BUSINESS & INVESTMENTS

SHOULD FIXED PERCENTAGE OF CAPITAL EXPENDITURES BE PAID OUT OF REVENUE?

W. ERIC HARRIS March 15 1925
BUSINESS & INVESTMENTS

SHOULD FIXED PERCENTAGE OF CAPITAL EXPENDITURES BE PAID OUT OF REVENUE?

W. ERIC HARRIS March 15 1925

SHOULD FIXED PERCENTAGE OF CAPITAL EXPENDITURES BE PAID OUT OF REVENUE?

This is a Vital Problem Confronting Individuals and Governments in Canada. Over-Use of “Dollar-downand-dollar-a-week” Plan Menaces Sound Business.

BUSINESS & INVESTMENTS

W. ERIC HARRIS

Major Eric Harris is now managing director City Club, Toronto. Prior to his appointment to his present position, he was managing secretary, Downtown Assodation of Toronto; superintendent of Vocational Courses for returned soldiers under the Soldiers’ Aid Commission; and during the administration of Rev. Dr. Cody, former minister of education for Ontario, he had charge of training of soldiers for the teaching profession.

WHEN Mrs. John Smith, who is the virtual head of the household, decides that a new buffet is needed for the dining-room, it matters not a great deal, in these convenient modern days, whether there is money in the exchequer for its purchase or not. That, by no means, causes her to give up the idea of the new buffet.

The next morning, probably, when the breakfast dishes are clean and out of the way, she picks up her bosom friend at the corner, and away they go shopping.

Since it is a furniture hunt they are on, and because of the conditions under which the purchase is to be made, there is only one store to which they think of going, and that is the leading store downtown which sells its goods on the “instalment plan.” No need for large sums of money there! Anything may be purchased, and readily. Nothing is beyond them!

They look at all the buffets in stock, discuss each at length and finally buy one—not the cheapest by any means. After all, they argue, the extra price is worth it, and it never pays to buy a cheap thing. It only means a few more weeks in which to pay. So they sign a few papers, pay a dollar or so down, and go their way.

That afternoon the buffet is delivered. Mrs. John Smith has made her purchase. When she makes up her mind to do a thing it is as good as done any time.

Now, Mrs. Smith hasn’t made a very good purchase when various points of view are taken into consideration. She has discounted the future income of the family and has spent money which the head of the family hasn’t yet commenced to earn. She has not, necessarily, obtained full value since her purchase had to be made at the “credit” store, forcing her to forego any possible advantages of cash prices and special sales in other stores. She has contracted a purchase for a larger amount than she would have considered for one moment if she had had to pay for the buffet in cash. And, finally, in one way or another, she will have to pay interest until her debt is fully met.

Government by Instalment

NOW, Mrs. Smith’s purchase is mentioned only from an ulterior motive, for we have something else in mind altogether, and it is this: that there exists an extraordinary similarity between the principles surrounding her small purchase and the conditions under which capital expenditures are made by our various governments, municipal, provincial or federal.

The transactions which are usually referred to as a government’s “capital expenditures” are nothing more or less than the larger purchases made by that government. When Mrs. Smith purchased the buffet, she made an expenditure. And so, when governments make expenditures, they are simply purchasing something they need, or think they need, whether it be an automobile or a bridge,

a building or a road. They purchase either materials or labor, or the results of both, created by some one’s brain power, and made possible by some one else’s capital.

As purchases, they can and should be judged in the same manner as any other minor purchases. Was the purchase essential, and was value obtained for the money expended? There are no mystic tests which can be applied to an expenditure of millions to judge of its soundness other than the sound common sense which should be applied to any small household or personal purchase. In principle they are the same, only differing in the amount involved.

Here is what often happens to cause a Government—particularly a municipal government—to initiate a capital expenditure:

A group of business men, proprietors of stores and real-estate men of a local section of a big city, meet in a little room. It is the monthly meeting of their Business Men’s Association. After much vague discussion of a dozen-and-one subjects, one of them happens to suggest that it would be a good thing if Fifth Street were extended to meet Eighth Street. It is a proposal which is sufficiently concrete for the meeting to grasp and something which promises to provide them with a suitable activity. Whether it is a work which would benefit the city as a whole, or even benefit their own locality sufficiently to justify the cost, isn’t given a great deal of consideration. Of course they will rally all manner of platitudes in support of the idea, and probably become quite convinced themselves that it would be a wonderful thing to do; but, so far as they are concerned, the proposal is not judged absolutely on its merits or with any regard to the other commitments of the city, or to other expenditures which the city might have to make in the near future of a far more important nature. They proceed to appoint a committee to arrange a deputation to go to the City Hall to place the matter before the powers that-be.

Is It A Real “Need”?

THE next scene in the action is probably at a meeting of the works committee of the city council. Before it, appears the deputation to state its case. The members of the committee hear it, discuss it, and go through their regular talk of the necessity of economy in the expenditures of the city. But it does not mean much. One of the members of the committee is an alderman for the ward from which the business men come. He needs their support to get elected next year, and could not possibly put himself in the position of turning down this request from a delegation of'his own particular friends. So he promptly speaks up that he knows the district very well and is absolutely convinced of the great value to the city of doing this hit of work; Continued on page 7

Continued from page 4 and he moves that the committee recommend to the council that it be done. Do the other members proceed to judge it on its merits alone, and vote accordingly? No so, indeed. They vote for it, because they know that some day they will want the vote of the Alderman who moved the resolution for passing some other proposition which affects them in their own ward. So on it goes to council. It is fast taking on the attributes of a “need.” It is becoming an essential work for the city to undertake.

Before the next meeting of the city council comes another deputation, this time, probably, a larger and more influential one. It states its case and then sits around the council chamber waiting until the council comes to the works committee report. Council comes to it eventually, and there may, or may not, be any discussion on the matter.

It becomes a nice question of judgment for the individual members to decide whether they can afford to oppose the matter in the interests of economy. If they do so they are likely to incur the enmity of the aldermen from the ward in which the work is to take place. The size of the deputation, the publicity which has been given the matter in the city press, the attitude of the public towards it, are most certainly the matters which the members take privately into consid• eration before they talk about it or cast their votes. The discussion is probably haphazard and the proposal is voted on and carried. Hasn’t it come up from the works committee, and shouldn’t they know what they are recommending? So council votes, and the officials of the city are instructed to carry out the work.

Not much difference in principle, is there, between an expenditure the necessity of which has been created in such a way, and Mrs. Smith’s “making up her mind” that she needs a new buffet?

Some of the other disadvantages of Mrs. Smith’s purchase also have their counterpart in Governmental expenditures. Here is a case in point:

Variable Bridge Cost

JUST outside of one of our larger cities some real estate interests wished to have a bridge erected over a somewhat deep and wide ravine. They arranged with the township in question that the bridge would be built at the cost of the real estate syndicate, but that it would be financed by the township and charged against the land to be benefited on the local improvement principle. The engineers of the municipality drew up the plans and specifications for the bridge in the usual way they would do if the municipality itself were building a bridge. Tenders were called for and, when opened, it was found that the bridge would cost well up to three hundred thousand dollars. The syndicate was not satisfied. It insisted that the design and specifications for the bridge be thrown open to competition between all engineers in private practice who might be interested. The result was that it procured a design for a new type of concrete structure, which was approved by the Provincial Railway and Municipal Board, and the bridge was constructed at a cost of under ninety thousand dollars. A saving was made of over twice the actual cost of the bridge, and all because there was an independent syndicate interested which would not allow the bridge to be constructed by the usual municipal methods.

The same city has just finished a bridge over another ravine to replace an old bridge which had outgrown its usefulness. The ravine may be slightly deeper and the bridge perhaps twice as wide as in the former case, but it has cost the city about seven hundred thousand dollars. How does this compare with the first bridge at ninety-thousand dollars? If the latter bridge had been thrown open to competition, would a similar saving have been made?

Seemingly, even a large city does not get maximum value when it goes purchasing bridges! It confines itself to the use of existing methods, just as Mrs. Smith was confined to dealing with the credit store.

• And talking of bridges—there is another example which is illuminating. In the building of a bridge in another city the specifications called for a considerable amount of more or less involved concrete ornamentation and moulding on the sides

of the supporting pillars. It is currently reported that the contractor had to place an item of one-hundied-and-fifty thousand dollars in his tender to cover the cost of this extra work. If this were true, wouldn’t it constitute an inexcusable increase in the expenditure, particularly since any such ornamentation must be completely hidden, and that such pillars must depend for their attractiveness from a distance, only on their general lines?

You see, the city was not paying cash for this expenditure. The money did not have to be taken from the current year’s revenue, and so it did not affect the current tax rate. Payment could be postponed and made over a period of years by the issue of bonds. Isn’t it something of the same motive as that whiéh made Mrs. Smith purchase a better buffet than she would have if she had to pay in cash?

Some Western Extravagances

THEN there is the case of many of the western towns and cities in the days of the Great Boom. Boundaries were extended miles into the country in the sure hope that the near future would provide the people to fill up the spaces. Sidewalks were laid, sewers and water services were installed, at a tremendous cost. Were not these capital expenditures made with too little regard to the actual necessities of the case? Was not what was purchased a great deal dearer than was essential?

Then, of course, there is the old story of the staggering cost of the construction of the Grand Trunk Pacific. Need we mention it at all, or ask whether value was obtained for every cent expended? Well, for that matter, is value obtained for every cent of expenditure even now?

We could go on for pages quoting examples of governmental expenditures which bear on their face evidences of the same disadvantages which were indicated in Mrs. Smith’s purchase of the buffet. Indeed, it is not too much to say that every proposed capital expenditure of any government throughout the land could be scrutinized with the sure knowledge that somewhere in the plan, or in its details, could be found opportunity for decreasing the total cost, without vitally affecting the result. It is here can be found the greatest single field for the very necessary decrease in the tax burden which the citizens carry. There is more scope for the saving of the tax-payers’ money in a rigid scrutiny of every capital expenditure than in any other way.

Charge Against Current Year

CAPITAL expenditures are all the more easy to make, so far as governments are concerned, because no part of the cost of them has to be met out of the current year’s revenue. It does not affect the current year’s tax rate in any municipality, and therefore the elected representatives of the people do not feel that check which they would otherwise feel if the results of their expenditures immediately were apparent when the people had to pay their taxes. So great is the effect of this ability to postpone payment upon the increase of the actual total expenditures of governments that it would seem to be worth consideration to make it obligatory on all governments to meet some fixed proportion — supposing we say twenty per cent.—of all their capital expenditures out of current revenues for the year. That would immediately show in the tax-rate of municipalities, or in the taxes levied by provincial and federal governments, and so give the public some idea of the liabilities which at the time were being incurred.

Capital expenditures put a burden on the citizens for years to come, and, once incurred, they are quite uncontrollable. In one Canadian city, for instance, a tax of nearly nine mills on each dollar of assessed values in the city has to be raised each year simply to pay the interest and sinking fund charges on debts which have been incurred in the past. This amount has to be collected before any consideration can be given to the other requirements for the year. And this is a condition not exceptional to this city.

Spend on Estimates Only

IN VIEW of these considerations, every proposed capital expenditure should be thoroughly investigated by some agency, on behalf of the tax-payer to see that it is an absolutely essential one to make, and

not one which is being made simply because it is so easy to spend money if one does not have to pay the bill until some future date.

Mrs. Smith, on top of all the other disadvantages, has to pay interest on the debt she incurred. So do governments in borrowing money to make their capital expenditures, and this interest mounts up extraordinarily. When a government borrows one million dollars for twenty years, by issuing debentures to pay for some work that has been done, it not only has to pay out the million dollars of the tax-payers’ money at the end of the time, but during the time, it will have paid out as well, in interest, another five hundred thousand dollars of the hard-earned taxpayers’ money. You and I pay all this interest and the principal when it is due. It is just as much a mortgage charge on your income and mine as the interest and principal on the mortgages on our house! The only difference is that it is not quite so obvious.

Such are the ways of capital expenditure. (On my typewriter I had written there, by mistake, “expanditures” and that would be, perhaps, a more expressive word, if it were one at all). Because of their very nature, and because of the amounts usually involved, expenditures of a capital nature by governments are not

often given the amount of attention which they should certainly have if the money provided by the citizens for public purposes is not to be squandered. It is here that the big leaks are, and it is here that the big economies can be made.

Unfortunately, a proper investigation of the soundness of a large proposed expenditure is not one for which the average citizen has either the time or the inclination. He wants to have his opinions and judgments made for him. The press in many cases are either not in a position to investigate matters of this kind sufficiently or the public apathy is such as not to make it worth while for them to do so. If they did start, the next hold-up would crowd such matter out of their columns. The press can only give the people what they want.

One solution seems to be through those independent organizations and publications which work to the utmost of their opportunities to give the public the true facts about its common affairs, and which seek to carry on what often seems to be the losing fight of trying to make the average citizen take more interest in the affairs of his city, and his province, and the Dominion, for the carrying on of whose administration he pays, and for whose mistakes and extravagances he pays doubly.