BUDGET PROBLEMS

Evening Post, Volume CXIX, Issue 134, 8 June 1935, Page 6

BUDGET PROBLEMS

AUSTRALIA'S PLANS

SPENDING AND RECOVERY

PUBLIC INVESTMENT

The Loan Council is once more to take up the task of reviewing Government finance and making plans for loan works in 1935-36, writes Professor

D. B. Copland in the "Sydney Morning Herald." There are two major problems for consideration—the Budget situation and public loan policy. In 1930-31 the Budget deficits reached the alarming total of £21,000,000. Thanks to the Premiers' Plan, the increase in loan expenditure and ' a' substantial measure of recovery in private industry since then, Budget deficits have been reduced to an estimated amount of £5,500,000 for 1934-35. As the public accounts of the States are now in more satisfactory condition than the Budget estimates suggested, the actual deficit for the year will be less. These deficits are arrived at after allowing for sinking fund payments, which for Australia as a whole amount now to about £8,000;000. An essential condition of continued recovery is progress towards equilibrium, and the Loan Council will have this.in mind in fixing the amount that may be borrowed for financing deficits in 1935-36. With the world as a whole moving towards an expansionist monetary policy, we may expect some respite from low prices. If it becomes certain that no respite is to be'forthcoming, a reconsideration of the Budget position will be required, as indicated >y the Committee of Economists and Under-Treasurers in 1931 when formulating their proposals for dealing with the Budget situation. This is the justification for. refusing to take further heroic measures at the moment to balance the Budgets forthwith, but it is no justification for relaxing our efforts to work towards balanced Budgets. We must,' therefore, assume that a reduction in Budget deficits is a first condition of sound policy. If deficits aggregate £5,000,000 for the present year, we may 'fix on a figure of £3,500,000 to £4.000,000 for 1935-36. FEDERAL ASSISTANCE. This figure would be conditional on the Commonwealth renewing the grant of £2,000,000 it made to the States last year. The case for some special Commonwealth assistance rests upon the simple fact that the Commonwealth got greater concessions in debt relief than the States in the depression, has benefited more from recovery and has been able to make up its revenue losses m part by sales tax and primage. Its obligations have recently increased, especially in respect of special grants to three States and assistance to wheat growers, while the States have obtained relief to the extent of about £2,500,000 from oversea conversion loans. But a substantial balance of advantage still rests with the Commonwealth, and its financial position is in any case inherently stronger. Pending a more drastic review of the financial relations of the States and the Commonwealth a grant to the States is the soundest expedient at the moment. A combined deficit Of £4,000,000 is only about 4 per cent, of the total expenditure of the States, and a deficit of, this order should not be regarded as unmanageable or in present circumstances damaging to credit. In fixing the figure we must recognise that the reduction in deficits this year is par^afrt b* the high wool prices of the 1933-34 season. Next year's Budgets will suffer by contraction of incomes caused by depressed wool prices this year, and it would be unfair to regard 1934-35 and 1935-36 as comparable years as regard Budget prospects. . PUBLIC INVESTMENT. Turning now to the loan programme, we have to recognise that national income and economic prosperity in all countries depend in larger part upon the maintenance of a flow of investment, both public and private. In all countries public investment constitutes an important part of total investment, and it is a great mistake to assume, as is often the case in Australia, that we differ fundamentally from other countries as regards public loan expenditure. It is true that our State Governments undertake public works that are left in many other countries to local bodies, and that we have certain instrumentalities like railways and electricity schemes that are left to public utility companies or speciallyconstituted public authorities in other countries By concentrating all these; activities in the hands of State Gov-. ernments we focus attention upon our public spending, which, in the aggregate appears disproportionately large. a we were to stop this expenditure or reduce it to the bare requirements of; maintaining reasonable efficiency in the present services we would throw; upon private investment,the task of re-, storing the volume of new investment, to the point at which, the labour.resources of the country would be fully employed. Moreover, we must remember that through insurance companies and-savings banks we are saving about' £25,000,000 per annum, of which; approximately two-thirds is normally > invested in Government securities. There is a case here for a substantial volume of public investment. Every increase in investment involves an addition to national income of much more than the original outlay, from 2J to 3 times the original outlay. This is why depression deepens as investment fails off and prosperity returns as investment recovers. PROGRAMME AND RECOVERY. Before the depression our public investment was from £35,000,000 to £40,000,000, and it was supported by overseas borrowing of £30,000,000 to £40 000,000. It fell in 1931-32 to the; small amount of £6,200,000'f0r the States for ordinary works and unemployment relief works. The Commonwealth in that year spent from loan funds £3,500,000 for a wheat bounty and a trifling sum on new works. The heavy fall in public investment from £40,000,000 to nearly £6,000,000 had, of necessity, a very depressing effect on employment and business prosperity, and under a more enlightened view of the needs of the-situation could have been avoided. The expenditure from loan funds on works in recent years has been as follows:— Commonwealth. States. Total £m. £m. Sm. 1929-30 .... O.i! 22.8 ■ 28.1 1930-31 ~..< 2.0 , 11J ™-\ IM2 « . . ■'! 10.0 10.4 1933-34 .... -5 16- (> ■ 16-° 1 These totals exclude the amounts required to finance deficits. For the current year the Loan Council approvec aggregate borrowing for works and the first instalment of the Commonwealth rural debt relief plans of £22,600,000. Doubtless the greater part of this will have been spent by the end of the year. For next year, 1935----36, the States are asking for increased loan appropriations, and the .Commonwealth will also require additional funds for debt adjustment and works. The figures may be stated to be of the following order:— Commonwealth S5- 0""'""1! Now South Wales .... '£10,000,000 Victoria £5,000,000 Other States, not less than £10,000,000 Total £30,000,000 To this must be added £4,000,000 for deficits, giving a grand total pi

£34 000 000, compared with £28,500,000 last'year, made up of £22,600,000 for works and an estimated amount of £5 900,000 for deficits. If we ignore deficits for the moment, the effective increase is from £22,500,000 to £30,000,000, a rise of £7,500,000. If this new investment is made and no reduction takes place in private investment, the addition to national income will eventually amount to about £20 000,000. But we cannot count upon the addition to income if we ignore the effects on private investment, and we cannot estimate the effects on private investment without considering the methods by which the funds are raised. A SUCCESSFUL POLICY. The success of public investment as an aid to permanent recovery depends upon three major influences, all of them indeterminate at the moment. Firstly, will private investment recover and make it possible for Governments to reduce their loan programmes if the burden of interest presses too heavily upon Budgets? Secondly, can we expect a moderate rise in export prices sufficient to make up part of the loss in national income that will be incurred from some contraction later in the volume of .public investment? Thirdly, are the works on which the funds are spent likely to be reproductive in the sense that they will directly earn interest on the outlay or indirectly increase the efficiency of production so that the tax revenue will expand sufficiently to cover any deficiencies in interest receipts? If we could confidently answer the first two questions in the affirmative the answer to the third would be less important,because the public investment programme would.have given the necessary stimulus to employment and recovery while we were waiting for the permanent foundations of recovery to be laid. There is some risk inherent in the programme, but the risk will be lessened if we abstain from some of our traditional methods of loan expenditure on rural development and concentrate more upon objects of expenditure that we shall permanently use. There is a danger that we shall exhaust our efforts on abortive schemes of land settlement and irrigation that will only add to our burdens later without yielding any really serviceable-asset.