NATIONAL FINANCES

Greymouth Evening Star, 8 April 1932, Page 5

NATIONAL FINANCES

DRASTIC ECONOMIES ESSENTIAL

GOVT. PROPOSALS OUTLINED

(Per Ministerial Favour.)

WELLINGTON, April 7.

In the House of Representatives, this evening, Mr. Stewart presented the Financial Statement. The Minister was afforded a very attentive hearing, and interruptions were practically absent. There was, however, a chorus of derision from Labour benches, when reference was made to the extension of the life of Parliament. When the Minister iad concluded, the Leader of the Opposition asked: Is this as full a statement as was supplied to the conference of editors. Mr. Stewart: it is a great deal fuller than any indication given Ky me to anyone eke. Nobody has seen this statement prior to its presentation to the House. . 7 A Labour Member: fjow has so much appeared m the papers I Mr. Stewart: A lot of guesswork goes on. The Statement was as follows: —

After a general o.utline of the position in respect to the figures avail-' able, regarding the last financial year,! Mr. Stewart said that the net expenditure as a whole, would’ exceed the revised estimates by approximately £ 506,000, due to'lncreased debt charges, and costs of exchange, arising out of the financial emergencies in Londpn. On the revenue side, he stated, the shortage would be about £2,000,000, notwithstanding that shrinkages of over £ 6,000,000 had been provided 'for in the main and supplementary budgets. Thus, the total deficit would be about £2,500,000. Ttegirrding the current -year, Mr. Stewart laid on the table of the House, concurrently with the statement, those portions of the Economic Committee’s report, dealing with the Budget which were withheld when the main portion of the report was published. After reviewing the principal items on the revenue and expenditure sides of the Budget, Mr. Stetvart announced that unless far reaching adjustments are made to decrease expenditure and increase revenue, the prospective results for the current financial year would be as follows: — Expenditure .. £26,120,000 Revenue .. £17,820,000 peficit . .... £8,300,000 The Minister stressed the seriousness of the position, especially when it is remembered that last year, taxation was largely increased, reserves heavily drawn, and resources generally strained in the effort to balance the accounts. He pointed put that to meet the shortage of much the same magnitude, during the current financial year, was a more formidable problem, having regard to the limited taxable capacity that remains, and to the fact that the bridging of the gap must be largely accomplished by means of reductions in expenditure. He showed that millions cannot be saved without very drastic economies involving a serious curtailment, and in some cases, even the abolition of various grants, subsidies and services, which have been undertaken under more prosperous .conditions. His statement indicated that the Government’s action must be governed mainly by what the country could afford, and ho appealed to members of the House and the people of the Dominion generally not to add to the difficulties by opposing each and every economy that is proposed. The remedial measures detailed in the financial statement are as follow:—

REMEDIAL MEASURES. The problem then arises how is this prospective deficit to be coped wtih. Before discussing the proposals contained in the economists’ report for reducing the amount to what they call a manageable deficit of between two and three millions, it will facilitate a comprehension of the position, if I state the suggested remedies in broad outline as follow: — Estimated deficit £8,300,000, to be reduced by (1) savings £4,100,000, (2) taxation to yield £2,200,000; total £6,300,000; remaining deficit £2,000,000. The details of the proposed taxation will be laid before the House at a later date. In the meantime, I may say that the Government proposes to submit to Parliament certain increases in both direct and indirect taxation. The savings proposed arise from the adoption in part of the economies recommended by the report of the National Expenditure Commission. Some economies recommended by that Commission were already in force, some were not agreed to by the Government, and some will not operate during this financial year, even if agreed to. ~ A statement will be made later as to which recommendations have been adopted, and the reason for the non-adoption of others. The Commission, of course, has not completed its work, and further recommendations will be contained in its final report. I may say, however, that the £4,100,000 referred to is broadly made up as follow: —Reduction in salaries, wages - and pensions £1,100,000; abolition of subsidy on unemployment funds £1,450,000, assistance from highways funds £500,000, subsidies to local bodies to remain a charge on highways account £125,000, reduction in other items £325,000, the “Hoover" moratorium (if extended) £600,000.

reduction in fixed charges. Both the Economists Committee and the Royal Commission recommended a reduction in fixed charges for interest and rent, as well as wages. Although these proposals only partially affect the Budget, I propose to deal with them at this point, both as they affect the general position and the Budget. In paragraph 97 of the Economists’ Report, it is stated: “A reduction of 20 per cent, in fixed money claims would make a substantial contribution towards bridging tho gap; between costs and prices.” They further indicate that both rent and interest should be reduced on this basis.. They also indicate a further reduction in wages of 10 per cent., ae being necessary. The Royal Commission on national expenditure, in paragraph 134 of their report, recommended a general reduction of 10 per cent, in salaries and wages of public servants. They also recommend a reduction of either 15 per cent, or 20 percent, in the rate of all classes of interest, both private and public. I will deal first with tho

QUESTION OF INTEREST

which is by far the most difficult and intricate. The problem divides it-

self into two branches, namely, interest on private mortgages, deposits, etc., and interest payable on the public debt held in New Zealand. In my view, different considerations apply tn these two classes of obligation. As to •private interest, I have on a previous occasion expressed the view that a flat cut all round would be unnecessary in some cases and insufficient in others. It would make no discrimination between those who had invested wisely, and those who had invested unwisely. My view was, and is, that voluntary private adjustments, aided where necessary by the provisions of the Mortgagors Relief Act, would provide more equitable results for the great variety of cases that exist, than any flat rato reduction could do. However, the Royal Commission on na•tional expenditure states in paragraph 163, that in their opinion, this process is -too .slow in operation, and may not result in an equal all round adjustment, and some, or all, of the Commissioners advocate a reduction by legislation of 15 per cent, or 20 per cent, (paragraph 316). The Economists’ fCpprt, part 10, also appears to hold that the reduction should bo by legislation. The same view has been urged by many outside representative bodies. Although I am still of the opinion that a fixed reduction by legislation is not the best .course, I have subordinated my personal view to that of my colleagues, and what appears to be the general view. Accordingly, the Government legislation will provide for a general reduction of interest and rent, but it will be qualified by provisions enabling the mortgagee or lessor to apply to the court if he can show hardship, and for the mortgagor or lessee to apply to the court if he can show that the relief is inadequate. The legislation will also allow for concessions already made, and for various other special considerations. It must be remembered also that in last year’s legislation, I imposed a special extra income taxation on receivers of investment income from interest and rent. The objection raised to that was that while it made this class contribute to the general financial needs of the Dominion, it made no concession to the mortgagor or tenant. As, however, it is now proposed to make a heavy reduction iii interest and rent this special taxation will require to be reviewed.

INTEREST ON PUBLIC DEBT. I now turn to the interest on the public debt. The Royal Commission on national expenditure recommended that assistance might be obtained towards the budgetary position by (1) Revenue from stamp duty on coupons and interest warrants and (2) A voluntary conversion loan. They pointed out that the advantages of revenue stamp duty were (1) That the duty could be put intd* operation immediately; (2) That there would be no costs involved and (3) That the duty would be purely of an emergency character and could be lifted wholly or in part as prosperity returns. As against that, if the charges are made ■on a permanent basis it would tend to prevent a general fall in the interest level, which is vital to the revival of trade and inustry in the Dominion. They therefore recommended a special emergency stamp duty on the interest on all internal loans, ■bearing interest at 41 per cent, or over. He did not suggest the rate of stamp duty which should be imposed as they considered the question of taxation was outside the order of reference. With regard to a conversion loan, they pointed out the disadvantages to be, (1) Considerable cost, would be involved in the process of conversion; (2) Immediate relief to the Consolidated Fund would not b Q possible and (3) It would penalise investors for the whole duration of the loans. In effect they recommended a combination of stamp duty and conversion. They admitted however, ’that nothing would be more fatal to our credit than an unsuccessful conversion scheme, and that the prospects of its success should be carefully gauged before it was undertaken, They suggest' that the general reduction in interest under a conversion scheme should be 15 per cent or 3s in the pound. Another section of the Commission recommended a conversion reduction of 20 per cent, but so that on loans the interest on which is taxable they should not fall below 4 per cent, and on the tax free loans a reduction to £3/12/-.

“CONVERSION” PROPOSALS

The Economists Committee recommended (see paragraph 108), (1) A. special stamp duty on interest on the internal debt or (2) A special income tax such as was imposed last year, or (3) A voluntary conversion loan whereby the internal debt would be converted into now securities, bearing a lower rate of interest. They suggest a reduction by 20 per cent to a minimum of 32 per cent. Reviewing these proposals, the Government is of opinion that at this juncture a voluntary conversion loan is not advisable for various reasons. In the first place the average rate of interest on the public debt is too low to make it probable that any voluntary conversion scheme would be successful. The tables show that the average rate of interest on the debt held by the public is only 4§ per cent, and on tha/t held by the Government departments

41 per cent. In the next place the proportion of the debt held internally in New Zealand, as against the external debt, is much lower than was the case in Australia. It would appear that in order to procure a successful conversion, it would be necessary to bring down the rates of interest so far below the market rate that it seems inevitable that the conversion would not be in effect voluntary but compulsory. In other words, it would amount to a composition with our creditors. .Moreover, although some calculations in the reports of the economists and the Royal Commission suggest that a net saving to the budget of £300,000 or more would be made, later figures worked out by the Treasury satisfy me that after making all the necessary concessions to our own mortgagors and taxpayers, the saving would be so small as not to warrant all the risk and turmoil of an attempted voluntary conversion. It may be that at some later date the question of a voluntary conversion will require to be reconsidered, but I do not think it is expedient at present. Finally as in the case of pri vate interest it must be remembered that the interest from Government bonds was subjected to a special income tax last year. It is my experience and observation that many investors both large and small readily agree that they must pay whatever taxation the State finds it necessary to impose, but they strongly resent’ any suggestion of a forced reduction of interest by the Government on its: own bonds. In reality they received a 10 per cent cut last year by virtue of the taxation. I am therefore! still of the opinion that the fairest way to call on the holders of Government bonds to pay their share towards the general need is by taxation. I therefore propose to maintain the taxation imposed last year. This will not put them on a level footing with the private mortgagee if he is to suf- - fer a 20 per cent, flat reduction. I propose therefore to supplement the taxation on interest from Government bonds by a stamp duty on interest coupons of 10 per cent. This brings me to the position of the

TAX FREE DEBENTURES Apparently both the economists and the Royal Commission contemplate that any stamp duty imposed or interest reduction should apply to the tax free debentures as well as those not tax free. The argument used is that this stamp duty is a special revenue duty framed for an emergency find not forming part of the ordinary bystem of income tax. This view is held not only by the Royal Commis/sion and the economists but it appears to be considered justifiable by some of the Stock Exchanges and other organisations dealing in investments. 1 'am unable to acquiesce in this view 'and it must therefore be understood that while the recommendation is submitted to the House by the Government on the advice and acquiescence of the authorities, I have quoted it does not express my own personal view.

LOCAL BODY DEBT. This will be dealt with in the same way as interest on the public debt, that is to say, interest on local body debt will be included in the proposal for a stamp duty of 10 per cent and the special income tax imposed last year will remain. Provision will be made in the legislation for payment to local bodies of the proceeds from the duty derived from the interest on their securities, less a deduction of 5 pei’ cent, to cover costs of administration. In order to preserve the existing relative position and ensure that the reduction in fixed charges is an allround one, it is necessary to consider the POSITION OF BANK RATES and deposit rates generally. In so Tar as bank rates for advance are (concerned, the question of a reduction .has been discussed with the associated banks, and an announcement in regard to the matter will be made by the Chairman of the Associated Banks shortly. A fairly extensive deposit business is done by trustee and investment companies and building societies, and in addition deposits are accepted by mercantile firms. All these institutions and firms are asked to assist in bringing about a general reduction in interest charges. In order to ensure that individual firms do not obtain an advantage over their competitors by refusing to participate in the proposal, it is proposed to ask Parliament for authority to prescribe the maximum rates of interest that may be offered for deposits by the different classes of business. The power to fix rates in this way will be made wide enough to cover interest on existing deposits. In this connection, I may say, that it is recognised that a reduction in mortgage rates will seriously affect the financial position of some institutions unless provision for reductions is made in the rates of interest for existing deposits. Power will also be taken to fix the maximum rates of interest that may be paid by Savings Banks. REDUCTION IN WAGES. In order to give effect to that part of the Government’s programme which contemplates a general reduction of rent, interest, salaries, and 1 wages a comprehensive Bill will be presented to the House, at an early date, with regard to a wage reduction. Both the Royal Commission and the Economists report contemplate a reduction of 10 per cent. The Royal Commission holds the view that a graduated reduction is not advisable, but the Government proposes, however, to graduate the cut as regards the civil service, and particulars of this will appear in the legislation. In paragraph 140, the Royal Commission recommend that insofar as the cut affects the Public Trust, the Government Life Insurance Office, and the State Fire Office, these Departments should not be deprived of the benefit of the reduction in wage, as was done last year, and the Government acquiesces in this view.

LOAN FINANCE.

As has already been announced a £5.000,000 loan has been underwritten in London. The loan bears interest at 5 per cent, and was issued at £9B/10/- per cent. The stock will mature on November 1, 1971, but the Government will have the option of repaying the loan wholly or in part on after November 1, 1956, on giving tjireo months’ notice. The return to investors with redemption at par, at the maturity date is £5/1/9 per cent, and the cost about £5/5/5 per cent Having regard to present economic

conditions; the underwriting of a loan on these terms is satisfactory. £4,060,000 of the amount is to be used for funding the Treasury Bills outstanding in London, which mature in June next, and the remaining £1,000,000 to assist in financing a much reduced programme of capital works.

The loan will greatly assist in easing the strain on local resources. On this point, the Economist's Committee stated in paragraph 133 of their report that “If it is practicable to. fund these Bills on maturity, such should be done so as to ease the position in New Zealand.” Further, the committee while recognising the necessity for a reduction in loan expenditure recognised that a complete sudden cessation would only deepen the ; depression and lead to waste, through leaving works in hand uncompleted. These remarks are in line with my own views, and the Government is endeavouring to arrange finance for carrying on capital works on a reduced scale. It is hoped that including the £1,000,000 from the London loan that arrangements can be made to finance an expenditure of £3,000,000 for public works, land development, forestry, and this would mean a reduction of over 50 per cent, compared with the programme for last financial year. Arrangements have also to be made to deal with loans maturing in New Zealand and Australia. About £5,000,000 held by the public matures during this financial year. In addition, an extensive use will have to be made of Treasury Bills to finance remittances to London and general requirements during the financial year.

STATE ADVANCES. In view of the heavy demands in other directions, I do not see any immediate prospect of providing additional capital for State Advances during this financial year. The matter will not be lost sight of and will be considered if the external money market after providing for other requirements is favourable. As to the existing resources of the office it is estimated that after providing for redemption of loans maturing during the year, not more than £750,000 will be available for reinvestment. From this amount, however, will have to be deducted the amount of interest and principal postponed by order of the Courts under the Mortgagors and Tenants Relief Amendment Act, 1932. Payments in arrears also, have a definite bearing on the available resources. To enable the State Advances Board to give further concessions in deserving cases it is proposed to introduce legislation to permit the Board to rearrange loans to mortgagors and capitalise arrears of interest. The Board will also be empowered in certain cases to allow the half per cent, rebate on prompt payment of current instalments, even though arrears are still outstanding in respect of previous instalments. These further concessions will also tend to reduce the surplus funds available for re-invsetment'. and as it is necessary in many cases to provide additional loans to protect existing securities, the Board is conserving its limited resources for this purpose. I think it desirable that the country should know this in order that misapprehension may not arise in respect to fresh applications for loans.

I have made no reference to one question which occupies a large part of the economists’ report, viz.,

THE EXCHANGE PROBLEM

and the price level. So far my immediate practical problem has been to make sure of getting funds to meet our London obligations, and all general considerations of advantages and disadvantages of a free exchange or a high exchange had to be subordinated to the more urgent one. Whatever New Zealand may decide to do, when it is clear that the need for the exchange pool no longer exists, it is fortunate that the Ottawa conference will enable the whole problem of the price level to be approached from an Empire standpoint. All attempts to raise the price level by international action have so far been unsuccessful, but concerted action on an Empire scale to raise the sterling level of prices of primary products, may be possible, and is the only thing that can relieve the burden of the external debt. At the present level of prices, New Zealand can either pay her London obligations or buy British manufactures, but she cannot do both, oi’ rather the latter must be severely restricted. It is satisfactory to note that the. Canadian Government proposes to make the question a prominent feature on the agenda paper at the Ottawa conference.

PROPOSALS SUMMARISED In the meantime, to deal with our internal problems, the Government proposes to submit legislation (a) to reduce wages and salaries in the Public Service, and to make equivalent reduction in interest and rent; (b) to effect certain economies in expenditure; (c) to raise additional revenue by direct and indirect taxation;

(d) to enable the State Advances Department to grant further concession and adjustments;

(e) to provide for the life of this ’and future Parliaments to run for four years instead of three. So far as balancing the budget is concerned, the proposals covered by this statement will, if the preliminary estimates of revenue prove to be correct, leave a deficit of £2,000,000. This position will be reviewed in the ordinary session when it is hoped that the situation will be clearer and the prospects can be more accurately gauged. Further, by that time the Government will have had time to consider the final report of the National Expenditure Commission. Apart from these considerations it is recognised that the ultimate budget stability must rest on a general economic recovery and care must be taken not to hinder that by imposing too heavy taxation in an effort to balance the budget. At the same time the budgetary position must not be allowed to get out of hand as that would consti-; tute a menace to the whole economic | fabric. If it cannot be avoided. with-|| out too drastic measures, we can, I think, legitimately off-set any reasonable shortage against the reserves which still remain. The book value ■ of these reserves invested in discharg-| ed soldiers’ settlement mortgages is £10,850,000. While this amount will' inevitably have to be reduced on ac-J! count of investment losses, the effec-; five value will be more than' ample to; cover the deficit for the last financial year and the £1,000,000 shortage for this financial year, should it remain

at that figure estimated. Finally the aim of the Government is to reach budget equilibrium by 1934.

ECONOMY COMMISSION’S ‘REPORT

WELLINGTON, April 7.

A deficit of £9,260,000 in 1932-33 (reducible to £8,660,000 if the Hoover Moratorium is continued) is predicted by the National Economy Committee, the second portion of whose report was tabled in the House of Representatives to-day. Summarising the position, the committee states: The inroads on public revenue made by the fall in the na tional income will be even more serious in 1932-33. Expenditure to provide for unemployment and exchange on the external debt has increased notwithstanding the fall in national income. The preliminary estimated deficit for 1931-32 is about £3,000,000. A net expansion of expenditure since 1929-30 of approximately 12 per cent and a reduction, of revenue of 30 per cent have helped to bring about the preliminary estifhated deficit of £9,260,000 in 1932-33. If the Hoover Moratorium is -continued, the preliminary estimated deficit will be £8,660,000.

A preliminary budget deficit of £9.26 m. for 1932-33 with a possible reduction to £8.66 m. should the Hoover moratorium be continued, demands drastic action in public finance. Adjustable expenditure, embracing all expenditure other than debt charges, unemployment and exchange, was £14.47 m. in 1929-30, and is estimated at £13.10 m. in 1932-33. Adopting 25 per cent as a standard for economies on the amount for 1929-30, the expenditure for 1932-33 should be reduced to £10.85 m. This would yield £2.25 min further economies. By reducing the unemployment expenditure from £2.9 m. to £2 m. and making the whole expenditure a charge upon special direct unemployment taxation. the Budget would be relieved by a further £1.45 m. An interest adjustment of 20 per cent down to a minimum of 3:? per cent, would save a net amount of £0.3 m. The total economies would amount to £4 m. On the revenue side taxation could bo increased by £1 m. by amendments and extensions of existing taxes. A special sales-tax to replace part of the loss on account of Customs revenue might yield a further £1 m. Reductions in wages and salaries in the Post Office and Railways would increase the net revenue from these departments by £0.6 m. The total revenue would thus be increased by £2.6 m. and the total contribution towards the Budget deficit would be £6.6 m„ leaving an uncovered deficit of £2.06 m. This is regarded as a .manageable amount which can be reduced later, either automatically as (trade recovers and unemployment expenditure declines, or by further special economies and taxation.