Evening Post. MONDAY, AUGUST 5, 1929. LOAN-INFLATED REVENUE

Evening Post, Volume CVIII, Issue 31, 5 August 1929, Page 8

Evening Post. MONDAY, AUGUST 5, 1929. LOAN-INFLATED REVENUE

A smoke-screen still lies over the 'story that the last Minister of Finance did or said something that prevents the present Minister of Finance from going to the London money market [lor two years. It is not even known when this two years' embargo expires. But if it comprises the financial years 1929-30 and 1930-31—and if the alleged inhibition is observed —the net result is that New Zealand, having borrowed twice in London in 1928-29, the second borrowing being in January, 1929, will be off the London market from January of this year until April of 1931.. On the face of it, tlie proposition does not look likely, but such seems to be the meaning of the Prime Minister's cryptic remark. One interesting aspect of an abstention from oversea borrowing is the probable effect on imports. Less external loans admittedly mean less imports, but it is difficult to calculate the ratio of the fall in imports to a given fall in oversea borrowing. Roughly, Australia's borrowing policy is comparable with New Zealand's, bulk for bulk. It is therefore of interest to know that the Economic Committee of Five, which went into Australian debts and tariff in an analytical manner that has never been attempted in New Zealand, reports that:

If 310 new loans had been raised abroad aud placed to our credit in London banks during the last ten years, ive should have had, perhaps, 20 per cent, fewer imports for that period. Now, 20 per cent is a big fall, whether expressed in terms of imports or of Sydney's city expansion, or of North Shore bridges, or of main trunk railways. An external loan, it is pointed out, enables imports to be made Avithout corresponding exports; just as, in personal relations, a man who borrows can spend without producing. The borrowing country that borrows abroad not only may import but practically must import. Also,

the goods which are imported aro taxed at the Customs, and the loans increase the Customs revenue.

So a Government that is short of revenue, and that seeks to balance its Budget, will derive much more help from Customs of it continues to borrow abroad than if it does not; therefore, an increase in Customs revenue enabling the removal of an unpopular increase in primage duty is much more to be expected by a Government that borrows oversea than by one that borrows within its own boundaries, as the New Zealand Government has been doing and may continue to do. A practical education in this phase of borrowing would at once be conferred upon ihe public if the break in oversea borrowing were loiig enough:

If tho [oversea] loan -woro an isolated one, tho "boom" associated with it would be seen, and. also tho slump following that boom, the fluctuations being larger or smaller according to tho size of the loan in proportion to ordinary spending power. But in. Australia tho practice of overseas borrowing has been fairly continuous, ana the prosperity auo to loan expenditure has been maintained. The new expenditure from revenue is possible without any apparent increase in taxation. Without tho borrowing, tho now expenditure could only have been raised by a deliberate increase in tho rates of taxation. Tho revenue is derived from the borrowing, and, in fact, part of the borrowing has found its way, through Customs taxation, into current revenue 11 his is essentially borrowing for revenue purposes. ...

In New Zealand the Government is showing, in the first session, a very apparent increase in the rate of'taxation, and the alternative in the next two years may well be continuity of external borrowing. But the abovementioned effects of borrowing will not be observable unless the break is marked. It has to be remembered that, according to Sir Joseph Ward's budget, all the seven millions borrowed in January are intact for spending this year (1929-30) and are fno^o c reinvested at a profit. So ±^-30 may be a year without external borrowing, but it will not be a year free from the spending of externally borrowed millions. The impossibility of excluding imports and at the same time continuing to borrow is strongly emphasised ;hi die Australian report. At the same time, borrowing "may reasonably be considerable for a country at Australia's state of development, provided that the loans are so expended as to bring about, directly or indirectly, a real increase in production for export sufficient to pay the added interest and sinking fund." In other words, will New Zealand's new ten millions for railways pay, either (a) as a matter of railway finance, the issue raised by Mr. Jones, or (b) as a matter of stimulating production for export, which is the plea of the developmental ists? Direct effects of a railway on railway finance are measurable; indirect effects, in the lack of special investigation, probably are not. Jo side

with the developmentalists is also to secure loan-inflated revenue, if the money is borrowed abroad. As lo local loans, the Committee of Five reports:—

A loan raised in Australia certainly does not increase imports, but neither does it increase income and the demand for Australian goods The Australian loan leaves Australian rjroduction much as it was before. An overseas loan increases the demand for goods m Australia, ana—while it abes not diminish the demand for Australian goods, but rather increases it—its chief effect is inevitably to stimulate still more the. demand for goods from abroad.

On the whole, it is difficult to imagine the New Zealand Government reconciling itself to two years' probation. The consequences would be highly interesting from the economic point of view, but are hardly the kind of experience that a Governjment seeks after.