the sake of brevity, select a certain number of representative years.

The above table tells its own story. We begin with huge deficits, all the greater when compared with the slender revenues, which even threatened to render the Government unable to honour the State signature. The period from 1866 to 1876 may well be called the heroic age of Italian financial history. Signor Quintino Sella, the Finance Minister, a portrait and marble statue of whom may be seen at the entrance of the Roman Treasury Palace (our Somerset House), as the true god of the Place, courageously set to work, remodelling the revenue system and imposing high taxes, which Italians valiantly paid. Hence, when in 1876 the old Conservative Party, the true makers of the Italian State machinery, whose leaders were bred in the same ideal world from which sprang the great British statesmen of the Victorian age, fell from power, the huge deficits had been converted into a small surplus.

The period from 1876 to 1889 was a time of prosperity. The Left, or Progressive, Party, and afterwards the Fusionist Party, took advantage of the increasing revenue and entered upon an ambitious policy of railway construction and colonial expansion. They abolished, moreover, the odious macinato, or tax on flour, only, however, to replace it after a few years by a still worse duty on foreign wheat. The programme was beautiful, but very soon, under Crispi’s Cabinet, the expenditure exceeded the revenue, and the year of the maximum war Budget was also the year of maximum deficit. Then follows a troubled period, which extends to 1897/98, of which the characteristic features were economic depression in the country, Abyssinian wars, meritorious efforts on the part of a saving Cabinet (popularly known by the nickname of «Compagnia della Lesina», «The Awl Company»[1], to reduce the public expenditure and to increase the revenue by new taxes. Of these perhaps the most interesting was the increase of the tax on Consols coupons from 13.2 to 20 per cent., which lowered the rate of interest from a nominal 5 and real 4.34 per cent. to 4 per cent. The most prominent financial members of this and succeeding Cabinets were Signor Luzzatti, Signor Boselli, and Baron Sonnino. At length the goal was attained. In 1897-98 the expenditure was reduced to 1,620.03 million lire, that is, about 116 millions less than in the year of maximum expansion (1888-89), while the revenue increased from 1,500 to 1,629 million lire.

In May, 1898, popular disturbances broke out at Milan and in various other places. But this was the last year of crisis and discontent, and marked the beginning of a new era of prosperity. The lesson of experience had been learnt. Popular liberties were respected, and for the first time the right of the people to form Trade Unions or to strike was admitted. From 1897/98 to 1906/07 there was a succession of very satisfactory Budgets, and the revenue continued to increase without new taxation being imposed. The most eventful year was 1906, when 8 milliard lire of 4 per cent. Consols were converted at a single stroke to a lower rate from 4 to 3 3/4 per cent. for five years and afterwards to 3 1/2 per cent. This conversion, which followed after an interval of only twelve years the forced reduction from 4.34 to 4 per cent. mentioned above was a truly great achievement, rightly comparable to Goschen’s famous conversion of British debt. With the expansion of revenue, however, the expenditure increased also, owing to a number of causes, of which I will only put on record the increase in the number of public servants and in the amount of their salaries. The public servants on the ordinary pay roll – exclusive of temporary employes – were as follows at various dates :

With the outbreak of the world crisis of 1907 and its repercussions in Italy, there began a series of lean years. But it should be remarked that, notwithstanding the increased expenditure, the last Budgets would have closed with a surplus, had it not been for the extraordinary expenses of the Lybian war. Although these expenses were only partially classed as effective expenditure, and were for the greater part charged to «Treasury Account», to be liquidated in instalments at a later date – a bookkeeping arrangement which was, by the way, much criticised in the Press and by Baron Sonnino in the House of Deputies – still they explain the deficit. In 1911/13 the war costs charged to effective expenditure amounted to 152,28 million lire, and in 1912/13 249,88 million lire.

As the Lybian war expenses were, however, effectively covered by debts, and as the ordinary effective Budget sufficed to pay the interest charge of these debts, one may say that, apart from the liquidation of the capital expenditure incurred, the Italian ordinary Budget was selfsufficing when the European war broke out. Let us now turn to the extraordinary Budget, or, to continue our nomenclature, to the second (railway construction) and third (capital investment) categories of the general Budget. For the sake of clearness and brevity it may be useful to lump the two categories together, the more so as they are both related to capital expenditure, and as in recent years, since the nationalisation of railways (July 1st, 1905), the State railway capital expenditure is for bookkeeping purposes mainly provided for by allowances out of the third category.

The table should be read in conjunction with the previous one on effective income and expenditure. In a general way, one may say that to a deficit in the first table corresponds a surplus in the second, which is, as above explained, a rational result. The surpluses and the deficits do not, however, exactly tally, as would be the case if the «Income and Expenditure Account» were selfsufficing. In some years even (as, for example, in 1906/07 and again in 1910/11) the ordinary and the extraordinary Budgets both close with a surplus. The explanation lies in the fact noted above that there exists also a separate «Treasury Account» which is drawn upon to make good a Budget deficit, that is in the ordinary or first category and extraordinary, or second and third category, considered as a whole, and is replenished if a surplus occurs. Thus it happens that the floating debts of the «Treasury Account» – of which no notice is taken in the annual Budget – are increased by a series of «deficit years» and diminished by a series of «surplus years».

Considering the above series, an interesting fact may be noted in the periods of construction and prosperity (1862 – 76, 1881 – 1888/89, and again in 1902/03 – 1913/14) the capital expenditure on railway construction and other investments grew; while in the years of crisis (1892/93 – 1897/98) these expenses were cut down and reduced to a minimum. We may in conclusion, by a simple arithmetical rule, sum up all the expenses and revenues from January 1st, 1862, to June 30th, 1914, and while taking note of the initial and final balances of the Treasury Account, construct a gigantic single account of Italian finance from its inception.

The totals are in part fictitious, as they represent the sums of items belonging to different years. But they are useful in so far as they give us a tabular synopsis of Italian financial history since the achievement of unity. A debt and a loss of patrimony of 13,416.66 million lire was incurred in the fiftytwo years to cover a total current deficit of 3,572.72 million lire (79,174.01 – 75,601.26), other extra Budget losses and expenses amounting to 421.81 million lire, and a capital expenditure of 9,404.49 million lire.

Roughly, we may say five/sixths of this sum was raised by loans, and onesixth by sale of lands (mainly ecclesiastical) and other State property. The debt figure may seem great – or seemed great before the present war, when all past figures are growing smaller and smaller – but we must remember that we had in the meantime to liquidate the burden of the war of independence, to supply funds for the war against Austria (1866), for the conquest of Rome (1870), for colonial expeditions, Erithrean and Lybian, to build almost the whole of our railway system, to sink millions in ports, roads, and in reclaiming swampy lands, to spread elementary and secondary education, which were almost non existent before national unity was achieved, and to create a sanitary machinery, by which the death rate has been reduced from 30.6 in 1863/67 to 18.2 per mille in 1912.

The price paid for attaining these ends was, indeed, high; but I wonder if any other State has done better. Our economic and financial policy has not been, perhaps, the best possible; but I think that nations in the making, as Italy was in the past half century, and still is, are very apt to err; and Italy’s wanderings, especially in protectionist directions, were many, and certainly not beneficial. But, if it were compatible with the object of the present essay, I am confident I could show that, notwithstanding the crushing weight of high taxation and high protection, our economic progress has been by no means small. Suffice it to quote only one figure. In the year 1862 Signor Maestri, a statistician of repute, valued our annual agricultural produce at 2,842 million lire, with a mean gross product of 119 lire per hectare (2 1/2 acres).

In the year 1912 Professor Ghino Valenti, the greatest Italian authority on agrarian economics, valued the annual agricultural production at 7.000 million lire, with a mean gross product of 290 lire per hectare. As agriculture is our most important industry, and occupies almost half the Italian population, the effect of so striking a progress – a progress in quantities as well as in values – upon the welfare of the masses could not but be notable. It is difficult, no doubt, to trace accurately the connection between public expenditure and economic progress, but it seems sure that vastly better roads, an improved railway system, better education (elementary and technical), better sanitation, & c., have had something to do with the progress accomplished.

III

Present structure

What, then, is the present structure? To describe it, we have to return to the 1913 – 14 figures, the last in our series. In what manner was the effective expenditure amounting to a total of 2,687.66 million lire apportioned?

A somewhat similar classification of public expenses for the year 1868 would have given a total expenditure of 1,014.36 million lire, a financial expenditure of 621.74 millions, a defence expenditure of 202.20 millions, a civil services expenditure of 94.47 millions, and a public services anti economic development expenditure of 95.95 million lire. Between 1868 and 1913/14 the total expenditure has increased by 165 per cent.; but the financial expenditure has risen only by 63 per cent., while the cost of defence; of the Civil Service, and of economic development have increased by 354, 316, and 275 per cent. respectively. The increase in the defence Budget was mainly due to «extraordinary» expenses, which in 1913/14 absorbed almost 40 per cent of the total expenditure for that year; and however little one may hope for a future decrease of defence expenditure, it is probable that the next peace Budgets will not permanently exceed the figures which in 9913/14 were sufficient to cover both ordinary and extraordinary expenditure.

Against an expenditure of 2,687.66 million lire, the effective revenue amounted in 1913/14 to 2,523.75 million lire. We may summarise the various items of public revenue as follows:

The income from public domain and the minor items present some points of interest. The income from Public domain would be dwindling were it not for the net revenue of the State railways. The figure of 28.07 million lire is not, however, the true net revenue of the State railways, but the sum which the railway administration has paid into the general Treasury, and it may be considered equal to the yield of the original capital, that is, the capital sunk in the State railways prior to July 1st, 1905, the interest and sinking fund of which are charged to the Public Treasury; while the Railway Administration Board pays interest and amortisation directly on the new capital, that is, the capital spent since the Act of Nationalisation (July 1st, 1905). The combined total capital sunk into the State railways was, on June 30th, 1914, 7.101 million lire.

The gross product in 1913/14 was 575 million lire; the proportion of the running expenses to gross product was 73.70 per cent., so that only 121.2 million lire were left as gross profits, from which various deductions would have to be made before arriving at the net profit. A slender remuneration on a capital of 7.101 million lire, perhaps less than 1,5 per cent. But the railway system was not built – so runs the theory current in Italy – as a private, but as a public enterprise; and although the real railway Budgets do not make both ends meet, leaving the Treasury, that is, the taxpayers, to pay the huge deficit (perhaps 200 million lire yearly) on the interest and amortisation on the capital, the people reap the advantages of the improved connections, economic development, and military defence. During the past May/June mobilisation the railways did a truly splendid service to the army, without suspending or only slightly reducing the ordinary traffic.

The two items under «Banking Profits» although small, are also interesting. The net profit of 2,756,000 lire is the result of the working of the largest Italian bank, the «Deposit and Loan Bank» or Cassa dei depositi e prestiti, a State institution, which controls the investment of over two billion lire of the Postal Savings Banks and of over 300 million lire of various provident public funds (elementary teachers, local bodies, clerical and medical staff, & c.). The profit was small, but the Bank works without capital and at cost. In Italy there is no market for bonds of local bodies, as all loans raised by them are obtained through the instrumentality of the Deposit and Loans State Bank, from the monies of the Postal Savings Banks, and of the provident public funds. This State Bank finances also sanitation, irrigation, aqueducts, and other public undertakings. The State’s share of the profits obtained by the three banks of issue (Banca d’Italia, Banco di Napoli, and Banco di Sicilia) amounted in 1913/14 to 5,915,000 lire, and is growing. As the right of note issue is a monopoly, the State earns a third part of the excess profits over 5 per cent. on the capital of the issue banks, and a half of the same excess over 5 per cent. when the profits exceed 6 per cent.

The postal, telegraph, and telephone services are run at a profit, with a total revenue of 170,446,000 lire, and a total expense of 148,138,000 lire. The charge upon ordinary letters has been lowered in recent years from 20 to 15 cents (of a lira), and the cost of a ten word telegram from 1 lire to 60 cents. The annual charge for the telephone service is 160 or 200 lire, without extra payments for intra communal calls and with variable fees for inter communal calls.

Having thus disposed of the non tax revenues, we have to consider the tax system. A simple method would be to summarise the whole matter in two figures taxes on wealth, 879 million lire (540.7 income taxes and 338.3 succession and stamp duties); and taxes on consumption, 1172.4 million lire (625.3 indirect taxes and 547.14 State monopolies). The balance of taxation seems unduly over – weighted against taxes on consumption. But we must remember that the figures for State monopolies are gross income, so that, to arrive at the net taxation charge, we must deduct the cost of making and selling salt and tobacco, and of paying lottery premiums, which the consumer would have had to pay or to receive even if the State monopolies were non existent. The deduction is made as follows (in lire, 000 omitted)

If we substitute the net total (393,605,000 lire) for the gross revenue figure, we obtain a sum of 879 million lire for the yield of the taxes on wealth against 1,018.9 million lire for the yield of the taxes on consumption. The scale is thus better balanced between direct and indirect taxes than it appears at first sight, and would be even better balanced if we could take into consideration also the local taxation system, in which the income taxes are of much greater weight than those on consumption. An excess of taxation on consumption remains, however, owing to the weight of the protective (private) taxation which is incident on custom dutes.

The figure of these protective taxes, if it were possible to calculate it, would run into several hundred millions of lire. The wheat duty alone (25 lire per ton), from which the State received in 1913/14 some 83 million lire, affords to the protected wheat growers at least 150 million lire at the expense of the non agricultural population. Thus it is with every one of the 1,200 items of our custom tariff. The protective tariff, the salt tax (the salt is sold by the Government at a price of 40 cents, about 4d., per kilogram), and, as some would add, the lottery, are, together with the high rates of taxation, the main defects of our financial system, which has, on the other hand, some admirable features.

The high rates of taxation have been the cause of many poet disillusions. In the heroic age of our finance (1862 – 1876) when the dread of a deficit was ever present, and when the national income and wealth were small, the taxes were raised to impossible heights with the usual results of evasions and enormous difficulties in the administrative verification of taxable incomes. At present the State rates for the income taxes are 10 per cent. on income from land, 18.12 per cent. on income from house property, and 23.46 per cent. (nominal rate) on the other incomes (industrial, professional, commercial incomes, salaries, & c.).

About the last we will say something more presently. As to the two first, local bodies enjoy the right of super taxation. Thus it generally happens that the total rate, that of State and local bodies together, amounts to 30 per cent., and not infrequently to 50 and 60 per cent. of the net taxable income.

The situation is somewhat analogous to the British local taxation system, as i think that the income from real property is liable to a State income tax and super tax and to local rates, while personal income contributes little to the latter. The apparent crushing weight of the enormous State and local taxes on land and house income – which in a few parishes reach even 100 per cent. and more of net taxable income – is, however, diminished by the smallness of the officially taxed income compared with the true income; frequently it happens that the rates are the highest where the valuation of income is the lowest. The true work of Italian Chancellors of the Exchequer should be the diminution of the tax rates and a rigorous valuation of true taxable incomes. But, alas! I fear that the present war will once more postpone this, the greatest of all possible improvements of our financial machinery.

The admirable feature of our financial system is the discrimination of incomes which is pushed farther than in any other European country. While British statesmen recoiled before the suggestions of the Hubbard Committee, and only quite recently adopted the, to my eyes, very imperfect discrimination between earned and unearned incomes, the Italian statesmen, as far back as 1864, drew a distinction between (a) incomes from capital alone, (b) incomes from capital and labour (industrial and commercial incomes), (c) incomes from labour alone (professional incomes, salaries, and wages), taxing the first on their entire sum, reducing the second class incomes by two eighths, and taxing the residual six eighths; and taxing the third class incomes only upon five eighths of their amount. Subsequently the third class was divided into two, and a fourth formed, comprising public salaries, which can be and are valued at their exact amount, and one half of which is exempt. Thereafter various other reforms were enacted from time to time, so that, instead of the above mentioned general rate of 23.46 per cent., the tax on all incomes, save those from land and houses, is roughly as follows:

1. 20 per cent. on the interest of capital lent to the State and other public bodies.

1. 17.60 per cent. on the interest of capital lent to private individuals and companies.

1. 11.73 per cent. on industrial and commercial incomes.

1. 10.56 per cent. on professional incomes and salaries (exclusive of salaries to public servants).

1. 8.62 per cent. on the salaries of public servants.

These rates are for all incomes in class I. and II., but apply only to incomes of 1,500, 1,667, and 2,000 lire and over respectively for the third, fourth, and fifth schedules. Below these limits various abatements are granted. Among the stamp and registration duties, the most interesting tax is the succession duty, which was lately modified by the Act of September 27th, 1914, and now ranges, according to consanguinity, from a minimum rate of 8 per cent. when the heir receives from 300 to 1,000 lire, to a rate of 7 per cent. when the sum exceeds 2,000,000 lire, and so on, rising as the relationship becomes more distant, up to relations beyond first german cousins, from which point the rate varies from a minimum of 15 per cent., when the sum inherited does not exceed 10,000 lire, to a maximum of 30 per cent. on 2,000,000 lire or over.

IV

Effect of the european war and new taxes

We will now inquire into the extent to which the present war has affected the Italian financial system as described above. The effective revenue was as follows (in lire, 000 omitted)

This table is a lesson in public finance. All categories of public revenue, exclusive of minor items, for which no general rule can be given, have withstood the war storm successfully, with two exceptions: the indirect taxes and profits from the State railways. There is little to marvel at if in the year 1914/15 the State Railway Administration was unable to pay any net profit to the Treasury, with the result that the income from public domain diminished from 44,776,000 to 23,645,000 lire, or if the stamp duties on railway transport fell from 43,436,000 to 33,498,000 lire, with similar results for the months of July to September, 1915, as compared with the same period of 1913. I think that loss of passengers and goods traffic is a common experience of all belligerent and non belligerent countries in these years of war. Even in those States where private ownership prevails the Public Treasury has had to bear the burden of traffic losses.

The most interesting experience in our war revenue is the huge decrease in the consumption taxes levied by customs duties. Whereas in the year 1913/14 the wheat duty brought into the Treasury 83,6 million lire, in 1914/15 the yield was only 17.2 million lire, and in the first three months of 1915/16 the yield dwindled almost to nothing. The international crisis has caused so alarming an increase of the wheat prices, from 250 lire per ton in July, 1914, to 350 lire in December, 1914, and 40o/450 lire in the spring of 1915, that the Government was obliged firstly to reduce the duty from 75 to 30 lire per ton, which it did by the decree of October 18th, 1914, and afterwards to suspend it altogether up to December 31st, 1915; and a prolongation of the suspension is probable. The yield of the other customs duties has also greatly diminished from 259.1 million lire in 1913/14 to 194.6 in 1914/15, and from 59.5 in July to September, 1913, to 42.8 in the corresponding period of 1915. The protective system, the growth of which in Italy may be partly ascribed to the financial needs of the State, which was only too glad to have new duties pressed upon it by vested interests, has signally failed in this time of financial stringency. The event was, indeed, anticipated in peace time, but the warnings of the few free traders were unheeded.

Income taxes, stamps, and other business taxes, State monopolies, and public services have, on the other hand, fared well notwithstanding the war. A new infusion of life was indeed necessary; or, in other words, a turning of the financial screw. The succession duty was raised up to the rates given above, by which it was hoped the revenue would be increased by 17 million lire. The stamp duties and the duties on bills of exchange were raised; a new tax on cinema tickets[2] was imposed by decree of November 12th, 1914. By decree of October 22nd, 1914, a super tax was levied on motor cars and motor cycles, rising from 3 to 9 lire per h.p., according to the motor power. An increase of the «»ad valorem«» duty on imports and exports was to yield a revenue of from 4 to 8 million lire. But the most important of the new war taxes was the additional tax on incomes, representing an increase of from 3 to 15 per cent. on the existing rates (by royal decree of October 15th and 22nd and legislative acts of December 16th and 23rd, 1914). From these increases were exempted income from land up to 125 lire yearly, income from house property up to 120 lire, income from industry and commerce up to 1,500 lire, professional incomes and salaries up to 1,667 lire, and public salaries up to 2,000 lire.

By virtue of these exemptions the progressive principle, which applied already to incomes from personal property, was further accentuated and extended to those derived from real estate. A recent royal decree of September 17, 1915, has imposed still further taxes. The protection granted to sugar producers and refiners has been diminished by an increase of 5 lire per quintal in the sugar excise without any corresponding alteration of the customs duty. The same decree also raised the spirit tax from 330 to 350 lire per ectanitre, and the prices of most qualities of tobacco, and has laid a new temporary tax of from 1 to 5 per cent. on the value of goods exported by virtue of a special licence. This last tax, which in ordinary times would be highly objectionable, aims at tapping the extra profits of the producers, to whom an exceptional export licence is granted.

A new royal decree of October 12th, 1915, has raised several postal, telegraphic, and telephonic fees, has increased most of the stamp duties, and has introduced two new taxes. An annual tax on exemptions from military service, which are granted because of physical disability, public duties, and other reasons, comprises a fixed sum of 6 lire per man exempted, and a variable additional sum rising from 6 lire for those with an income between 1,000 and 2,000 lire, to 12 lire in the case of incomes between 2,000 and 3,000 lire and so on, till the maximum rate of 3,000 lire is reached for men exempted having an income of 200,000 lire and upwards. In making the assessment, account is to be taken of a part of the income of the parents of the men exempted.

The other new tax is a special additional tax on the fees of directors of joint stock companies, & c. The tax is at the rate of 5 per cent. on the total fees earned up to 2,500 lire, 8 per cent. on sums from 2,501 to 5,000 lire, 10 per cent. between 5,001 and 10,000 lire, 12 per cent. between 10,001 and 20,000 lire, 15 per cent. between 20,001 and 40,000 lire, and 20 per cent. on the sums earned of 40,000 lire upwards. Other taxes are shortly expected, including a war excess profits tax, somewhat on the lines of the British tax. But the Italian tax will be, I expect, progressive, and will exempt the excess profits below 8 per cent. on the capital invested.

Particulars cannot be given as, at the time of writing, the decree has still to obtain the royal assent. It is probable that a wholesale rise of income tax will also be decreed. The yield of the new taxes, which have been imposed since the outbreak of the European war, is estimated at 107/120 million lire; that of the new taxes, which are about to be introduced, at 150 million lire; altogether about 260 million lire annually.

V

New debts and treasury prospects

These new taxes will yield, after the declaration of peace, a positive, substantial increase of the public revenue; for the moment they more than counterbalance the suspension of wheat duties and the shrinkage of the revenue from the custom duties and railways. The public expenses have meanwhile greatly increased. Against a total disbursement by the «»Treasury during 1913/14 of 3150.1 million lire, including 2687.66 millions of effective expenditure and of railway construction and other capital expenditure, the Treasury disbursement of 1914/15 amounted to 5630.6 million lire, representing an increase of 2480 millions. The greatest increase was in the defence department’s accounts: 1927,5 million lire in the War Budget; 167.1 in the Navy Budget; and 169.5 in the Colonial Budget. These may be defined as «expenses in preparation for war» as the Italian war only commenced on May 24th, 1915. The expenditure of the first three months of actual war is set forth above.

How the Italian Government has managed to surmount so terrible a difficulty may be seen in the following table, in which are summarised the Principal items of the Treasury indebtedness on the last day of the last pre war financial year and the last day for which figures are outstanding at the present time.

The Minister of Treasury, Signor Carcano, and his principal adviser, Signor Stringher, Director General of the Bank of Italy, deserve high credit for having successfully resisted the demand of the many who, in the first months of the European crisis, clamoured continuously for new note issues as a universal panacea. We may, indeed, congratulate ourselves that the total over issue has been limited to 2,034 million lire, and has not reached the figure of 3,000/3,500 millions as was anticipated. The results of the two War Loans are a truly great achievement. Nobody felt sure, in a country where the annual savings were variously estimated at from 900 to 1,000 million lire, whether the two national loans, of 10/25 year bonds at 4 per cent., tax free, issued at 97 per cent. in January, 1915 (royal decree of December 19th, 1914), and at 95 per cent. to new subscribers and 93 per cent. to subscribers of the first loan in July, 1915 (royal decree of June 15th, 1915), would prove a success. But that 880 million lire were subscribed by the public and 120 million by the banks in January, and 1,127 by the public and banks in July, was a success indeed; and the genuineness of the subscriptions is demonstrated by the fact that, although payment in instalments up to October 1st, 1915, for the first loan and to January 2nd, 1916, for the second loan was allowed, nearly the whole of the sums subscribed have been already paid into the Public Exchequer.

With these payments, and with a certain sum obtainable from the discounting of special Italian Treasury Bills by the British Government, which was the outcome of the interview at Nice last June between Mr. McKenna and Signor Carcano, the requirements of the war Budgets are assured up to December, 1915. Another war loan will then be issued in due course, and I feel sure that the figure of the July war loan will be surpassed. Subscribers have seen that our Government is not recoiling before the task of laying new taxes for the service of the new debt, for the new, above mentioned, taxes will be sufficient, when the war is over, to cover the interest on the two national war loans already issued.

As to the service of future loans, the next Budget speech should have something to say. Times are ripe for a financial reform on the British or German lines. Our income taxes are mainly objective taxes, with some regression for the lowest incomes. A progressive supertax on the incomes above a certain limit, say, 2,500 or 3,000 lire, will give a sum sufficient to cover the interest on a third war loan, greater than the past two. The war against Austria, which is not a war of conquest, nor an imperialistic war, nor a war of hatred or economic ambitions, but a war for the unity of Italian speaking men, is, in virtue of her idealistic and national character, very popular in Italy. Our people are willing to submit to any sacrifice of men and money which may appear indispensable for attaining our long cherished hopes of giving freedom from the foreign yoke to our Trento and Trieste brethren.