PAYING FOR REARMAMENT
By H. V. HODSON THE figure of £280,000,000 to E300,000,000 has been so often mentioned, in newspapers close to the Government, as approximately the cost of the rearmament programme that it is hard to believe there is no inspiration behind it. By the time the Government's intentions are fully known, public opinion will have come to accept a figure of round about this size as a yardstick for any rearmament proposals put forward from this quarter or that ; if £100,000,000 had been bruited abroad as a possibility, £300,000,000 would now seem stupendous, or if £500,000,000 had been the whispered figure, one half of that would seem almost cheap.
In these immense ranges the man in the street is in danger of losing a sense of proportion. . One way of finding it again is to compare the suggested total for rearmament with our actual arms expenditure. The budget estimates for the Navy, Army and Air Force in the current fiscal year totalled £124,250,000. Over the past five years—a period during which, so we are told, our defence preparations have been dangerously pared—our aggregate expenditure on the three forces has been about £556,000,000, not counting this year's supplementary votes, which have been necessitated for the most part by the Italo-Abyssinian war. In other words, if the rearmament figure of £280,000,000 is con- firmed, we arc being told that our defence expenditure during the last five years should have been over half as high again if we were to possess today the power that our world responsibilities demand.
This argument, scarcely convincing by itself, is rein- forced by another. The second plea is that while other nations having been rapidly rearming we have struggled to disarm, with the result that in relation to our needs and responsibilities our defence is definitely on a lower plane today than that of other great Powers. In face of a rearmed Germany, a militant Italy, an expansionist Japan, and rising armaments everywhere, we must raise our whole defence system, by a once-and-for-all effort, to a higher level. Now, the respective weights attached to these two arguthents help to determine the proper method of financing our armament plans. For if rearmament is required because the exigencies of the slump compelled us to economise unduly, then the repairing of the gaps should be a. first charge on recovery revenue ; just as a business firm that had been forced during the slump to let its plant deteriorate would regard the cost of restoring it as a first charge on returning profits, rather than as an operation demanding a fresh appeal to the public and a fresh burdening of the capital structure. But if his whole business were on too small a scale for modern requirements, then he would naturally float a capital issue to pay for its expansion ; and if this is the proper analogy then a loan is the proper method of financing rearmament.
The business man would have a further important consideration in mind when deciding on the means of financing his plans—the rapidity of obsolescence of the new plant. No prudent manufacturer would saddle his business with a long-term debt, the service of which would still have to be met long after the machinery bought with its proceeds had been scrapped, tinier at the same time he set aside as a matter of internal finance an ample sinking-fund for obsolescence. Hence even if rearmament is to be regarded as strictly a capital operation it ought not to be financed by a loan of longer date than the expected efficient life of the arms that we are to buy. How long that is no one can definitely say ; the life of a battleship is at least half a dozen times the life of a military aeroplane, as a modern weapon, so that the more aeroplanes there are in the rearmament pro:- gramme, and the fewer battleships, the shorter the period of obsolescence, and therefore the greater the provision that must be made for it. Let us suppose that the average effective life of our new arms is ten years. The Govern.: ment could probably raise the money for that period on Treasury Bonds at 2 per cent. That gives a service charge of about £30 million a year on a loan of £280 million. This is the figure by which the budgetary burden ought to be annually loaded if we are prudent in the financing of our rearmament. If the estimated life of the arms is shorter, the burden must be correspondingly increased. This, of course, makes no allowance for the increased annual cost of maintaining bigger defence forces all round, including pay and equipment for an enlarged personnel. We could hardly expect less than another £30 million a year on this account.
A longer loan would, of course, reduce the annual burden, but there are arguments for an even shorter term. The argument that we are only repairing the economics of the slump period must have some weight, with the implication that we should " pay as we go." And even to the extent of a few years or a few million pounds there is no moral virtue in asking a later generation of taxpayers to pay for the present generation's security. We may perhaps be told that it is impossible, taking the com- munity's economic life as a whole, to " mortgage the future," since the necessary diversion of economic re- sources must always- take place in the present. This is true enough, but we have only to consider the difference between having had, in ten years' time, a decade of securer defence, and having still the things like schools and roads and telephones and hospitals on which the same capital sum might alternatively have been spent, to see how a present diversion may prejudice future economic welfare. There is a similar answer to the argument that the cost of rearmament is not a net economic loss, since it will serve to absorb unemployed who would otherwise be a charge upon the community ; for the same consideration applies to any other way of spending the same sum of money.
No : whichever way we turn we come back to the eon- elusion that the capital charge for rearmament ought -to be fully paid off by the time our purchases are obsolete, and that probably means in ten years or so. We might have to revise this conclusion if it were apparent that raising so much at that term of life would disorganise the capital market or endanger the credit of the Government in other directions. But the opposite appears to be the case. The market, wanting, a sign 'from high quarters, is becoming chary of accepting long-term loans --at the easy-..rates . hitherto piling; on the other hand, short money...is , still extraordinarily cheap. Pointing to this anomaly ,iak,his;,annnal .speech to the National Mutual Life Assurance Societylast week, Mr. J. M. Keynes declared tltat 4..protracted.period . of low rates of interest was itecessarx, for...the full. employinent of our economic re- sources, and appealed to the.Government for a sign, in the shape of a five to ten-year bond issue, which would assure the market that the powers that be have faith in the continuance of cheap money. If Mr. Keynes is right, a ten-year loan would be not only the just and prudent method of financing rearmament, but also a help towards the rationalisation of the interest structure. on which the future of industry fundamentally depends.
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