THE PRESS, THURSDAY, JULY 26, 1984. Borrowing by the State

Press, 26 July 1984, Page 16

THE PRESS, THURSDAY, JULY 26, 1984. Borrowing by the State

The Government stock tender of $5OO million being offered tomorrow should give the clearest indication so far of where deregulated interest rates are likely to settle. In recent tenders, with the regulations in force, interest rates on Government stock were around 8 per cent. The incoming Government is offering coupon rates of 11 and 12 per cent on part of the latest borrowing, and will let the market set the rate for the remainder. When the State is offering 12 per cent or more on large-scale borrowing, other borrowers may have to go appreciably higher to attract funds. Much uncertainty has been shown about interest rates by borrowers and lenders since the 20 per cent devaluation of New Zealand’s currency last week. Some institutional borrowers have increased their rates rapidly; others have moved more cautiously. Lenders, too, have reacted variously. Hire purchase rates on motor vehicles have been reported as high as 30 per cent. House mortgage lenders have been slower to adjust. Trusteebank Canterbury, for instance, has talked of a new base mortgage interest rate of between 13 and 15 per cent. When the interest rate regulations were in force, and when the State was borrowing at 8 per cent, the maximum interest rates for first and second mortgages were set at 11 per cent and 14 per cent respectively. If something like the same spread of interest rates is maintained by the market, first mortgage rates of 15 per cent, and second mortgage rates of 18 per cent, are possible. Home owners, and those seeking house finance, can hardly be pleased by the changes which come soon after rates had been reduced by regulation. Once the new Government gets into its stride, however, special arrangements are likely for those on lower incomes or with other claims for assistance.

The continued borrowing by the State, in spite of the change of Government, is a reminder that New Zealand’s Budget deficit has still to be covered. The extent of the deficit, now and in the coming year, will ndt be: known until the Labour Government presents its first Budget. Further borrowing can be justified in the short term as a means to mop up surplus purchasing power in the economy. An increase in consumer spending might help to stimulate the economy, but to the extent that it increases the demand for imports, a spending spree now would begin to offset the advantages of devaluation.

In fact, any rush of spending, particularly on imported items, is likely to be brief. As prices rise, and while incomes are held down by the freeze, the ordinary consumer will not have the cash to keep up a boom in sales. This is not out of line with Government policy. The Government has set a course that is not designed to raise domestic spending and general living standards in the short term. Rather, it has worked towards lower living standards for most households. Some relief through tax concessions is almost certain for people on lower incomes; these might include tax relief on the interest on house mortgages. Such a scheme was introduced by the last Government for first-home owners. A variation of the scheme could give tax concessions on interest paid by people on low incomes. Such

concessions tend to push up interest rates, and might be administratively tricky. Nevertheless, the idea may appeal to the Government The explanation that money is being borrowed to absorb some of’ the inflow of capital in the wake of the devaluation is misleading. There was no massive movement of money out of New Zealand, and then back again, in the days before and after the election. The shortage of foreign exchange came about largely because importers hastened to acquire foreign exchange in advance to pay eventually for goods ordered; and because some exporters delayed receiving payments from abroad, also in expectation of a devaluation. Most firms could follow such policies only for a matter of days, or weeks, at most. Others could afford to buy forward exchange well in advance of their immediate needs. This earmarked millions • of dollars of foreign exchange and, had the process not been arrested, the Reserve Bank would eventually have had to refuse requests for foreign currencies or borrow more foreign currencies. The question was certainly critical, and determining how far the demand for currency and the stalling of incoming funds could be allowed to run had to be answered. The Reserve Bank took the protective line and urged devaluation rather than the risk of delay.

People who had covered themselves, at a cost, by acquiring foreign exchange in advance were quick to cancel their arrangements and put their recovered New Zealad dollars elsewhere.

Some of this money, loosely said to be “coming back” into the country, is needed to meet payrolls and other regular, normal business payments. It is not all suddenly on hand to be borrowed by the State. Profits have also been made from the devaluation speculations. If something closer to a free market has returned to New Zealand’s financial institutions, surplus funds are likely to find investments that offer a better return than Government stock.

The best justification for further Government borrowing is that money is required for investment in enterprises' that will increase production, provide more jobs, and produce substitutes for imports. Much of New Zealand’s recent borrowing has gone into such projects, although not all of them have been as well founded, or as accurately costed, as they might have been. If the new Government is serious in its intention to risk higher inflation as a price for reducing unemployment, its own borrowing at higher interest rates needs to be for productive investment. Borrowing that gets frittered away through unproductive handouts to consumers will help no-one. In the end, loans have to be repaid, either by further borrowing, by higher taxation, or by increasing the real wealth that provides the base for taxation. If the new Government hopes to retain support for policies that mean higher inflation, higher interest rates, and more expensive imports, it will have to show quite soon that its policies are leading to the creation of additional wealth. Something more is needed than a redistribution of the burdens of the last few years.