[From 1911 MacDonnell Inquiry]

VI. - FINANCE.

35. The financial arrangements of the Island are based in the main on the Isle
of Man Customs, Harbours and Public Purposes Act, 1866 (29 Vict. cap. 23). This
Act-which, it may be observed, was passed by the Imperial Parliament in the
same year as the Exchequer and Audit Act, and at a period when much attention
was being given to financial questions, more especially in connection with accounting
and control.-has, on the whole, answered expectations in maintaining the financial
stability of the Island. If, however, we do not suggest modifications of its provisions
it is only on the understanding that the Act will, in future, be administered according
to the method, and in the spirit, which we shall indicate in this Report.

Undoubtedly dissatisfaction with the Act and with its administration does exist
in the Island, but it appeared to us early in our inquiry that this dissatisfaction
was, to some extent, due to misunderstandings regarding the method in which the Act
was administered; and we think it is of importance that these misunderstandings
should so far as possible be removed. Something was done during the 10 days
which we spent in the Island to remove misapprehensions, and we shall endeavour to
complete the explanations which we then gave by weaving into our remarks a
description of the essential features of the Act, and of the methods in which in our
judgment it should be administered.

The Annual Budget.-Ordinary Revenue and Expenditure.

36. The Public Revenues of the Isle of. Man (excluding income from municipal
and local rates) consist of income from the following sources:-

(1) Customs duties on spirits, tea, tobacco, &c., a.naounting in the year 1910-11
to 80,2241.
(2) Harbour dues.
(3) Passenger taxes.
(4) Fines and miscellaneous.

The total income for last year was 85,2601. There are two facts of fundamental
importance to be noted in this connexion, first, that the inhabitants of the Island are
exempt from a large number of imposts in the form of direct taxation to which the
inhabitants of Great Britain are subject : such as Income Tax, Stamps, Inhabited
House Duty, Land Tax, Death and Estate Duties; secondly, the proportion to the
population of persons affected by taxation, and contributing the bulk of it, is much
smaller in the Island than in Great Britain. Taxation per head in Great Britain is
about 31. 6s. ; in the Isle of Man it is 11. 7s.

37. A Financial Statement is submitted annually to Tynwald usually in May
or June. It deals with ordinary Revenue and Expenditure, with the Accumulated
Fund (which is the aggregate of the unexpended surpluses of previous years with
the interest on the portion invested), with the Insular Debt and with certain
miscellaneous accounts, and it partakes of the nature both of Estimates and of
Appropriation Accounts, since it deals both with the year which has expired and with
that which is commencing. It is drawn up in the Government Office under the
directions of the Lieutenant-Governor, and is presented to Tynwald by His
Excellency. It may be added that some of the expenditure proposed in the
Statement---chiefly expenditure of a normal and necessary character, falling due
between the beginning of the year and the submission of the Statement-now is,
and must continue to be, voted by Tynwald before the Statement is formally
submitted.

The impression prevalent in the Island in some quarters that the items in
this Statement are approved by the Home Departments before its presentation is
incorrect. From time to time the Lieutenant-Governor or the Treasurer may confer
informally on some doubtful point with the Home Office or the Treasury, but no
formal authority is sought or given until resolutions have been passed by Tynwald.

38. On the Revenue side a, small amount (some 5,0001. a year at present) is
attributable to fees, fines, and other insular receipts of a miscellaneous character,
but otherwise the public services of the Island are financed from Customs Duties
collected by officers of the Imperial Customs. Where the Manx duties differ from
those of the United Kingdom-i.e., in practice, where they are lower-they are
levied in the Island and the actual proceeds are credited to the Manx Exchequer.
Where they are identical, and where, in consequence, goods may be moved freely
between the two countries without Customs restrictions, an arrangement called a
" Common Purse " exists, whereby the Island receives in respect of such duties the
same amount per capita as Great Britain does, plus an addition, calculated according
to a formula which allows for the number of persons temporarily visiting the Island
and the larger quantity of dutiable commodities which it is calculated they consume.

39. The duty of estimating the probable revenue of a year now rests upon the
expert officers of the Executive Government, and we think it desirable that this practice
should continue, as the estimate forms the basis of the Budget, and it is of the first
importance that it should be framed on uniform, safe, and accurate lines.

40. We have noticed that the Annual Financial Statement and Budget as
presented to Tynwald does not include the Estimates of the Administrative Boards,
through which Tynwald carries on its executive functions and the administration of
the Island is, in other respects, conducted. We are of opinion that the finance of
the various Government Boards should form part of the Insular Budget, the receipts
of the Boards being credited to the Insular Revenues and the expenditure of the
Boards being disbursed from the common Treasury —the Customs Department. We
think that the present system under which the Insular Finance is divided into
watertight compartments should be terminated. It is a recognised principle of good
finance that separate funds should not be unnecessarily created, and the unification
and centralisation which we propose will increase the control of Tynwald over Insular
finance, while at the same time effecting a salutary reduction in balances.

41. Passing from Income to Expenditure, we have first to refer to the charges
which are made obligatory by the provisions of the Act of 1866 as modified by the
Isle of Man Loans Act, 1880 (43 d. 44 Vict. cap. 8). Briefly stated, the obligatory
charges on Insular Revenue (in order of priority) are--

(1) The cost of collection incurred by the Imperial Customs Department.
(2) The expenses of Government.
(3) An annual sum of 2,3001. appropriated to Harbours in 1845 by the Act 8 & 9
Vict. cap. 94 with the view of giving the Island the benefit of an increase
in Customs Duties made at that date.
(4) Provision for the services of the Insular Debt pending its liquidation.
(5) Payment of the sum of 10,0001. to the Imperial Government.

Reserving an observation on point (2), we consider that the Lieutenant-Governor
has under the Act of 1866 no discretion as to these payments, which indeed are made
without his intervention by the Commissioners of Customs and Excise (with whom.
the Island may be said to bank). It would seem to follow that it is only when
these charges have been defrayed that the optional expenditure of the Island may be
said to commence and that a question arises as to the respective powers of the
Lieutenant-Governor and Tynwald.

42. The reservation mentioned in the preceding paragraph has reference to the
wording of section 3 of the Act of 1866, which runs as follows:--

"The Commissioners of Her Majesty's Customs shall apply the Duties of
Customs collected in the Isle of Man (except the necessary Charges of collecting,
recovering, and accounting for the same, which Charges they are hereby
authorised and directed to retain and pay out of the gross Amount collected,
notwithstanding the Provisions of the Act of the Seventeenth and Eighteenth. of
Victoria, Chapter Ninety-four) in following manner; (that is to say,) they shall
thereout pay and defray the necessary Expenses attending the Government of the
Isle of Man, and the Administration of Justice there, and other Charges incurred
in the Isle which have heretofore been or may hereafter be deemed fit and proper
Charges to be deducted from and paid oat of the Duties of Customs collected in
the Isle of Man, including so much (if any) of the Services which shall have been
voted by the House of Commons applicable to the Isle of Man, as the Commissioners
of Her Majesty's Treasury shall from Time to Time direct: Provided that no
Part of the said Duties of Customs shall be applied for or towards any of the
Navy Services, except the Salaries and Expenses of the Coast Guard Service of
the Isle of Man, and that no Part of. the said Duties of Customs shall be
applied for or towards any of the Army Services, except the Charge of the
Volunteers of the Isle of Man."

43. The operative parts of that section for present purposes are (1) " the necessary
" expenses attending the Government of the Isle of Man and the Administration of
" Justice there," and (2) " other charges incurred in the Isle which have heretofore
" been or may hereafter be deemed fit and proper charges to be deducted from and
" paid out of the Duties of Customs collected in the Isle of Man."

On (1) it might be argued that not all expenses, but only " necessary expenses "
are chargeable against the Insular Revenue ; and the right of discussing what are
" necessary expenses " conceivably might, as occasions arose, be claimed by Tynwald.

But the discussion, as it seems to us, could hardly fail to be barren, in face of (2),
which precludes limitations on the plenary powers of His Majesty's Government to
charge on the Insular Revenues any payment whatsoever which it may deem fit and
proper to make. It seems to us that the competency of His Majesty's Government is
complete and unquestionable to prevent by means of the Lieutenant-Governor's veto
any expenditure it deems objectionable, and to direct through the same medium any
expenditure to be made which it thinks fit to make.

44. But while this is, in our opinion, a correct statement of the existing law as to
the ultimate control over the Insular finances, it is obvious that a strict enforcement
of the letter of the law would reduce self-government in the Island to a nullity.
If we abstain from recommending an alteration of the law in this connection, we do so
only because we believe that adequate financial freedom can be secured to the Island
by executive action without legislation. We regard both the Government's veto on
expenditure, and its statutory power of directing expenditure to be made, as emergency
powers which should be only used at a crisis, and we are glad to learn that no
use was made of them during the constitutional deadlock of last spring, when the
difficulty as to the grant of supply was finally overcome by discussion. We consider
that in ordinary times a larger measure of financial control should be allowed to
Tynwald than has been permitted hitherto; and we proceed to indicate how this may
be done within the Act of 1866.

45. The following tabular statement exhibits, in broadest outline, the extent to
which, at present, His illaiesty's Government sanction expenditure in the Island
without the intervention of Tynwald, and the extent to which Tynwald's concurrence
is secured:-

41. On the foregoing statement our comment is that " the other expenditure
not voted by Tynwald " appears to be unnecessarily large compared with the
expenditure which Tynwald sanctions. It includes the charges for the civil establishments
and other services, many of which should, in our opinion, come under the
scrutiny and vote of Tynwald.

The end in view--the bringing under the scrutiny of Tynwald all expenditure
not of the obligatory kind in the strictest sense-can, we think, be best secured by
an alteration in the form of the annual Budget. We think it reasonable that, just as
certain Imperial charges when once sanctioned. by Act of Parliament do not come
before the House of Commons for annual criticismn, so certain Insular services-to
be described as Part, I. of the Estimates-should not be discussed in Tynwald,
because of their inevitable character They lie at the foundation of the government
of the Island, and should not lie challenged.

47. We think the following form will be appropriate.

Financial Statement--Part I.

Cost of collecting the Revenue.
Service of Public Debt.
Grant of 2,300l.,. to Harbours.
Contribution (10,0001.) to the Imperial Exchequer.
Pensions.
Cost of Audit.
Cost of Census (decennial).
Salaries of :-

Lieutenant-Governor.
Judges and their Office Expenses.
Secretary to Government and his Office Expenses.

All services not included in Part I. of the Financial Statement would fall
automatically into Part II., which should come in the ordinary course of business
under the scrutiny and vote of Tynwald. Any increase over the salaries and office
expenses shown in Part I. of the Estimates for the preceding year should be included
in Part II. of the Estimate, and laid before Tynwald for approval. In this way
there will be not only actual compliance with the claim of Tynwald that all additions
to salaries and cost of government will come ander that Court's criticism and vote,
but a large extension of its financial activities.

48. As to the subsequent procedure, we consider that Part II. of the Estimates
when laid by the Lieutenant-Governor before Tynwald should be referred at once to
the Finance Committee for consideration and report. That Committee should be
free to propose, for given reasons, the removal of items from the Estimates to which
it objects, or the transfer of funds from one Head of Expenditure to another, or the
increase of items which seem inadequate, or the addition of new items, provided that
the Committee's proposals do not alter non-recurrent into recurrent expenditure and
do not raise the estimated expenditure above the estimated revenue by a larger sum
than is available from the accumulation of realised surpluses, a point to which we
shall presently refer in greater detail. The report of the Committee should be
carefully considered by Tynwald at a meeting specially called for the purpose, and
Tynwald's orders on the Committee's reports should be accepted and acted upon by
the Government, unless the Government sees fit to exercise in regard to them, or any
part of them, its emergency powers.

49. When the Budget of ordinary Revenue and Expenditure has been considered
by Tynwald, the present practice is that it should be sent by the Lieutenant
Governor to the Home Office and the Treasury in order that it may be approved,
and that the necessary instructions for placing the Island in funds may be given to
the Board of Customs and Excise.

We consider that this practice should continue.

50. The practice of submitting to Tynwald votes for necessary expenditure,
falling due in the interval between the beginning of the financial year and the
submission of the Financial Statement for that year, must also of necessity continue.
As it is always inconvenient and often impossible to modify such votes after they
have been passed, the necessity of an early submission of the Financial Statement is
emphasised, It should, we think, be, submitted not later than the 15th May.

Disposal of the Realised Surplus.

51. When the end of the year has arrived, the actual revenue and actual
expenditure for the year are known and the amount of the realised surplus can be
ascertained. The normal practice in the United Kingdom is to carry this surplus to
the Old Sinking Fund. In the Isle of Man its allocation is regulated by the sections
8 and 9 of the Act of 1866, which run as follows

" Section 8.-The Surplus, if any, of the Duties of Customs of the Isle of
Man, after deducting the Sums herein-before directed or authorised to be paid
or set aside thereout or charged thereon, shall be applied for such public Purposes
of the Isle of Man, to be approved of by the Commissioners of Her Majesty's
Treasury, as the Court of Tynwald shall from Time to Time determine, the
Lieutenant-Governor having a Veto upon such Decision.

" Section 9.-The clear surplus Income (if any) arising from the said Duties
of Customs in any Year which shall not be required for the Purposes of that
Year shall be invested in such Names and on such Securities as the Commissioners
of the Treasury shall from Time to Time direct; and the Sums so
invested, with the Interest and Accumulation thereof, shall form a Fund to be
called 'The Isle of Man Accumulated Fund,' and such Fund, or any Part
thereof, shall from Time to Time be applicable for the Purposes and in the
Manner in which the same would have been applicable if it had been surplus
Income of the Year in which it shall be applied."

The preceding sections of the Act of 1866 obviously deal with an accrued, not
with an accruing, surplus ; and we take it to have been the intention of Parliament
that, when each year had ended, such portion of its surplus as was immediately
required should be spent under the conditions laid down by section 8, whilst
such part as was not required for expenditure should be invested under section 9,
and should remain in the Accumulated Fund until it was needed. The purposes
and manner in which expenditure was to be made under the two sections were, it will
be seen, identical.

52. The actual practice of the last 30 years seems to have deviated somewhat
from this procedure. It is not quite clear how the divergence arose, but some light
is thrown on the question by the following extract from a printed Minute on the
Insular finances by Sir Spencer Walpole, dated 5th October, 1882, and apparently
laid before Tynwald

" At present the Commissioners of Customs receive the whole of the revenue
of the Insular Government. They act, for all intents and purposes, as bankers to
the Insular Government. They defray most of the charges over the surplus
revenue at the close of the financial year to the credit of the Isle of Man
Accumulated Fund Account at the Bank of England. But they do not pay the
charge for education and some minor votes, which are paid direct out of the
Accumulated Fund. In consequence, these charges, instead of being defrayed
out of the revenue of the current year, are paid out of the surplus revenue of
the preceding year. Thus, the accounts do not accurately show the extent of
the expenditure in any one year, since a portion of it, which ought to be paid
out of the accruing revenue, is paid out of the surplus revenue of the preceding
twelve months.

" This arrangement is perplexing, and the Lieutenant-Governor has, therefore,
decided on using his best endeavours to terminate it. The matter seemed to
him of such importance that he decided on personally visiting London and
conferring with the Treasury and the Customs, and he has reason to believe
that no objection will be raised by these Departments to the Alteration of
Account, which it is thus the Lieutenant-Governor's desire to introduce."

Sir Spencer Walpole's chief object seems to us to have been the removal from
the surplus revenues to the annual budget of recurrent expenditure such as educational
charges. We agree that recurrent expenditure should not be charged against
the Accumulated Fund. For example, it would, to take an extreme case, be
indefensible to establish a system of Old Age Pensions because the balance at credit
of the Accumulated Fund stood at a high figure on a particular date. But subject
to such exceptions as that, and subject to the retention of an adequate reserve,
we think the fullest liberty should be permitted to Tynwald to allocate to purposes of
general utility the realised surplus funds, whether invested or not.

It is no doubt true that the finance of any community must be regarded as a
whole, and that some inconvenience is bound to arise if it is divided into separate
compartments. But we attach importance to the consideration that, in the case of
realised surpluses, the question of maintaining a permanent equilibrium between
reserve and expenditure hardly arises; and we think that in normal circumstances
and subject to the permanent retention from year to year of an adequate reserve,
the distribution of the money which ex hypothesi is available may safely be left to
Tynwald.

Treasury Requirements with regard to Budgets.

53. There are two circumstances which render the Manx Revenues precarious.
In the first place, they depend very largely on the Customs Duties derived from
articles consumed by visitors to the Island. A slight change not only in the
prosperity of Lancashire and Yorkshire, which mostly supply the visitors, but in
the habits of those counties with regard to holidays which affect the flow of visitors
to the Island, would exercise a serious effect on the Insular Budget. In the second
place, the Insular Tariff is in practice closely connected with that of the United
Kingdom, and must vary with variations in the British Tariff. In cases where the
duties levied in the two countries stand originally at the same figure, a decrease in
the English Tariff is generally followed by a similar decrease in the Isle of Man.
In so far as this is so, the Insular Revenues are liable to be diminished at any
time owing to circumstances beyond the control of the Island.

54. Having regard to these facts, the Treasury have laid down two administrative
rules, viz. :--

(i) that the annual Financial Statement should be so framed as to show an
estimated surplus of not less than 5,000l. on the year's working ; and

(ii) that the estimated balance in the Accumulated Fund on the 31st of March
in any year (excluding the realised surplus to be paid in after that date)
should not be less than 20,000l.

It may be said that the first of these stipulations involves no loss to Insular
funds, since the surplus, when realised, passes into the Accumulated Fund ; and
that the second stipulation permits of the investment of the 20,0001. and the
utilisation of the resulting interest for Insular purposes. But while admitting the
force of these considerations, so far as they go, and while not wishing to press the
point that a higher interest might be obtained in other ways (e.g., cancellation of
debt), we desire to point out that the Insular Revenues are not large, that the effect
of transferring a certain sum from the Annual Budget, where it is available for
recurrent and non-recurrent expenditure alike, to the Accumulated Fund, where it is
available only for non-recurrent expenditure, diminishes pro tanto the annual
revenues of the Island available for immediate expenditure. The need for greater
expenditure in the Island is admitted ; and it is to the general interest to keep no
larger sum as a reserve than is necessary from the standpoint of financial stability.
We, therefore, think that so long as a reserve of 20,000l. is maintained intact Tynwald
should not be restricted from framing its budget according to its income and
available surplus. Yet no budgetting for a deficit should be permitted and further,
a reasonable provision for unforeseen contingencies should be included in accordance
with the usual principles of good finance.

We may add that at the present moment the balance in the Accumulated Fund
(estimated at 78,439l. on 31st March 1912) is admitted on all hands to be unnecessarily
high.

Procedure in connection with Money Resolutions and Taxation Bills.

55. Before we proceed to sum up the effect of our preceding observations we
desire to call attention to two matters connected with finance, viz. (1) the desirability
of a discussion in Tynwald preliminary to the introduction of a Money Bill, and
(2) the competency of the Local Legislature to deal with Taxation.

(1) On the first point we would observe that in the House of Commons a Bill
involving a charge on public funds must be based on a preliminary Resolution in
Committee of Ways and Means. No such procedure exists in the Isle of Man ;
but we are agreed that it would be beneficial to introduce the procedure into
Tynwald. It seems to us desirable both as a means of educating public opinion in
the Island and clarifying the minds of the Members of the Council and the Keys on
particular proposals, that the essential principles and the objects and scope of a
financial measure should be discussed and realised in all. their bearings before the
measure takes the form of a Bill. Not only will legislation become more precise
and more adapted to the end in view by such procedure, but the drafting of the Bill
will be facilitated. We recommend, therefore, that the Standing Orders of Tynwald
and of both Chambers be altered with a view to the introduction of this procedure.

(2) On the second point noted above, namely, the powers of the Local Legislature
in respect of taxation, we would point out that there is no limitation on the power
of the Local Legislature. to deal with taxation (other than Customs Duties) except the
power of veto exercised through the Lieutenant-Governor. Taxation other than Customs
Duties is imposed by an ordinary Bill no special procedure being applicable---and
we think the application to all taxation proposals of the procedure indicated in the
last preceding paragraph will afford all the security desirable in respect of caution and
deliberation.

56. On the other hand Customs Duties are imposed in the manner prescribed
by the Isle of Man (Customs) Act, 1887 (50 Vict., sess. .2, cap. 5), which provides
as as follows (Sec. 2):-

"If the Court of Tynwald of the Isle of Man resolve that it is expedient to
impose, abolish, or vary any Customs Duties in the Isle of Man, and that such
imposition, abolition, or variation should take effect immediately, and the Commissioners
of Her Majesty's Treasury approve of such resolution, such resolution shall
have full effect as from the date specified therein until the end of six months
from the date of the resolution, and, if Parliament is then in Session, until the
end of the then current Session of Parliament ; but, save as otherwise provided
by this or any other Act, shall at such date or at any earlier date at which either

(a) An Act of Parliament relating to the duties of Customs in the Isle of Man
is passed ; or
(b) The Commissioners of Her Majesty's Treasury by Minute declare that there
is no prospect of such resolution being confirmed by Parliament

cease to have effect without prejudice to anything previously done in pursuance
thereof

Provided that:--

(a) If any person satisfies the Commissioners of Her Majesty's Customs that
by reason of any provision of any such resolution he has paid in respect
of any goods duties in excess of the duty which he would otherwise
have paid, and that such goods are still in his possession at the date
of the said provision ceasing as aforesaid to be of effect, the Commissioners
of Customs shall repay him so much of the duty as they consider
to have been so paid in excess; and

(b) A person may not by virtue of any provision of any such resolution pay
less duty than he otherwise would pay, unless and until he gives to
the Commissioners of Her Majesty's Customs such undertaking or
security, by deposit or otherwise, as they may require to pay the duty
which he would otherwise have paid in the event of the said provision
ceasing to be of effect."

It may be explained that the object of this legislation was to enable a change
in the Manx tariff to be effected swiftly, but without removing from Parliament its
ultimate control. It will be seen that a resolution of the Court of Tynwald relating
to Customs duties has full effect for six months from the slate of the resolution,
and, if Parliament is then in session, until the end of the thus current Session of
Parliament ; but such resolution must be approved by the Treasury, and, unless the
resolution is confirmed by Act of Parliament, it ceases to have statutory force at the
end of the period mentioned.

In ordinary circumstances it is unlikely that the Treasury would refuse to approve
the resolution or that Parliament would refuse to pass the confirming Act. Indeed in
1909, when difficulties arose over the English Budget, special care was taken that
the Isle of Man Customs Bill should be. introduced in the ordinary way in order that
the island might not be put to inconvenience. There is therefore every probability
that any Customs Duties imposed by Tynwald will become operative.

In these circuntistances we are of opinion that the Island has a reasonable measure
of control over its own taxation, and we do not recommend any change on this point.

57. We are now in a position to recapitulate the manner in which we think that
the finances of (say) the year 1912-13 should be treated. A Financial Statement,
with the expenditure shown in two Parts, should be prepared by the. Lieutenant-
Governor. "Part I" of the programme of expenditure should not be discussed by
Tynwald at all. On " Part II." there should be full discussion by Tynwald ; but as
a preliminary to such discussion, the Part should be referred by Tynwald to its
Finance and General Purposes Committee for consideration. and report. On submission
of the Committee's report, Tynwald should consider it in the light of the Committee's
recommendations and all other relevant circumstances. The Financial Statement as
recast by Tynwald, if necessary, should then be submitted to the Lieutenant-
Governor, who should reserve his orders for such reasonable period as will allow
of the Secretary of State and the Treasury Board to consider the Statement and
convey to the Lieutenant-Governor their conclusions. The Lieutenant-Governor will
then be in a position to issue his orders of acceptance, or of dissent (veto) upon any
particular points.

On 31st March, 1913, the balance for the year should be struck ; and the realised
surplus should be added to previous accumulations, and dealt with by Tynwald in the
ensuing year in accordance with the principles already stated.