The history of state budgets begins with the emergence of the “nation-state” familiar to us, in which power is exercised through a bureaucracy, and the state is perceived as a depersonalized set of institutions. More precisely, it would be correct to say that the state budget largely gave birth to what we are accustomed to calling the state. This happened in Britain, at the end of the 18th century, when parliament granted the crown an annual salary of 8,000 pounds, thus separating the expenses for the king from the other expenses for state needs.
Before this, “state” was synonymous with “ruler’s possessions,” meaning taxes and other levies were collected directly for the crown and spent in its name. Interestingly, today this feudal system looks fairer than the “nation-state” that replaced it. Judge for yourself. The king had to convene parliament each time to “adopt a budget”—actually, the main work of parliament was reviewing the crown’s financial requests and approving or rejecting them. This system operated in all major feudal countries—England, France, Spain (Castile). Many cities also had their own parliaments, whose main functions were financial matters and justice. Taxes and other levies required parliamentary approval, and were levied for specific purposes and limited periods. Meaning that if the levy period expired, the king had to convene parliament to extend it, and there was no guarantee that parliament would agree.
The crown was in complete financial dependence on the parliament (the assembly of taxpayers). This led to interesting effects. For example, the so-called “Hundred Years’ War” (actually, it was not one war but a series of many conflicts) continued, in the opinion of some historians, for so long because the English parliament, after each successive English victory, immediately ceased funding, reasonably believing that “we’ve won, that’s enough.” The war stopped and resumed only when the crown managed to wheedle out more money. In general, France owes not so much to Joan of Arc as to English parliamentarians.
Of course, kings did not like this state of affairs, and by the 16th-18th centuries they “solved the issue” by getting rid of the “power of the purse” that belonged to parliament. But not in Britain. For many reasons, British kings lost the struggle against parliament, and the final “solution” consisted of allocating a fixed sum to the king and transferring control of the remaining state revenues and expenditures to professional bureaucrats. This, as we said, gave birth to the “state budget.”
As we can see, from the very beginning, even from the feudal practice of parliament financing the crown, the budget has one main purpose—controlling and restraining the state. On reflection, the budget is the main—and actually the only effective—mechanism of such control, which works very simply: no money means no activity. When the state is forced to beg for money each time, this gives real leverage over state policy to those who provide the money. All other “separations of powers” and “checks and balances” are worthless if the state has managed to appropriate the “power of the purse,” and Ukraine’s experience, incidentally, perfectly confirms this.
Most currently developed countries sooner or later moved from feudalism to the form of a “nation-state,” financed through a budget. However, the “power of the purse” has remained with parliament in full and unconditional measure far from everywhere. The Americans were the most consistent in this regard; we recently observed the shutdown caused by Congress’s failure to pass a budget; in other cases, things were not so rosy. Constitutions adopted in the 19th century usually contained various provisions allowing governments to circumvent the “power of the purse.”
Moreover, at the same time as establishing the practice of financing through a budget, states began searching for ways to circumvent it. The first such method was “public debt,” that is, the government’s ability to borrow in its own name. It is clear that “government debts” had to be repaid by taxpayers. By the way, in the United States, public debt, since the constitutional debate, was considered by many as almost a crime. But, as we see, this opinion has now gone out of fashion; Obama accumulated more debt than all previous presidents combined. The second method is “debasement of coinage” or inflation, allowing the state to obtain income by reducing the purchasing power of money. When the state mastered fractional reserve banking and accepted the idea of a central bank, this method of financing state activity confidently competed with taxes and the budget.
However, the main blow to the budget, as a real instrument of taxpayer control over the state, was delivered by the “welfare state,” namely, the fact that among state expenditures there appeared all sorts of “charity” in the form of social insurance, healthcare, pensions, and so on.
What this has led to is clearly visible in the example of Ukraine. However, before turning to this example, it must be noted the following. When speaking of Ukraine and the post-Soviet space in general, we should remember that here, not for a single second over the past three hundred years, has the practice of the “power of the purse” ever existed. In autocratic Russia, the revenues of the crown were simply the crown’s revenues, without any restrictions or parliaments. The “state budget” in those moments when it existed was actually an accounting document recording the income and expenditures of the tsarist state. Then autocratic Russia was replaced by the equally autocratic USSR, in which people worked directly for the state as if by obligation. Here, moreover, there were no restrictions on state ventures whatsoever, and the budget performed the same role—that of an internal reporting document.
Thus, it comes as no surprise that in Ukraine at the moment of gaining independence, there simply were no people who understood the role and significance of the state budget in a free country. Moreover, Ukraine automatically inherited all the institutions and practices of the USSR, such as the “right” of the treasury to finance state expenditures “according to the previous year’s norms,” which turns the political procedure of adopting a budget, and its very existence as a “law,” into a simple fiction. In the regulatory system that exists here, there is simply no need for an annual state budget adopted by parliament. There is no practical need for a special document in a situation when the state collects taxes and receives other income throughout the year, and immediately spends them on its activities. I repeat—with such latitude, the budget should simply be some internal document of the Ministry of Finance. By the way, until a certain point, this was effectively the case; the author of these lines will never forget the story of how the finance minister of Ukraine easily and simply promised the IMF to adopt a deficit-free budget, since this was required by the agreement with this very IMF. This was in the mid-90s, and for the Finance Ministry, this posed no real problem, because all financing was conducted manually, plus, there were numerous “off-budget” funds easily allowing one to draw anything into the budget while actually financing what was needed. By the way, since then, budget execution has not changed at all; it is always conducted manually; moreover, the state budget was executed as prescribed by the relevant law only once—under Yekhanurov.
So why then do we observe annual budget hysteria every year, actively covered by the media, and what is the sanctity of the entire “budget process”? At this point, we return to the groove of global trends and the question of the influence of the “welfare state” on the state budget. Before the appearance of the “welfare state,” parliament consisted of taxpayers. And they decided whether to permit state spending or not, and what its volume should be. It was about their money. With the growth of “social” programs, beneficiaries began to enter parliament. And the more “social” the state became, the more the legislative body represented the interests of those who do not give but receive from the budget. In the late USSR, where, in Simon Kordonovsky’s opinion, a kind of “administrative market” existed, the same was observed, only on a hypertrophied scale—ministries and departments waged fierce battles among themselves over the volumes of “funds” they were to “utilize.”
Ukraine inherited, on the one hand, the Soviet practice of “utilization of funds,” and, on the other hand, the idea of the “welfare state” as the only correct and progressive form of state existence, where budget recipients sit in parliament. Therefore, the budget process in Ukraine and all the accompanying hysteria is nothing more than a process of dividing the money that the state must “collect” in the productive economy. The hysteria stems from the fact that all this is usually presented through the needs of numerous orphans and beggars, whom the state allegedly cares for, and whom, despite this care, become more numerous every year. It is the very possibility to “correctly” divide the money seized by the government in an honest fight between interest groups that keeps the domestic budget process afloat, not allowing it to turn into a simple formality of the Finance Ministry. This same problem, though in milder form, is inherent in all other countries where the legislature adopts a budget—this document today plays a role directly opposite to the one with which it began its journey.
Thus, if we ask what to do with the state budget, the direction here is obvious—to return it to a state where it represents the only relatively reliable means of controlling state activity. In all other roles, this document is simply a screen covering ordinary looting and part of the propaganda justifying this looting.
To accomplish this, the following must be done:
Return taxpayers to parliament. How to do this is a separate, difficult conversation beyond the scope of this article. In the most general terms—only donors should have the right to vote.
Concentrate all state revenues and expenditures within the framework of the budget. Any revenues and expenditures outside this document must be prohibited.
“No taxation without representation.” Only parliament can establish and change taxes. Naturally, the Ministry of Revenue and Duties must be abolished.
Make it impossible to finance any state activity before the budget is adopted. Failure to adopt the budget on time means an unconditional shutdown.
Eliminate the system in which “local” budgets give something to the “central” government and receive something from it. Local taxes form local budgets; state taxes form the state budget.
Set the minimum “budget line item” at a low level, say, 1,000 hryvnias—that is, all budget expenditures must be itemized down to this amount.