N.Z. ECONOMY OUT OF BALANCE

Press, Volume C, Issue 29444, 21 February 1961, Page 14

N.Z. ECONOMY OUT OF BALANCE

Government Proposals To

Combat Inflation

(Front Our Own Reporter)

February 20. To restore balance to New Zealand’s economy,. the Prime Minister (Mr Holyoalcte) said in his “state of the nation” broadcast address this evening that the Government would not adopt “crash tactics.” In its longer-term policy of reconstruction it would: —

Conduct the public finances on a sounder basis. Halt unwarranted increases in Govemriient spending. Carry out a review of the Public Service structure. Abstain from undue reliance on the Reserve Bank. Begin a steady building up of cash balances in the Public Account. Restore a sounder balance in the economy of the country. Import controls would not be relaxed untiLthe overseas funds position had improved, Mr Holyoake said. A tariff and development board would be set up soon to review the position. The Government would borrow overseas to help to meet capital expenditure. “We will keep a steady hand on advances of the commercial banks,” Re said.

“Although we face a number of serious financial and ] economic problems and diffi- 1 culties, we do not intend to ; take crisis actions,” the Prime Minister said. “At heart our economy is. sound. With , prudent management' we can ■ confidently look forward to . general progress and expansion and rising standards of living for every section of our people.’’ Mr Holyoake set out the present economic situation as: 1. A deficit of £27m had been incurred in the overseas balance of payments in 1960 and overseas funds had fallen by another £l4m since the beginning of 1961 2. Government expenditure had been running well above the receipts for the present financial year, after a deficit of £lBm last year 3. Deficits in Government expenditure had been financed by "funning down cash reserves and drawing on Reserve Bank credit. Government borrowing from the Reserve pank in 1960 increased by more than £2sm. 4. As a result of the economic and monetary policies which had been in operation there had been an unduly large increase in trading bank credit. Last year, overdrafts advanced by commercial banks increased by more than £ 25.5 m. 5. Prices and costs of living were rising as ah inevitable result of those conditions. During the last three years the consumers’ price index had- risen by more than 9 per cent. ' 6. An acute shortage of labour was developing which would further force up prices and costs and jeopardise future development if remedial action was not taken. “All this adds up to a very serious inflationary situation, Mr Holyoake continued. “This is the situation which faced the National Government when it came into office. State Spending “One of the major factors in creating the present degree of inflation has been the tremendous growth of Government expenditure and the methods used to support this expenditure.” he continued. •‘Government spending was £342m in 1956-57 and £425m in 1959-60. an increase of more than 24 per cent. The information I now have indicates that it will increase by another £2sm this financial year. “The greatest part of the increase has been in social security, social services and housing. In the three years, spending on social security, education, health and. other social services rose by more

than £50.2m. Housing expenditure by the Government has doubled in the last three years and is expected to reach £s3m this financial year. “There is a continuing burden of expenditure on subsidies, which have risen to more than £lsm this financial year. “Unfortunately, this higher level of Goverment spending has been undertaken without adequate long-term planning as to how it could be financed. It has been financed by a combination of five methods—increased . taxation, using reserve funds built up in previous years, running down the cash balances in the Public Account, borrowing from the Reserve Bank, increased borrowing, both overseas and within New Zealand.” ’Tax Increase In three years total taxation had been increased by more than £44m a year. The use of reserve funds and cash balances from the Public Account was a temporary expedient which had to be paid for in a later day, in this case, by a later Government. In the three years to December, 1960. cash balances in the Public Account dropped by £ 39.5 m and the reserves in the Defence Fund had been run down by £ 12.7 m. Borrowing from the Reserve Bank was heavily resorted to in 1959-60 and again in 1960-61. “In conditions of full employment this it an inflationary deVice which is. in effect a direct levy on the value of everyone’s savings and incomes and it is nonetheless direct for being hidden.” the Prime Minister said. “In the year alone ’ t 0 December. isbO, net Government indebtedness to the Reserve Bank rose by over £2sm to an all-time high of £li£m. "This undue reliance on Rese'?fe Bank credit, combined with the increase in trading bank lending to the public, is highly inflationary. Money has been created which has not been matched by a corresponding increase in the volume of goods and services The full effect has yet to be felt. Indeed, it will take a full year and more before the effects are shown fully in the national economy. “It is not practicable to make sudden and drastic reductions in Government expenditure. We have already stopped work on the Nelson railway. This will save the country up to £l6m in the long run ’’ In the 1957 election a majority of the people of New Zealand showed they wanted the social welfare structure expanded to provide for increased family benefits and other social securltv benefits and the family benefit capitalisation scheme.-he said. The Government accepted that

decision, and these schemes and would continue to operate them. Housing Review The Government would, however, have to review the housing programme.' The present programme has resulted in rapidly increasing costs ot house building and of building sections. More than half the houses built each year were now financed or built by the Government. Some action had already been taken. The Minister of Housing was well ahead with plans for second mortgage guarantee for the purchase of existing houses. The Government was also reviewing otjier public expenditure and making every effort to hold spending to an efficient minimum. Some steps had been taken to initiate a comprehensive review of the whole Public Service structure. As part of its long-term programme, the Government had floated a cash loan for £lom, and Mr Holyoake appealed for everyone with the country’s interest at heart to contribute to the loan. Labour Shortage The country’s existing labour force was being asked to carry out a multiplicity of tasks beyond the capacity of the numbers available. In the last year notified vacancies had risen by more than 60 per cent; to 8800. In part, the acute shortage of labour had been brought about because of a drop in immigration. The Government was reviewing immigration and would aim at establishing the target at the highest level consistent with reasonable economic stability. Mr Holyoake said. Wages, salaries and other incomes had had to be increased to compensate people for the increased costs of living caused by inflationary pressures, the Prime Minister continued. With higher incomes, consumers had sought to buy more goods and services than were being produced, employers had been competing for staff to keep up with the rise in demand, and as a result costs and prices were rising still further.

“This Government fully recognises that everyone in employment should share the rewards of increases in production and real wealth,’’ he said. “But increases in wages and salaries which are not matched by corresponding increases in production are selfdefeating. Under such conditions what a wage-earner gains in his wage envelope he loses in higher housekeeping bills and taxation.” The Government would introduce legislation in the coming session of Parliament to set up a monetary and economic council, as had been, promised in the election policy.