BUDGET BURDEN OF £4,500,000

Evening Star, Issue 21570, 16 November 1933, Page 16

BUDGET BURDEN OF £4,500,000

MR DOWHIE STEWART ATTACKS EXCHANGE POLICY GOODWILL LOST AND RETALIATION PERILS TEMPTATION TO PUT RATE HIGHER 1 [Per United Press Association.] WELLINGTON. November 15. Devoting the whole of his speech in the Budget Debate to the Government’s high exchange policy, Mr Dotynie Stewart made in the House of Representatives this afternoon a very thorough examination of the effects and repercussions of this form of currency depreciation in New Zealand. Ho emphasised what he had said, after resigning the portfolio of Finance last January—that to depreciate currency without at the same time ensuring, a balanced Budget was a dangerous procedure. “I am still convinced,” said Mr Stewart, “that the high exchange has imposed so heavy a burden on the Budget that it was unwise and dangerous.” This burden ho estimated at £4,500,000. 'At the outset Mr Stewart expressed the view that the references to the exchange rate were the most interesting features of the Budget. It was shown by the Minister, he said, that during the half-year ended September 30 the London funds purchased from the banks had amounted to £13,345,000. From this had been deducted £8,500,000 required for use in London and Australia, leaving £4,845,000 as surplus sterling assets taken over from the hanks. “It is important to note,” Mr StewJirt said, “ that these figures relate (Only to the first half of the financial year. Nothing is said as to how much may require to be - taken over during .the current half-year. But if over £13,000,000 was taken over during the jirst half of the year it seems safe to anticipate that another £4,000,000 will have to be taken over during the latter jialf, and from this there is no deduction for overseas interest requirements, Us these have already been paid. So that unless the Minister is entitled to hold in suspense the exchange cost of the surplus funds it is clear that his Budget should have been debited, not pnly with £1,790,000 on his normal requirements, hut also with £1,200,000 on the surplus sterling assets (£4,845,000) taken over up till September, and it would probably also have to be debited with perhaps another ,£1,000,000 on surplus funds to be taken over 'during the current half-year. In short, his Budget would be burdened .with more than £2,000,000 additional expenditure. “The question arises whether the (Government is justified in treating as a suspense item the cost of incurred in buying the surplus funds. 1 contend that if the exchange indemnity is to remain for some time a feaiure_ of the Government’s fiscal policy it becomes an ordinary item of expenditure—a recurring item—which should he met by-current taxes, or, if this is not feasible, it should form part of the deficit .for the year in which it is incurred. In point of fact, the out-go has already been made, and 'the money been paid out of borrowed money raised on Treasury bills. “ If the Government or the Reserve Bank succeeded at a later date in selling these surplus funds at a profit, then some later Budget would, get this benefit; but if they were sold at a loss then some later Budget would have to bear the extra burden. ALARM CAUSES CHANGE OF FRONT. “The Minister himself, in January last, held the view I now express. He anticipated that he would have taken ever £4,000,000 of surplus funds—and .that has already occurred iu the first jix months—so he debited his estimate of the year’s expenditure with £1,000,000 on that account as an additional item over and above the exchange cost on-his overseas interest, This view was also held by the Trealury at that time. “What has led to the change?” Mr Stewart asked. “ Is' not the real reason that the volume of surplus funds threatens to be so alarming that the Minister saw that if the cost was charged to the Budget his deficit would mount, up to such an immense total that he could not state the figures without a public outcry ? He saw that by the end of the financial year he might well have between £8,000,000 and £10,000,000 on his hands unless imports increase rapidly at an early date, and if the cost of exchange were debited against the current year his deficit, instead of being £2,000,000, might be between £4,000,000 and £5 000,000.” , Continuing, Mr Stewart said: “The Minister says that the surplus funds may be sold at such a price as to show *r net gain. One would like to know fthe basis of this surmise. The funds iare a drug on the market at the prepent time, and no one seems prepared {to buy them at the present rate of exchange. Is he being pressed already to put up the rate owing to the fact that the temporary stimulation caused by the exchange is already disappearing?” (Mr Stewart drew attention to the report of the committee which had advised tho Australian Government on the subject. It had pointed out that it was a characteristic danger of tho raising of the exchange- rate that there was no logical stopping place and had added:

“ Even if overseas prices went no lower repeated increases in the exchange rate with increasing burdens on the Budgets would be necessary to maintain export production.” Mr Stewart said he was still convinced that the high exchange had imposed so heavy a burden ou the Budget that it was unwise and dangerous. It had to be remembered, moreover, that in the year after next the Government could no longer rely on drawing £2,000,000 from the Discharged Soldiers’ Settlement Fund to supplement the revenue. Mr Stewart remarked that he had made no reference to what might he gained from gold, as no reference had been made to this in the Budget. ‘‘ When I see the elaborate estimates of how much extra income the farmer has received in New Zealand money,” Mr Stewart said, ” I reply that such calculations are useless unless we can first/ estimate how -much he has lost in sterling through the effect of competition in depreciated currencies on the British market. Many authorities hold the view that world prices for farm products are being held down and prevented from recovering through competition between countries in depreciating their currencies,” DANGEROUS WEAPON. Mr Stewart said the most significant and striking .comment on New Zealand’s high exchange had appeared in the ' World Economic Survey,’ published by the League of Nations. It had stated: ” Competitive currency depreciation, even when it is reluctantly entered upon, is a most formidable weapon of economic warfare, but unfortunately it tends to have a boomerang effect, returning to strike dangerously at the spot from which it started.” The writer had drawn attention to the repercussions in Denmark and other countries following the raising of the exchange rate in New Zealand, and had added: ‘‘All these actions were taken purely for reasons of domestic policy without any intention of instituting reprisals. However, the price of butter in London went down substantially, and the advantage accruing to the New Zealand exporter was minimised with the more permanent possibility of his markets being restricted.” Mr Stewart declared that loss ot goodwill and resentment created in the minds of the British farmers and others was a still more serious aspect of the higher exchange rate. “In fact,” he said, “ when I see the effects of the high exchange on the Budget, and the difficulties in which it has involved the local authorities, and when I see the retaliation ,it has created abroad, I am more than ever confirmed in the opinion I expressed in January that the temporary benefits which it may appear to have secured have been too dearly bought, and that the end is not yet.” Mr W. E. Barnard, the member 191’ Napier, who was the next speaker, said that Mr Stewart had presenter! a case to which it was the duty of the Government to reply. Mr A. D. M'Leod said that Mr Stewart had given the impression that the exchange rate was going to bo increased. He could not agree that such an inference could justly be drawn from the Budget, and ho thought that in doing so Mr Stewart had been very unfair to liis one-time colleague, the present Minister of Finance. Mr M'Leod added that the high exchange rate should have been in operation eighteen months or two years ago.