‘Consuming too much, investing too little’

Press, 16 July 1979, Page 16

‘Consuming too much, investing too little’

By

OLIVER RIDDELL

in Wellington

A sour and sorry future faces the New Zealand business community according to the State of Business Survey (1979) made for the Chambers of Commerce by the Wellington firm of Barr, Burgess and Stewart.

The survey shows that unless the problem of business liquidity is solved, fewer jobs will be offered by the private sector in 1980 than in 1979. The survey shows why more and more smaller companies are going to be driven into the arms of fewer and fewer big companies, or face voluntary liquidation or bankruptcy, or else have to receive injections of money from the Government and so begin the slow drift towards becoming public corporations. One speaker at a Chamber of Commerce seminar on the survey described this last process as "creeping socialism.’’

Such contribution as is made to the standard of living of New Zealand and everyone living in it by the import substitution and domestic activities sector of business must, inevitably, continue to decline.

Basic to the issue of inflation and the failure of business to cope with it (other than to borrow capital to tide it over, in the Micawberish hope that things will get better) is the distortion which arises as a result of measuring business profit in a way which ignores the cost of inflation.

Tins is compounded by a taxation system which measures profits in one year against historic cost factors, rather than in terms of value after inflation. Many businessmen blame the Government for failing to take action on the recommendations of the Richardson Committee in 1976 on inflation accounting. But the chairman of Dunlop New Zealand. Ltd fMr J. E. S. Hammond) believes the main stumbling block to their implementation is to he found among the boards of directors of New Zealand businesses. "It mijjht be unfair to say

this, but I wonder if some boards of directors do not have difficulty in understanding the present system of historical taxation, without introducing a new system of inflation accounting taxation,” he said.

Mr Hammond profferred two main reasons for this failure by business: Concern that if business was inflationproofed then wages and salaries would need to be inflation-proofed too; and the failure of business to speak to the Government and the general public with a united voice.

The problem of measuring profit as is done in New Zealand today is that it allows businesses to arrive at their distributable profit without ensuring that they are maintaining their operating capacity. This is not a matter of concern to investors only. Employees depend on business for their jobs, while the Government and society depend on business for a substantial contribution to the welfare of the economy. This continual ignoring of the question of inflation accounting alarms many business leaders. The Richardson Committee expressed it by saying:

“The experience of inflationary conditions in recent years has highlighted the

deficiencies of historical cost accounting. Conventional financial statements have lost much of their significance. They have, in many cases, seriously distorted the position of the enterprise. “Historical cost accounts fail to provide an up-to-date measure of the resources and the results of the accounting entity. This omission often leads to an incorrect assessment of past and current performance, present position and future prospects of the enterprise.”

Perhaps to introduce inflation accounting would be to admit the permanence of rapid inflation, and even fuel it a little. But inflation is external as well as internal, so not to admit its existence has devastating effects on he external economy of the country, as well as the economy of individual businesses.

The survey showed that private business in New Zealand, just like the individual citizens, is continuing to consume too much and invest too little.

The 1977 and 1978 surveys indicated that business in New Zealand roughly broke even, and then borrowed to pay shareholders’ dividends; the 1979 survey shows that business made an operating loss of about $lOO million, and still borrowed on top of that to pay shareholders.