DOMINION FINANCES

Hawera Star, Volume LII, 27 January 1933, Page 9

DOMINION FINANCES

Review by the Minister DECLINE IN REVENUE Facing £9,850,000 Gap OUTLINE OF ECONOMIES STEPS TO MEET CRISIS. (Government Memorandum.) Wellington; Jan. 27. in a statement to the House, the Rt. Hon. J. G. Coates, Minister of Finance, said: “Since the adjournment of the House the Government has again taken thorough stock of the economic position of the country and lias considered ways and means or meeting the situation. In particular the Government has been concerned about the plight of tiie primary industry which is the basis of the whole economic structure of this Dominion. “During 1932 there was a. further heavy fall in the export prices and the general level of these prices as shown in the- index numbers is now little more than one-lialf of what it was in 1929. Comparing the position as shown by the Government Statisticians with the index of prices in 1914 and in November 1932 we have export prices 21 per cent, below 1914. farm expenditure for the year 1931 49 per cent, above 1914, retail prices 39 per cent, above 1914 and wholesale prices 21 per cent, above 1914.

“The notable feature and the one calling for urgent action is the fall in export prices. This fall in prices is disastrous and it renders the financial position and the outlook of a large proportion of the farmers increasingly difficult. They have been able to carry on and to maintain production only by failing to meet their fixed charges and by living on capital, but farm maintenance is suffering and in many cases stock is being sacrificed. If some effective action is not taken a greatly reduced volume of production must assuredly follow. “During the past- year much was done in one way and another in the direction of relieving the situation, but it fell far from short of what was required to bridge the widening gap between costs and prices. New Zealand, in common with other countries, has been looking to a recovery of world prices. Unfortunately these hopes have not been realised. In the contrary, as is well known, prices have fallen still further. “The fall has been particularly severe in those products which are the exports of New Zealand. We have not yet received the full benefit from the arrangements made at Ottawa and 1 am confident that, following the world economic conference, steps will be taken by the great powers to relieve some of the principal underlying causes of the depression and to bring about a rise ill world prices. These measures will assist the Dominion, but the Government is satisfied, after a searching examination of the situation, that we cannot afford to wait any longer for assistance from these sources. We must immediately take steps of a far reaching nature to assist our primary industry. “At the outset the general line of approach favoured by the Government in bringing costs and prices into line may be indicated. It is frequently said that an initial and fundamental choice must be made. The choice is between either reducing costs or in- j creasing prices otherwise and less accurately the choice is said to lie between ‘deflation’ and ‘inflation.’ Our view is that, with the choice of reducing costs or increasing monetary receipts, the country should deliberately proceed by both methods. The gap to be bridged is a wide one. By l approaching tilie _ problem {from both ends and ov deliberately planning t.o increase receipts and where possible to reduce costs we shall bring adjustment with less dislocation than if wo seek to obtain adjustment by one method alone. ‘ ‘Presently 1 shall refer to certain directions m wliic-h the reduction of costs as well as the increasing of receipts is to be sought, but at once 1 may say that a further reduction m the rates of wages and salaries in the Government employment is not contemplated and this is itself a reason for our taking in hand adjustments of an alternative kind. “All suggested methods such as | bounty on exports, remission of rates and land tax, exemption of farm loans from income tax aiid the direct issue of credit by the Government were carefully considered, but the raising of the exchange rates was. deemed preterable to all other methods and as honourable members are aware, action lias already been taken in this direction. Arrangements have been made with the associated banks, whereby the exchange rate f-or telegraphic transfers, i\ew Zealand on London, has been raised from £lO9 to £125 for £IOO in London and other rates have been raised correspondingly. ‘ ‘This action has been taken by the banks at the request of tile Govern-

ment and as a method of economic adjustment. This being so it is reasonable that the banks should be safeguarded against loss iu giving effect to the Government’s policy. Accordingly the Government lias agreed to safeguard the banks against loss arising out of exchange dealings at the new rates. This in effect means that the Government will purchase any sur_ plus London credits bought by the banks at the new rates of which they are unable to dispose at the curfent rate. In this way the Government may be called upon to purchase more exchange than is actually needed for current requirements,, bujt any such surplus amount can bo used to pay off debt abroad with funds borrowed in New Zealand. TRANSFER OF DEBT

“The net apart from exchange, is thus a. transfer of debt from abroad to New; Zealand. While some surplus exchange may have to be purchased during the first year it is considered that this is but at a temporary phase as" conditions will soon adjust themselves to the new position. The Government recognises that whatever the rate of exchange may be stability is a most important factor in the interests of all sections' of the community. This being .so it is proposed to maintain the present rate of exchange for a reasonable period and I may .s.ay that it will not be departed from lightly. It is, of course, impossible to fix any definite period, as we cannot forsee the course of events either in New Zealand or abroad. A. Bill to give effect to the arrangements with the banks will shortly be introduced. ‘ INTEREST CHARGES. “With the fall in prices and the decrease in the volume of business fixed charges have become a serious problem. In practically . all businesses as in the case of primary products prices have fallen most severely and the burden of fixed charged is particularly acute in the business of farming. Thus the question of lowering interest charges must be a major item in ail>' scheme for adjustment/ of costs. The Government is anxious to bring about lower market rates of interest on a sound basis and if this can be achieved it will be of much greater and of more lasting benefit to all sections of the community than a simple cut in existing charges. In London interest rates in the short term loan market have fallen to a very low level and following the. recent British conversion long term rates are also- coming down fairly rapidly. ‘ <jn Australia comprehensive steps | were taken to reduce the rates of inI terest on all existing securities of the Government and local bodies, and this, together with other measures, has led to lower market rates of interest. In New Zealand our market rates of interest continue to be relatively high and it i would appear that the situation is influenced by the rates on the large volume of existing securities.. The Government considers it essential that interest rates on existing securities should’ bo brought down to a lower level and at present we are discussing ways and means of achieving this object. I am hot in a position at this stage to make any definite statement, but I hope in 1 due course to be able to bring forward comprehensive proposals for dealing with the whole problem and as far as possible on a voluntary basis. “This is a difficult matter, particularly in so far as local bodies debts are concerned, because there are so many local bodies with securities on the market. Any reductions brought about in the interest rates on local body debts, in so far as they exceed the benefit at present derived from the 10 per cent, stamp duty, would enable local authorities to give further relief to ratepayers. Any such relief would, of course, bo of direct assistance in lowering the fixed charges of exporters and other producers. If the more comprehensive proposals can be successfully arranged the present 10 per cent, stamp duty, which is somewhat irksome to bondholders, will be abolished concurrently with the reduction of interest on Government and local body securities. “We have also to consider deposit rates and overdraft rates. Discussions in regard to these matters are well in hand and I am hopeful that arrangements can be completed to lighten the cost of these items. “Finally, there is the problem of mortgage rates. As honorary members are aware legislation is already upon the -Statute ' Book providing for a. 20 per cent, reduction and for the review of individual eases by the mortgagors’ adjustment commissions and the courts. In so far as statutory reduction is concerned I do not think it would be in thei ntorests of borrowers to go any further in this direction for it must be recognised that if industry is to be carried on the confidence of investors must be retained.

INTEREST RATES. “The existing powers for the review of individual eases ajre already very extensive and no further major amendments of the law appear to be necessary. Moreover, it should not be overlooked that if the‘rates of interest ; on (Government and local body securities and on deposits can he brought down, this in itself must make mortgage investments relatively more attractive than they are at present and, consequently ivill induce more investments in this direction. Ini fact, a lowering of interest rates on gilt-edged securities must benefit all borrowers, as it will permeate through the whole held of investments.

RAILWAY FREIGHT CHARGES “Ais r. further step towards bringing down, costsy arrangements are being made with the Railway Board for a reduction of about 15 per cent, in the freight charges covering a fairly wide range cf commodities. This will add to our Budgetary difficulties, perhaps to Hie extent of £160.000 in the first

year, although increased traffic at- the

lower rates may later reduce 'the amount of the loss involved. In any case it is considered that the reduction is warranted from the more important viewpoint of assisting to reduce working costs.

DECREASES IN REVENUE.

“Having; regard to all these considerations it is .at present anticipated that the customs revenue ror the next financial year will show a falling off, compared with probable, receipts tor this year, of £1,400,000. Income tax which will be based on this year’s trading operations will undoubtedly be less, but at present it is difficult to gauge the extent of the shrinkage. Tentatively a comparative decrease of £750,000 is being allowed for. “Stamp and death duties revenue has been well maintained during the current year. Next year, however, decreases in valuations will adversely affect death duties, while there is likely to he a further decline in other items particularly duty on instruments aiid racing revenue. The net decrease- in the revenue is estimated at £250,000.

“Interest receipts from the railways will be directly affected by the proposed reduction in freight and with a further probable decline in the receipts from other investments the net shrinkage is estimated at £220,000. “The post office revenues continue to reflect the general slackness in business, hut on the other hand if services are to be maintained there is a limit to the extent to which falling revenue can be offset by savings m expenditure. For these reasons on the present indications the Rost Office estimates that it will not be able to tio more than make ends meet next year, so that no revenue is likely to bq received under the headijig of Post and Telegraph profits. “This will inerea.sie the revenue shrinkage by the amount anticipated to come to hand this year, viz., £470,000. .“The remaining items of revenue will all he more or less affected by the continuance of the present conditions and a net decrease of _ £260.000 has been put down for such items.

RESERVES. “This bears revenue gnd will include £2,500,000 to b e derived from the liquidation of reserves invested m discharged soldiers’ settlement mortgages. Special arrangements have been made for the liquidation of these mortgages by way of hypothetication of the securities. With the possibility of obtaining any further assistance under this heading I will deal ?horily li\ reviewing possible remedial measures, but in the meantime the item is being deducted to arrive at the net budgetary shortage. “On the other side of the accounts we have to consider what additional items of expenditure have to be provided for exchange based on the anticipated results for this year. ine largest expenditure increase will undoubtedly be under the heading • f cx change due to the fact that a considerable amount of the funds required in London for the current financial year were remitted during the closi i-, months of last financial year . ndm the exchange pool arrangements Hie expenditure on exchange for this >eai will not exceed £350,000. For the next financial year, even at the 10 pel cent, rate, this item would liaie been doubled, involving an increase of £350,000 in the sum required, ihe increase in the exchange rate adds to further £1.050,000 to the cost m New Zealand * currency of remitting payments due on loans contracted m the U “ In l Treasury estimates allow for a contraction of imports to such an extent that the exchangc smplus in London will total £4,000,000 and that the extra exchange costs under the indemnity arrangement wilt amount to £1,000,000— that is, 25 per cent, of the exchange surplus. “It is to be added that we have no precedent in New Zealand by which the possible accumulation of funds m London by reason of the altered exchange rate may be accurately forecast and "with the general uncertainty in external -conditions it wroulu be hazardous to attempt any precise estimate. Indeed there are authorities who consider that the accumulation o± funds in London will fall short of the stated figure and that any temporary loss will be recoverable later. -However /the estimate of £1,000,000 is taken as a working figure for the purpose of present calculations.

DEBT CHARGES. “As indicated in the Budget a very drastic reduction was in the borrowing for capital works for the current financial year. It would appear that the amount that can be provdied will be still less although a small amount will be necessary for carrying on essential works. The debt charges, however, will be considerably increased owing to the necessity for relying upon Treasury bill finance. to cover past deficiencies and financing general requirements during the year and the prospective shortage for next vear.

“The estimated increase in expenditure under this heading is £350,000. This estimate makes no allowance for a resumption of the funded debt payments to the British Government. Payments under this item have been suspended during 'the current financial year pursuant to the arrangement with the British Government, but if no further action is taken the half-yearly pyament will fall due on December 1 next. It appears likely, however, that some action in regard to war debts will be taken before then so that to some extent this item may be regarded as a contingent one if the . instalment

is paid. The next cost to be budgeted will be about £825,000.

BENEFIT FROM HIGHWAYS

“It will be remembered that part of the budget for the current financial year provision was made to retain iii the Consolidated Fund up to £500,000 of revenue that would otherwise have been transferred automatically to the main highways account. This provision is for the current year only and if it is not extended the result will be a comparative increase of that amount in the expenditure of the Consolidated Func PENSIONS. “Normally this is a progressive increase in the cost of pensions, but owing to the depression the increase for old-age pensions and family allowances will inevitably be larger than is usual.' Accordingly provision will have to be made for a further £50,000 for the cost of pensions. “To sum up the prospective budgetary position it would appear that we are faced with a gap an the finances of £9,850,000 made up as follows : Equivalent of current year’s shortage, £700,000; revenue decreases, customs £1,400,000, income tax, £750,COQ, stamp and death duties, £250,030; interest receipts, £220,000; P'ost and Telegraph profits £470,000; other items, £260,000; reserves, £250.000; total £5,850,000. Expen di time increases.—Exchange, extra cost exteimal debt charges on account of full year at 110 £350,000; extra cost external debt charges by reason of exchange increase to 125, £1050,000; allowed for cost exchange on surplus bank funds London, £IOO,C 00; total £2,400,000. “Additional interest and other debt charges £350,000; motor taxations, payable to main highways fund,' £SOO- - pensions, £50.000; total £3.330,000. •- * ' . - REMEiDIAL- MEASURES. 1 ‘ln the past two years large gaps in the public finances have had to be bridged in one way or another and as time' goes on the possibilities 1 of further remedial measures become more limited. “With the source of revenue seriously depleted there is the clearest need .for rigid economy in public expends ture and to this the Government is giving constant attention. During tlif ■past two years drastic cuts have been made in the expenditure and during the present year the Government lias had detailed reports of the national expenditure commission to work upon of the recommendations that have already been given 1 effect. A further net saving estimated at £IOO,OOO will be obtained next*" year arising out of the fact that the economies will be operative for the full year of the total recommendation of the commission.

“The items not yet given effect to amount to £1,150,000, but. £BOO,OOO of this is bound up in three items viz: Naval defence reduction to one cruiser standard, £200,000; reorganisation of hospital system, £300,000; and reduction in expenditure on agriculture, cancellation of subsidies on lime and fertiliser, etc., £300,000. “As a matter of policy it is not considered advisable to adopt the first Item and the position of the primary producers precludes' any possibility of adoption of the last item. “As for the reorganisation of the hospital system this is a matter that lias not been overlooked, but it is obviously a proposition that would take The grand total to the relief of the expenditure. The remaining recommendations of the commission are now being gone into, hut the most that can be hoped to be obtained from them is £IOO.OOO. “While on the question of economies I would like to recall the efforts that have been made, since the depression developed, to meet the situation b>- economies and adjustments in the expenditure of the Consolidated fund. Towards the close of the financial year 1929-30, right at the commencement of the trouble, efforts were made to keep down departmental expenditure and for that year a saving of £260,000 was made in the votes. In the following year savings and adjustments totalled £136 000 As the depression deepened in 1930-31 efforts in this direction were continued and savings aggregating £4,320,000 were effected. As tor the current financial year the economies and adjustments to be effected are summarised in the budget and amount in the aggregate to £3.-500.000 The grand total to the relief to thy Consolidated Fund from these savings and adjustments, since the depression developed amount to no less than £9— 490,000 briefly made up as follows: Savings.—Reductions in salaries ana wages, £2,310,000: suspension of war debts (net saving),. £3.370.000; reductions in grants and subsidies, £440,000- general reductions V departmental ’ votes, £1,760,000; reductions in railways and post and telegraph expenditure, £1,530.000: reductions m pensions, £300,000: total, £7,710,000. 'Adjustments.—Abolition of unemployment subsidy, £950.000: benefit from motor taxation. £300.000: other adjustments. £330,000, £1,780,000; total £9.490,000. . , ' . _ , “Some of the adjustments admittedly represent only ' a transfer of the burden to other accounts, but they do provide additional relief to the general budget. “it will. I think, be generally recognised that huge savings cannot be obtained without drastic action and the figures ~I have mentioned give some indication of the efforts made by the Government to meet the situation by effecting economies in pulic expenditure.”