e, with a lower scale of profits, brought about by a lower price
level, entering into the income-tax average. It looks as though 1923 may
just pay its way, but if so, then, like the current year, it will make
no contribution towards the reduction of the debt. So much for the
"short period." Our worst difficulties are really going to be
deep-seated ones.

THE TWO PARTS OF A BUDGET

Now a national budget may consist of two parts, one of which I will call
the "responsive" and the other the "non-responsive" portion. The
responsive portion is the part that may be expected to answer sooner or
later--later perhaps rather than sooner--to alterations in general
conditions, and particularly to price alterations. If there is a very
marked difference in general price level, the salaries--both by the
addition or remission of bonuses and the general alteration in scales
for new entrants--may be expected to alter, at any rate, in the same
direction, and that part of the expense which consists of the purchase
of materials will also be responsive. The second, or non-responsive
part, is the part that has a fixed expression in currency, and does not
alter with changed conditions. This, for the most part, is the capital
and interest for the public debt.

Now the nature and gravity of the "long distance" problem is almost
entirely a question of the proportions which these two sections bear to
each other. If the non-responsive portion is a small percentage of the
total the problem will not be important, but if it is larger, then the
question must be faced seriously. Suppose, for example, that you have
now a total budget of 900 million pounds, and that, in the course of
time, all values are expressed at half the present currency figure.
Imagine that the national income in this instance is 3600 million
pounds. Then the burden, on a first approximation, is 25 per cent. Now,
if the whole budget is responsive, we may find it ultimately at 450
million pounds out of a national income of 1800 million pounds, _i.e._
still 25 per cent. But let the non-responsive portion be 400 million
pounds, then your total budget will be 650 million pounds out of a
national income of about 2000 million pounds, or 33-1/3 per cent., and
every alteration in prices--or what we call "improvement" in the cost of
living--becomes an extraordinarily serious matter as a burden upon new
enterprise in the future.

Let me give you a homely and familiar illustration. During