Terminable Annuities
Terminable annuities are employed in the system of British public finance as a means of reducing the National Debt. This result is attained by substituting for a perpetual annual charge (or one lasting until the capital which it represents can be paid off en bloc), an annual charge of a larger amount, but lasting for a short term. The latter is so calculated as to pay off, during its existence, the capital which it replaces, with interest at an assumed or agreed rate, and under specified conditions. The practical effect of the substitution of a terminable annuity for an obligation of longer currency is to bind the present generation of citizens to increase its own obligations in the present and near future in order to diminish those of its successors. This end might be attained in other ways; for instance, by setting aside out of revenue a fixed annual sum for the purchase and cancellation of debt (Pitt's method, in intention), or by fixing the annual debt charge at a figure sufficient to provide a margin for reduction of the principal of the debt beyond the amount required for interest (Sir Stafford Northcote's method), or by providing an annual surplus of revenue over expenditure (the "Old Sinking Fund"), available for the same purpose. All these methods have been tried in the course of British financial history, and the second and third of them are still employed; but on the whole the method of terminable annuities has been the one preferred by chancellors of the exchequer and by parliament.
Terminable annuities, as employed by the British government, fall under two heads:--
- Those issued to, or held by private persons;
- those held by government departments or by funds under government control.
The important difference between these two classes is that an annuity under (1), once created, cannot be modified except with the holder's consent, i.e. is practically unalterable without a breach of public faith; whereas an annuity under (2) can, if necessary, be altered by interdepartmental arrangement under the authority of parliament. Thus annuities of class (1) fulfil most perfectly the object of the system as explained above; while those of class (2) have the advantage that in times of emergency their operation can be suspended without any inconvenience or breach of faith, with the result that the resources of government can on such occasions be materially increased, apart from any additional taxation. For this purpose it is only necessary to retain as a charge on the income of the year a sum equal to the (smaller) perpetual charge which was originally replaced by the (larger) terminable charge, whereupon the difference between the two amounts is temporarily released, while ultimately the increased charge is extended for a period equal to that for which it is suspended. Annuities of class (1) were first instituted in 1808, but were later regulated by an act of 1829. They may be granted either for a specified life, or two lives, or for an arbitrary term of years; and the consideration for them may take the form either of cash or of government stock, the latter being cancelled when the annuity is set up. Annuities (2) held by government departments date from 1863. They were created in exchange for permanent debt surrendered for cancellation, the principal operations having been effected in 1863, 1867, 1870, 1874, 1883 and 1899. Annuities of this class do not affect the public at all, except of course in their effect on the market for government securities. They are merely financial operations between the government, in its capacity as the banker of savings banks and other funds, and itself, in the capacity of custodian of the national finances. Savings bank depositors are not concerned with the manner in which government invests their money, their rights being confined to the receipt of interest and the repayment of deposits upon specified conditions. The case is, however, different as regards forty millions of consols (included in the above figures), belonging to suitors in chancery, which were cancelled and replaced by a terminable annuity in 1883. As the liability to the suitors in that case was for a specified amount of stock, special arrangements were made to ensure the ultimate replacement of the precise amount of stock cancelled.
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