OUT OF GEAR

Evening Post, Volume CXV, Issue 39, 16 February 1933, Page 12

OUT OF GEAR

STATE FINANCES

EFFECT OE EXCHANGE

SALES TAX IMPOST

tm. STEWARTS ANALYSIS

While admitting that extra taxation would have had to have been found this year, the ex-Minister of Finance, (the Hon. W. Downie Stewart) expressed the opinion in the House of Representatives yesterday afternoon that the Government, in raising the exchange rate, had not only made the sales tax more unpalatable, but had also added a considerable load to the Budget. In his opinion, the depreciation of New Zealand's currency was "bad strategy and bad economics," and had been responsible for a wide gap in the State finances. He had serious doubts as to the safety of-the margin forecast by the Minister of Finance (the Right Hon. J. G. Coates). Mr. Stewart said it was true that in his Budget of 1927 he had drawn attention to evils of sales taxation, and these objections had been stressed by various members of the Labour Party. He did not wish to withdraw from anything he had said then, but wished to point out a consequent statement he made last year. . It was pointed out in 1927 that the tax should be avoided as far as possible, but during the present .depression they had been .faced with decreasing reserves and the necessity of imposing harsher and harsher economies, in order to cope with declining sevenue. How rapidly the rovcnue declined could be illustrated by the fact that the last year in which the Budget, jwas balanced was in 1930, when there •was a small .surplus of £148,000. In Italy of that year it was also pointed cut that it was expected that for the yea? ended March 31,1931, there would Jvc a.drop in revenue of £2,800,000, and __.'.Tise sin expenditure of half a million. £a order to cope with this shortage of i5£;3,000,060, the then Minister of Knance imposed increased' Customs taxation and income tax,' putting the large farmers on. " the income-tax Schedule. Increased death duties and Btamp duties were also brought into teffeet. It was estimated that by this jneans the Budget would tie 'balanced. -The decline in revenue was so Tapid .hat the Minister'of Finance, in order to recover himself, had to make further economies and also utilise further jreserves and assets. It was estimated •tfiat during the year Customs revenue would fall by £ 2,000,000, and he had feiready taken steps to remedy that, but towards the latter part of ;the year the if ail in revenue was still more rapid. Not only was there a drop in Customs revenue, but railway income and other isources of revenue also declined. The only item held its own was income tax. The year ended'up with a 'dieficit of £1,600,000. It was" obvious fet that time'that the position was becoming more and more acute. Although every,effort was made to withstand the jstrain, the prospects for the next year jgrew rapidly worse. Exports fell, imports fell—in two years the fall in imports amounted to over £18,000,000.

ANOTHER EFFORT.

In order to cope with the position, Retrenchments were made, salaries were ieut, the Arbitration Court made a general order of a 10 per ceint. reduction in wages, the Mortgagors Relief Act was passed in an endeavour to help the farmer, interest rates were reduced, and St lower rate was alsO imposed on Government bonds sold over. the counter, Post Office bonds, and other Government investments. This was an illustration of the enormous efforts made to ieppe with the position, but notwithBtanding these efforts, there was a fall in revenue for the year ended March 81, 1932, of between £4,000,000 and '£5,000,000. Additional expenditure 'approximating £2,000,000 had also been incurred through unemployment and other items. The prospective Budget jßeficit for the end of the year was &56,800,000, and in order to meet this jfurther increases were made in income tax, and a surtax of 30 per cent, was imposed, stamp duties were increased, and Customs taxation was raised for Jhe purpose of bringing in another [£1,000,000. It was hoped that a total of £5,000,000 would be raised by increased taxation. Later in 1931 the new Government jwas formed, and when he came to review the position in October, he found that," notwithstanding the efforts his predecessor had made to balance the Budget, there had been a further drop 5n other sources of revenue. There was toother £1,250,000 to be made up in Ifurther Customs and income taxation. JvTotwithstanding tho further burden which had been n^ade on the Budget, it was expected that there would be a (deficit of £2,500,000. The year ended jsrith. a deficit of just over £2,000,000. In April of last year, he made a .statement to the House forecasting a ifurther : drop of £4,700,000 in the, revenue for 1932-33, and also estimated that increased expenditure on unemployment and other contingencies would amount to £1,000,000. There also lhad to be kept in mirid the previous year's deficit of £2,000,000, so that the gap was over £8,000,000. To close that gap without making the position too desperate for the taxpayer, he had proposed to carry out economies amounting to £4,000,000, and impose additional taxation amounting to £2,250,000. This would leave a deficit nt March 31 next of £2,000,000, but fortunately for New Zealand, there was a renewal of the moratorium on debts to the British Government and the estimates of revenue were also maintained, and by this means tho prospective deficit was reduced to £700,000. He had hoped at last Christmas that the Dominion had reached rock bottom. As stated before, he had anticipated raising £2,250,000 by extra taxation for the current financial year, but when he I'ame to review the position he saw the grave difficulty in which the taxpayer was placed in having to bear a further burden. . Nothing was left in sight except a Bales tax. He made this statement in order to point out the position and show that he had not somersaulted on his attitude towards a sales tax. The imposition of this tax had been prevented by the hypothecation of reserves invested in discharged soldiers' settlement mortgages. The Leader of the Opposition (Mr. !I|__. E. Holland): Do you still recognise that the sales tax bears most heavily on the poorer section of the community?

FREE BREAKFAST '-'ABLE,

Mr. Stewart replied that it depended On. the Exemptions which were made. Under the present Bill, there was a long list of exemptions, and they had practically a free breakfast table. The sales tax, which he had in mind in 1927 contained no exemptions, as he was not then aware of the modern practice. Dealing again with the budgetary position, Mr. Stewart said that the Minister of Finance had estimated that for next year there would be an enormous shortage of £9,800,000 in the Budget. In his opinion, £4,000,000

was due to the high exchange, and it was clear that tho sales tax had been rendered imperative by the exchange increase. Even without the increased exchange, the sales tax would have had to be imposed, or, alternatively, it would have been necessary to impose some other heavy taxation. "I think the grievance of the public is this: ttiey are being shot down with both barrels at the same time," continued Mr. Stewart. "I believe that if the high exchange rate had not been imposed, the public would have ac^uiesed in the sales tax. Without the increase in the exchange, it would have been possible to bring down the deficit to within manageable limits. I think the taxpayer feels that a burden has been placed upon him, and that at the same time the budgetary position has not been brought to within a safe margin. The extra cost of exchange prevents us from achieving this margin of safety." Mr. Stewart reiterated that the budgetary position had been put badly out of gear as the result of the enormous and unknown liability in connection with -the high exchange. It had been stated that the sales tax was unsound, and it should only be used in the last resort, but he was bound to say that the other sources of revenue, such as income tax and death duties, would not bridge the gap. Anyone who had studied the position would realise that increases in income tax would not realise the amount necessary.

LABOUR OBJECTIONS,

The Leader of the Opposition: Isn't it true that a sales tax comes out of income ■? Mr. Stewart: Yes, I agree; but this tax yields what other taxes do not. He added that in his experience, no matter what taxes were imposed, they were objected'to by the Labour Party. When he had tried to put income tax on a more equitable basis, the Labour Party had been opposed to his scheme, and joined hands with tho Welfare League and the 1928 Committee. The same, applied to economies. The Labour Party had opposed economies as well as additional taxation, b-.t it should be realised by responsible people that it ivas necessary to balance the Budget as far as possible, and whoever was iii power would find that taxable resources had just about reached the limit. There was no, alternative but to reduce Government expenditure. That should be obvious to everyone, although few people would admit it. . Those who were still unconvinced should study the Budgetary position during the last few years and see the enormous drops in revenue. However, ho thought they would have been successful in bringing the deficit into a manageable limit had it not been for tho high exchange.

SHOULD BALANCE BUDGET.

"However," Mr. Stewart said,- "it would be unchivalrous of me not to say that even without the exchange^ some such, taxation or an alternative would have been necessary. I think it was bad strategy and bad economics to thrust on to the taxpayers and consumers this heavy extra exchange burden and then the very next week to 'come at them' with, a sales tax, and to tell them that after they have submitted to tho high exchange and a heavy sales tax, the Budget itself will be still far from balanced. I am still emphatically of the opinion that where a country Js deliberately depreciating its currency, it is a matter. of prime and absolute necessity that it should balance its Budget. Ido not know how it can be done with these extra millions bein# thrown on by the high exchange." Mr. Stewart said that he did not deny the statement ho had made in 1927, but he had been driven to the sales tax by necessity; and had he not been able to utilise certain reserves, he would have had to impose such a tax last year. The Labour Party had not yet presented a clear alternative either to the House or to the country.

COUNTRY'S CONCERN.

. "We have just listened to a very interesting speech," said Mr. J. McCombs (Labour, Lyttelton), who followed Mr. Stewart, "but I think the country will be grievously disappointed. I think the country is not bothering its head about what the e_5T-Minister thinks of the Labour Party. All the country is concerned about at the moment is what the ex-Minister thinks of the Government's recent legislation and the taxation that is now before the_ House. The ex-Minister on this occasion, as on a previous occasion, has rushed to the ' assistance of the Government and has just tried to find excuses for the legislation—the very legislation which caused him to leave tho Cabinet. This legislation now before the House is the direct outcome of the increase in the rate of exchange." Government members:' Nonsense. Mr. McCombs: The public revenues of tho country are going to be reduced by £3,800,000 as a direct result of the increase in the exchange. The ex-Minister talks about the storm that threatened the country in 1931. He said nothing about the artificial storm that the present Government has just created by an artificially ' high exchange. The people have to make good the loss that the Government has deliberately created. The Government proposes to increase Customs duty, to put a tax on tobacco, to put a duty on gold, to put more taxation on petrol, and to put on a sales tax. The revenue from all these things will hardly bridge the gap which has just been created m the public revenues of the country."