Alternatives: borrow or slash consumption

Press, Volume CXIV, Issue 33672, 23 October 1974, Page 1

Alternatives: borrow or slash consumption

(By a staff reporter) The problems with which the Government must come to grips in its new economic programme nearly all stem from two root causes of trouble for New Zealand.

One is the serious upsetting of the terms on which this country trades with the rest of the world; the other is internal inflation. The two are connected.

No single influence on world trade has been greater than the sharp rise in the price of oil from the Arab countries. It has been a blow to all industrial countries of the West, and it has been a crippling setback to developing countries which have been trying to build up industries of their own. For New Zealand, the results have been a great extra charge on foreign exchange to pay for oil, increases in the cost of transporting exports, and poorer markets abroad for our main exports. Although the higher prices have affected New Zealand’s bill for oil less than they have affected many countries, New Zealand can do little or nothing to get a better deal from the Arab countries. It must also accept whatever prices it can get for exports. The decline in export earnings and the rise in the price of almost every imported product has hit New Zealand’s balance of payments hard. Drain for imports Since June, 1973, when official overseas reserves were at the record level of $1093 million, the drain on overseas funds to pay for imports and other commitments abroad has cut the reserves in half. The Arab countries may be said to have seized foreign aid on a scale that makes the ordinary levels of aid — spread more widely and, perhaps, more fairly — look ridiculous. When the Arab oil-exporting countries decide to spend their increased wealth in money on goods and services that will benefit their economies a revival of world trade and business may be expected. Such a revival will assist

New Zealand’s export earnings. In the meantime. New Zealand can do little but borrow overseas to make good its continuing losses. Alternatively, New Zealand would have to cut production and consumption that depends on imports. Home inflation Much of New Zealand’s inflation has been generated at home. Higher wages have resulted from the interruption of Government controls on incomes, and the increases, in turn, have generated higher prices. Greater business activity has put great pressure on all resources, efficiency has suffered, interest rates have soared, and for all these reasons prices have gone up repeatedly. Business profits have also increased, but not enough to finance extra investment to match the booming demand for goods. The clamour for land, partly as a hedge against the loss of value of money in small savings and in most customary financial investments, has put housebuilding out of the range of many New Zealanders. While it may be felt that inflation is not harmful so long as increases in wages keep pace with increases in prices, the effects of excessive inflation are serious for every citizen. Political danger Exports become harder to sell at rewarding prices. People on fixed incomes cannot maintain a fair standard of living. Faith in the worth of money, the essential currency of everyday commerce at the corner shop as well as in high finance, is shattered. The urge to find more secure assets adds to the pace of the inflationary spiral. Under the pressures of

inflation, the country’s money, as an instrument for directing effort and resources to produce greater social and personal welfare, fails to secure the desired results. Ultimately, unchecked inflation and the loss of public confidence in the currency reduces freedom of choice, and, as has happened in many economies in the past, decisions and choices are no longer made by the people but by their political masters.