A Sinking Fund Must Not Be Diverted From Its Express Use

6. A final condition admonishes us that under no circumstances should a sinking fund, or any portion of it, be diverted from its express purpose either by utilisation for alien needs, however urgent, or by intermission of the devotion of the regular and necessary instalments to the design in view.

The Duty Of Creating A Sinking Fund May Be Assigned To An Assurance Company

Where it is difficult or impracticable for the investor to create a sinking fund himself, this duty can be assigned to an assurance company, whose continual practice and facility of investing enable it to afford the investor the benefit of genuine compound interest.

Sinking Funds For Reduction Of National Debt

The sinking funds adopted for the reduction of our National Debt exhibit a somewhat different form and are worth a brief recital. Their nature and object are of course identical with those of a sinking fund constructed in the customary way. Beyond the mournful statement that our egregious debt is virtually the accumulated cost of war, nothing further needs here to be added upon its origin and history. Originally it was the practice of the Government to pledge specific taxes as the security for payment of interest, and the redemption of principal in respect of borrowed moneys. Thus, in 1692, when new duties on beer and other liquors were imposed, it was ordered that the receipts from those duties should be retained in a separate account as an express and hypothecated fund or security for raising a loan. But Governments in periods of stress often act like other spendthrifts, and become as careless of engagements as the prodigal: the notion of repayment speedily vanished, interest alone being provided - and the principal was treated as a permanent liability. A more scrupulous attention, however, gradually arose to the interests of the nation, for nations, like parents, should act as trustees for their progeny - particularly where the material sources of revenue, from natural exhaustion, become slowly reduced.

In 1723 Sir Robert Walpole established a sinking fund in the form of allotting a sum of money every year derived from the national revenue, and accumulating it at compound interest; and thus, when the fund had attained to the dimension of the debt, an instantaneous redemption would occur, and fund and debt be simultaneously extinguished.

The adoption of this particular form was open to two objections: (1) it was a cumbrous and indirect method, for the sums appropriated annually could be more conveniently applied at once in the extinction of portions of the debt by purchase in the market; and (2) an accumulating fund of any dimension provided an enormous temptation to an impecunious or distressed Government to divert it to the satisfaction of any urgent financial difficulties in which they might be involved.

Existing Methods Of Reducing The National Debt; The Old Sinking Fund

The stupidity of arrangements of this description becoming recognised in time, a sounder plan was pursued, and our existing Sinking Fund now consists mainly of three parts, namely (a) any actually realised surplus upon each year's national account of income and expenditure. This is termed the Old Sinking Fund. When a surplus exists the amount is paid to the Commissioners of the National Debt, who (through their stockbroker) apply it in the immediate purchase and consequent cancelment of its equivalent Government stock.

The Process May Be Briefly Explained. In Introducing The Working Of The Old Sinking Fund

the Budgetl in any year the Chancellor of the Exchequer submits an estimate (based upon the financial experience of past years in each department of national income and charge) of the revenue and expenditure for the ensuing year. If the former be thus expected to exceed the latter - that is, if a surplus be anticipated - remissions of taxation may be allowed; while if the latter be calculated to prove the greater, fresh taxation may be requisite to supply the deficiency. But this surplus, if one be shown, is a mere estimate - the expected income and expenditure forms the basis for the provision by Parliament of the probable demands of the succeeding year. We are not concerned with it in connection with the Sinking Fund. But at the same time the Chancellor recalls the corresponding estimate which he submitted in his previous Budget of the income and expenditure for the year just closed, and compares that estimate with the revenue which has been actually received during the past year and the expenditure which has been actually incurred during its currency. If the former exceed the latter, the difference is an actually realised or existing surplus, and must by Act of Parliament be at once devoted to the diminution of debt.

The New Sinking Fund or Fixed Debt Charge.

(b) There is in addition what is termed the New Sinking Fund, started in 1875, and sometimes named the Fixed Debt Charge. A definite amount is annually set aside (at present £28,000,000 a year) as a provision for payment of the

1 Budget: a diminutive form of the French bouge, a wallet or pouch; the bag in which the national money is supposed to be kept. In former days, the Chancellor of the Exchequer, when submitting his annual statement, was officially said " to open his budget." interest upon the debt and for redemption. As the debt is gradually cancelled by that portion of the Fund which remains after the interest for each year is discharged, the interest portion successively becomes less, and, since the £28,000,000 is a constant sum, the yearly balance applicable to reduction continuously increases. It was stated when the Budget was introduced in May 1908, that the £28,000,000 then represented the sum of nearly £10,000,000 appropriable to the cancelment of debt, the balance of £18,000,000 being absorbed in the payment of interest upon its existing capital-amount.

Terminable Annuities

(c) We need only refer to a third mode of reduction, which consists in the substitution of terminable annuities for annuities payable in perpetuity. Our National Debt is virtually the representative of a perpetual annuity; a power of repayment is reserved, but, in all probability, if that power were exercised the operation would assume the form not of the redemption of the capital, but of a future diminution in the rate of interest. I purpose in illustration to deal here only with terminable annuities in the shape of annuities granted during the lifetime of specified persons. A lady aged sixty-five (for these annuities are chiefly purchased on the lives of women) possesses £500 of Consols. She prefers to receive an assured income of larger amount than the 2½ per cent, and equally well secured; she is willing, therefore, to barter her stock for an annuity which terminates at her death. She accordingly transfers to the National Debt Commissioners at the National Debt Office her holding of stock at (say) the price of 85 15/16 (the value at the time of writing); that is to say, she hands over a security worth in money £429 13s. 9d. In exchange she is granted an annuity during her lifetime (according to the Government tables) of £40 18s. 4d. The Government thus is released from the annual payment of 2½ per cent on the £500 or £12 10s., and from the liability of redemption, and pays instead a sum of £40 18s. 4d., limited to the lifetime of the lady, - the average duration of life and of the payment (taking females of age sixty-five one with another) being about thirteen years only.