BUDGET DEFICIT

Dominion, Volume 26, Issue 112, 4 February 1933, Page 6

BUDGET DEFICIT

Effects of High Exchange ECONOMIST’S VIEW A Critical Examination INDEMNIFICATION COSTS That the official estimate of the prospective cost to the Budget of the recent rise in exchange is “extravagant, ill-founded, and needlessly alarming,” is the opinion expressed by Professor A. H. Tocker. after an analysis and review of the figures in a special article in the Christchurch “Press.” Professor Tocker says the clearest statement of the ofiicial estimate of the cost of the high exchange is that giver by Mr. Dowuie Stewart in his recent speech as follows: — Extra cost of external debt charges I,0o0,00( Allowed cost of exchange on surphis bank funds in London.. 1,000,00 Decrease of Customs revenue, say I,<Wt Decrease in Income tax and other items of revenue as estimated by Treasury 500,001 Total £3,800,001 Indemnifying the Banks.

Professor Tocker says the clearest statement of the ofiicial estimate of the cost of the high exchange is that given by Mr. Downie Stewart in his recent speech as follows: —

Extra cost of external debt charges 1.000.000 Allowed cost of exchange on surphis bank funds in London.. 1,000,000 Decrease of Customs revenue, say 1,-oO,OOU Decrease in Income tax and other items of revenue as estimated by Treasury 500,000 Total £3,800,000 Indemnifying the Banks. After conceding that the first item, £1,050,000, for extra cost of external debt charges, is approximately correct, Professor Tocker asserts that the Treasury’s estimates of £4,000,000 in surplus bank funds in London and of £1,000,000 as the cost of indemnifying the banks against loss on them, are merely guesses. The Treasury assumes, says Professor Tocker, in making its estimate of £1,000.000, that the Government’ will have to sell its surplus at par; that is, they will have to pay £5,000,000 in New Zealand for £4,000,000 in London, and then sell this amount for £4,000,000, losing £1,000,000 in the process. Since the Government’s action induced the banks to raise the rate only from 110 to 125, it would surely have been fairer to arrange that the Government should buy any surplus from the banks at 125 and sell the amount back to the banks at 110, a rate for which the banks alone were responsible. This would involve the Government in a loss on the total of 15 per cent., or only £600,000. This indemnity, however, can be calculated only when the rate of exchange falls. It is very doubtful when the rate will fall, and there is some doubt at least whether it will ever reach parity again. The raising of the rate to 125 is now an accomplished fact. Every day it remains at that level increases the difficulty and the dislocation that would be occasioned by a subsequent reduction.

If the present rate is'< maintained a short time, the only justification likely to be found for a reduction is a very substantial rise in export prices expressed in sterling. Such a rise Is. to say the least, unlikely. It is certainly .unlikely to occur before the end of the financial year 1933-34.

The estimate of £1,000,000 for indemnifying the banks is therefore based, first, on charging the Government with any loss accruing to the banks as the result of a 25 per cent, rise in exchange, instead of charging only the loss resulting from the 15 per cent, increase: and, second, it is based on the assumption that the rale will be restored to parity before March 31.1931. Let us approach the matter in another way. Suppose the rate remains at 125, but the Government has to purchase the £4,000,000 surplus in London nt that rate. The Government might then use the money so obtained to redeem debt in London to the amount of £4,000,000. At present the Government has to find interest on that money in London at, say, 4} per cent., but it has to raise the interest in’ New Zealand and pay exchange at 125. The finding of 41 per cent, on £4,000,000 in London is, however, exactly equal to the finding of 4} per cent, on £5,000,000 in New Zealand. The cost to the Budget will not be altered if the Government has to borrow £5,000,000 in New Zealand at 41 per cent, in order to redeem £4.000.000 in London on the same rate. In these circumstances the cost to the Budget of redeeming the surplus would be nil. The additional costs of interest payments in London have already been allowed for. Effect on Customs Revenue. In estimating the effect on Customs revenue of an alteration in exchange rate two factors have to be considered, says Professor Tocker. First, there is the automatic Increase in ad valorem rates as the result of a different basis of valuation. Second, there is the effect. ou the volume of imports, and therefore on the yield of Customs duties. of the higher exchange rate. The first factor has apparently not yet been considered at all. As a result ad valorem duties on New Zealand imports have been reduced by approximately 20 per cent. If there is to be such a tiling as an ad valorem duty, the basis of valuing imports for Customs purposes must necessarily be the currency in which the duty is collected. Unless this is the case any change in the relative values of the two currencies concerned involves a consequent change in the rate of duty.

Logically, therefore, the first effect of a rise in the nites of exchange is to increase proportionately the yield of all ad valorem duties on a given volume of imports. The second effect would probably be to decrease, for a time at least, the volume of imports, and so decrease the yield of Customs duties. The situation will become both confused and illogical and the rates of Customs duties sanctioned by Parliament, will be reduced automatically by 20 per cent, if imports are not in future valued in New Zealand currency.

The introduction of a logical system of import valuation would result in an increase of 25 per cent, in all ad valorem duties. Such an increase should be sufficient at worst to balance any decline in Customs consequent upon the reduced volume of imports. Tn these circumstances (hero need be no decrease in Customs revenue. The Volume of Imports. It. is to be expected that the immediate effect of the rise iu exchange will be a decline in imports. But imports depend on the purchasing power of the people to a much greater extent than on'ihe rate of exchange. The importers have apparently forgotten that, while they will have to pay 15 per cent, more for exchange, within a short time many of their customers will have at least 15 per eent. more to spend. Out of £37,000,000 of exports last year. £22,000,000 went out in the March and June quarters. If the same volume goes out in the same quarters of this

year, the increased exchange rate will 1 add about 15 per cent, to its value. This moans additional receipts to exporters of about £3,500,000 expressed in New Zealand currency. In addition it is reported that about £3,000.000 is seeking repatriation to New Zealand from Australia alone. There are doubtless some accumulations of funds elsewhere which will be repatriated now the exchange has risen. ’.The direct result of the rise in exchange is therefore an increase in New Zealand’s receipts over this half-yearly period of perhaps £7,000,000 or more. As this money circulates throughout the country it will increase purchasing power and in due course win increase the demand for imports. While expecting some fall in imports during the next few months, Professor Tocker argues that as importers’ stocks are already low, next spring should see the increased money circulating in New Zealand create an additional demand and lead to an expansion of imports which will bring the total for the financial year 1933-34 at least up to its present level of £23.000,000 sterling. Should this occur there need be no fall in Customs duties consequent upon a reduced volume of imports. On the other hand there should lie an increase in Customs duties consequent upon the higher yield of ad valorem duties due to raising the basis of valuation.