COMMERCIAL Wilson Budget Will Dispel Uncertainty

Press, Volume CVI, Issue 31120, 25 July 1966, Page 15

COMMERCIAL Wilson Budget Will Dispel Uncertainty

(By Our Commercial Stag! Harold Wilson’s crash austerity programme—can it be called a “Black Budget”?—may not be designed to gain the affection of those who voted his Government into power, but it has dispelled all uncertainties about his ability and determination to halt the run on sterling. No-one can now really believe that sterling is likely to be devalued in the near future; Mr Wilson has, in effect, staked his political future on the maintenance of the present sterling exchange rate.

Apart from the supplementary Budget and Mr Wilson’s statements, there are good reasons why it is unlikely that sterling will be devalued.

■ -1 A devaluation large enough - to ensure a major improvement in Britain’s balance of payments—something like 25 per cent—would put enormous pressure on the United States dollar. As a result of the United States own balance-of-pay-ments problem the dollar is Weak and already overvalued against sterling and most European currencies. The United States trade surplus is not so much the result of American competitive export advantage as the product of American overseas spending. Devaluation Devaluation of sterling could cause a flight from the dollar by both official and I private holders. The lessons of the depression clearly show that the world’s reserve currencies I must stand or fall together. ' But even if both dollar and pound were devalued the benefits might be mainly imaginary. If such devaluation set off a round of competitive devaluations—because many other countries might not feel able to compete with either the United States or the United j Kingdom on the new terms—inn benefit would accrue to ’ anyone. The internal cost of sterling devaluation would also be , very high. I The gold guarantees by the I Bank of England on the 1 United Kingdom liabilities to

the International Monetary Fund and the liabilities involving swap arrangements with other centril banks would have to be repaid at the old exchange rate. The Bank of England is believed to have also bought sterling for forward delivery in an attempt to stop speculation. The extent of these purchases is a closely guarded secret but it is likely to Be large. These contracts would have to be honoured by delivery of dollars at the old rate. International It may therefore be said that the workings of the international monetary system and the recent official support policies by the United States and European central banks combine to make devaluation of sterling very difficult. But something drastic had to be done, and Mr Wilson did it. i Mr Wilson's programme I may not be even severe according to some informed opinion in Britain. However, should sterling devaluation ever eventuate, the question would naturally arise: what would New Zealand’s position be? Would New Zealand follow Britain, or would the New Zealand pound be allowed to appreciate against sterling? In 1949 when sterling devalued 25 per cent it was decided that New Zealand would maintain the value of its currency at parity with sterling. However, the composition of New Zealand’s trade has changed a lot since then. In 1949 Britain took about 75 per cent of New Zealand’s exports and provided about 56 per cent of this country’s imports. Proportions The proportions have changed steadily over the years and are now lower than 50 per cent and 40 per cent respectively.

New Zealand’s external reserves are at a very weak level and, quite apart from British devaluation, the immediate outlook is not too bright in spite of the efforts of the recent Budget. Import demand is still very high, prices for the bulk of our exports are no more than average and capital inflow is likely to be lower in the near future. Anti-inflationary measures in the recent Budget are not proving nearly strong enough and the economy may soon have to absorb a basic wage increase.

All round, the present balance of forces seems to be in the direction of continued rising prices in some degree. There has been some talk in the past of the merits of New Zealand devaluation, and a good case could be made out, even if only on the basis that it would be no more than a recognition of an existing state of affairs: that the New Zealand pound is overvalued against the rest of the world. Unilateral On the domestic front a unilateral New Zealand devaluation might not serve any useful purpose. Any advantage might quickly be off-set by rises in domestic prices and money wages. What then would the position be if the New Zealand pound were allowed to appreciate against sterling? Imports from Britain would be cheaper. The New Zealand consumer would benefit and so would the importers of British goods, because of the change in the composition of imparts by countries. Other importers would lose to that extent. The main burden would fall on those primary producers to whom Britain is the major market The existence of long-term contracts would aggrevate the position. Attraction The British market would lose its attractiveness and the ' search for other markets, 'would acquire greater urg-; lency. i The purchasing power—other than in Britain itself—' i of the sterling reserves would [fall. Ignoring the effects on New Zealand investments in Britain—which would depreciate —there would be an effect on United Kingdom investments in New Zealand. Such investments would have increased value and so would their future earnings, but further expansion of British investment here would be dearer. To that extent Mr Callaghan’s directives would get the support of market forces. There could also be an effect on migration from Britain to New Zealand. Although all this may bei quite difficult to assess it j would seem that New Zealand

stands to lose considerably by not following Britain if sterling devalued. This conclusion is reinforced by the effects that New Zealand devaluation would have on trading relationships with the rest of the world. Retailing Problems of expansion by retailing organisations were again pointed to last week. In his annual report last week, Sir John Hott, chairman of McKenzies, said it was common experience that new operations took a year or two to contribute fully to a company’s over-all position. During the latest year McKenzies spent more than £30.000 on development. Most of this went on new supermarkets at Hastings and Rotorua scheduled to be open by the end of this month. Naturally this expansion added nothing to McKenzie’s profits in the latest year. Establishment Last month Mr W. Calder Mackay, chairman of Farmers’ Trading Company, pointed out in his report that establishment costs of new and expanded units had affected profit. But these costs have to be accepted as a fact of retailing life in New Zealand in the 19605. The cherished concept of “heart of the city” shopping in New Zealand towns has been shattered during the last few years. Retailing has made largescale moves to suburban supermarkets and shopping malls.

This has helped to increase the cost of selling along with other factors.

McKenzies’ disappointing year has been blamed on to the increased cost of selling. Sir John Hott said there had been a substantial rise in operating costs and reduced profit margins. These had stemmed from increased competition and had minimised the effect of a higher turnover by McKenzies. Not Covered McKenzies’ profit was not enough to cover the steady 10 per cent dividend, and shareholders have been warned that this rate may not be maintained, although directors hope the current year’s results may be better. Set-backs in retailing are not altogether unexpected in this changing pattern, but management should be able to cushion the sharper jolts. Consolidating on new trading fronts is the retailing strategy of the mid-1960’5, and acceptance of the trend to the suburbs is inevitable. There is an old Dutch proverb: "Cost comes before profit.” It seems extremely apt in retailing today. Business Personal Mr R. S. Brittain, of Wellington, has been appointed a director of Leopard Brewery. He retired as chief manager for New Zealand of the Bank of New South Wales in 1962.—(P.A.)