Letter from James J. McElligott to Seán MacEntee (Dublin)

My dear Minister,
I enclose herewith draft of a memorandum¹ which I have prepared in criticism of the Treasury memorandum which I forwarded with my letter of yesterday². You will notice that, taking the items separately, the lowest figure to which I am able to get, on the arguments made is, £12 millions. My letter to you of the 21^st instant³ reached a figure of £10 million by viewing the matter from another angle, namely by attempting to beat down the £25 million which I was given to understand included the Compensation Annuity. Apart from the fact that this approach to the problem produced a lower net figure for the British claim than the total (at that time) of the figures under separate heads, and that our figure for Local Loans should have been £4.1 millions instead of £3.9 millions, subsequent discussions and the correspondence from the Government Actuary's Department make it clear that the estimate in respect of the liability under pensions was arrived at on a quite impartial basis and contained no margin for contingencies to safeguard the Treasury. Accordingly the only reduction which could be effected was in respect of bringing forward the figures by two years, and I am afraid that the £10 millions could hardly be defended now.

2. I can see no ground for further attack with a view to reducing the £12 millions unless we introduce some argument about the 'Disbandment' element of the R.I.C. You will recollect that you were committing to paper certain representations the purpose of which was to refuse liability for pre-Treaty pensions and to accept a 'fair' share of the disbandment pensions. As the point is primarily a political one which may, as I indicated in my letter of yesterday², cut across our attempts to avoid the liability in respect of the external element, I would welcome some guidance from you in the matter. You will no doubt have noticed that the Government Actuary's liability of £12.3 millions for R.I.C. pensions as on 1st April 1936 was divisible into £9.4 for disbandment cases and £2.9 for others.

3. I had a long discussion at the Treasury today with Sir Warren Fisher. Like all other British officials he was courteous and anxious to help. He spoke at length on the desirability of a settlement from the point of view of both countries but seemed disappointed that further progress had not been made in that direction before the Ministers left for Dublin. He hoped that negotiations would be resumed at the earliest possible date and brought to a successful conclusion. His general conversation was all on these familiar lines.

I put it to him that he could contribute to the desired end by inducing a more reasonable approach and more rational methods of calculation in regard to the various financial matters outstanding. His reply was that they had already wiped out exactly three-fourths of their claim, that is £78 millions out of £104 millions (although they could have collected it all if they wished) and that in regard to the remainder they had made substantial reductions in deference to our views but that we had shown no desire to accommodate ourselves to their point of view. From £26 million they had come down to something between £18.2 millions and £18.6 millions and could hardly be expected to go on making further reductions especially as we had not shifted from our original offer of £10 millions. I elaborated our various reasons for differing even with their lowest figure, including the point about defence expenditure. He took the latter very well and said that no Treasury man could dispute the fact that all estimates of defence outlay for any purpose whatever were liable to be grossly understated. He said the views of military and naval men on the cost of modern defences were entirely worthless and that a multiplier should be always used.

I am seeing Warren Fisher again tomorrow and we will continue our discussion.

Unless you have something further for me to do here I was thinking of returning before the end of the week, on say, Friday.

[Enclosure]

1. The Treasury memorandum of the 24th instant indicates that the United Kingdom claim in respect of items in dispute, other than Land Annuities and Compensation for Damage to Property, amounts as at 1st April 1938 to £18,572,000. The Department of Finance is unable to accept this figure for reasons explained in the following paragraphs which deal separately with (1) pensions and (2) local loans, in accordance with the arrangement in the Treasury memorandum.

(1) Pensions

2. The British claim under this heading is £11,653,000, comprising the following items:

1. R.I.C. pensions
2. Judicial, Civil and revenue Department pensions (excluding Post Office Pensions)
3. Administrative and minor expenditure (including cost of audit and annuities under the Railways (Ireland) Act 1896 and the Marine Works (Ireland) Act, 1902).

The figure of £11,653,000 is arrived at by making an estimate of the liability as at the 1st April 1938 from figures supplied by the Government Actuary in respect of items (a) and (b) as at 1st April 1936 and by treating item (c) in a similar manner.

3. The Department of Finance agrees to accept the figures furnished by the Government Actuary as being a fair estimate at 3½% of the outstanding amounts payable to pensioners and further accepts, as a working arrangement, the approximate method of re-assessing the amounts as at the 1st April 1938. The sum of £11,653,000 cannot, however, be accepted as a liability of the Irish Government for the following reasons:

1. The Actuary's estimate of the capital value of R.I.C. pensions as on 1st April 1936 amounts to £12.3 millions. It is understood that this amount is divisible as to £9.1 millions pensions payable in Ireland and £3.2 millions payable outside Ireland. The Department of Finance is unable to assume liability in respect of pensions payable outside Ireland and, according to the figures supplies, this would mean a reduction of £3.2 millions in the total of £12.3 millions. The corresponding reduction (on a proportionate basis) in the liability as on 1st April 1938 would be about £3 millions.
2. It is suggested that the amount taken as the capital value of item (c) is excessive. As 3½% is the basis adopted in the calculations, the figure of £150,000 regarded as the capital value of an annual sum of £10,000 presumes a continuance of that payment annually for about 22 years. Having regard to the fact that administration charges will fall not only because of decreasing numbers of pensioners but also arising out of any settlement which may now be reached, it is contended that a sum of £100,000 ought to meet the charges under this heading.

4. On the basis of these considerations, the figure of £11.7 millions should be reduced by £3.05 millions, leaving £8.65 millions.

Local Loans

5. The British claim under this heading is fixed at £6,919,000, which is arrived at by adding together the following two items:

1. Excess (accumulated with interest at 3½%) of sums not paid by the Irish Government in the years 1932 to 1938 over the amounts paid and amounts purported to have been paid by the Exchequer to the Local Loans Fund in that period; and
2. The present value at 3½% of the remaining payments falling to be made.

6. The Department of Finance cannot accept any liability under the heading (a). The British Government imposed Special Duties on Irish imports for the purpose of recouping itself in respect of the sums withheld and the Irish Government cannot be held responsible for any British domestic arrangement which did not adequately recoup the Local Loans Fund nor, indeed, for any insufficiency in the total amount of Special Duties actually collected.

7. It is agreed that the basis suggested by the Treasury for calculating the capital sum outstanding in respect of the remaining annuity payments, namely, to discount future annuities at an appropriate rate of interest, is a fair one. It is observed that the rate of interest suggested is 3½%, being roughly equivalent to that at which the United Kingdom Government can borrow. It has to be borne in mind that a lump sum payment calculated at such a rate of interest would fully compensate the Treasury but it is suggested that some regard should be had to the higher rate of interest at which the Irish Government can borrow. From this point of view it seems reasonable that the liability should be computed from the Schedule which appeared in the Local Loans Fund account 1926 - which involves a rate of interest of about £3.13.6. The amounts on the two bases are £4,195,000 and £4,126,450 respectively.

8. It is observed that the Treasury do not consider that the calculation should be made with reference to the Schedule mentioned in the previous paragraph having regard particularly to the fact that the present price of Local Loans Stock is very greatly in excess of 80. According to Stock Exchange Reports the current price of this Stock is about 88 and it is thus only about 6 points above the average price of £81.13.3. upon which the initial liability was calculated. This difference in price is much less than that which existed in 1926 when the current market price was between 60 and 65 and the liability in respect of the nominal amount of outstanding stock was written into the British Accounts at the price of £81.13.3. It is also pertinent to remark that the price of the stock was much less than 70 during the whole of the period 1926 to 1931. During this period, considerably more purchases and cancellation of stock could have been made and accordingly considerably more written off capital account than the schedule actually provided for.

9. Summarising the position in respect of (1) and (2), the Department of Finance contends that the appropriate amount in respect of pensions should be £8.65 millions and in respect of Local Loans £4.1 millions, making a total of £12.75 millions. After allowing for a slightly higher rate of interest in respect of the pensions calculations and rounding to the nearest million, the sum of £12 is proposed as the total liability.

10. It must not be overlooked that in the event of a settlement considerable outlay on the protection of certain ports and harbours will have to be incurred by the Government of Éire. No precise estimate is available as to the possible cost of the various defence measures to be undertaken but a capital figure of nearly £1 million and an annual figure of between £1/2 million and £1 million have been mentioned. These very substantial sums must be considered as in some degree offsetting the claims of the British Government even when the latter have been reduced to their lowest level. Savings will also result to the British Exchequer as a result of liabilities taken on by Éire.