THE H.B. TRIBUNE SATURDAY, AUGUST 20, 1927 PUBLIC DEBT EXTINCTION

Hawke's Bay Tribune, Volume XVII, Issue 211, 20 August 1927, Page 6

THE H.B. TRIBUNE SATURDAY, AUGUST 20, 1927 PUBLIC DEBT EXTINCTION

by any means the least interesting features in connection with the debate on the Budget were Sir Joseph Ward's criticism of the sinking fund scheme which is now in operation for the ultimate extinction of our Public Debt and the reply thereto made by Mr. W. Downie Stewart, the present Minister of Finance. No doubt the latter gave particular attention to this, phase oi the general attack on his administration because it came from one who had for many years occupied the same highly responsible office which he himself now holds, thus giving it more apparent weight. The present Minister seems to have had little difficulty in disposing of Sir Joseph’s claim that a mistake was made in throwing 'over the plan which was originated in Liberal days and adopting that which is now at work. A little examination of the two schemes will probably convince most people that, if the real purposes of a sinking fund—the actual redemption of interest-bearing debt—is to be served at all, then Mr. Downie Stewart was on a much better wicket than Sir Joseph Ward.

Under the plan which was enacted by the Liberal Government in 1910 there was to be made at the end of each financial year an appropriation from the Consolidated Fund which, if repeated annually and invested at compound interest, would in 75 years equal the amount of the Public Debt oustanding at the close of such year. By this method it was intended that, on the expiry of the period mentioned after our last State borrowing had taken place, the whole of our debt would be wiped out. The fly in ths ointment of this rather attractive looking plan lay in the method of investment of tint sinking-fund appropriations. This, it was directed, should take the form of loans to settlers, workers and local authorities through the State Advances Office. That, of course, meant a huge accumulation of investments in a form which would make it extremely difficult, without grave disorganisa. tion of private and local body finance throughout the country, to get in the fund when wanted for its primary purpose of debt redemption. With regard to loans to wittiers and to workers the process could scarcely prove to be anything short of disastrous in a case such a 8 this where so many millions must he involved.

Under the scheme adopted in 1925 and now in vogue provision i s made for annual appropriations that are calculated, at compound interest, to wipe out the Public Deht at the expiry of sixty, instead of seventvfive, years from the date of the last State borrowing—both plans seem to contemplate a cessation of borrovrit-g at some time or other. But, in place of these sinking-fund appropriations being invested as before through the

Advances Office, they are to be applied, as favourable occasion offers, in the purchase and actual cancellation 4f some or other or the many outstanding securities issued by the Government. In order to maintain the force of compound interest accumulation in the sinking fund interest at a stated rate upon the amount of redeemed stock continues to be paid into it. This plan, we are now told by the present Minister, is an adaptation of that in force both in Great Britain and in Australia, and has consequently the approval of the best financial brains in both those countries. Even to the layman it has the manifest advantage over our earlier scheme that it is really effecting the proper purpose of a national sinking fund inasmuch as it is gradually liquidating the capital debt, instead of merely building up against it internal assets of an unrealisable character. As Mr Downie Stewart puts it, the new system means that the debt would be repaid much m the same manner as under the table mortgages with which first our building societies and then our State Advances Office have made us familiar.

There are doubtless still some sceptics—and we have to confess ourselves among them—who ire doubtful as to the real advantages of eyen such a sinking fund plan as the present one so long as we go on borrowing more than we are paying back. A sinking fund raised out of the earnings of some specified under taking—especially one likely to suffer deterioration or to become obsoletein order to repay the capital borrowed to institute it is understandable as prudent business safeguard. But, with regard to a general body of outstanding debt, to gather taxes with one hand to repay a little of it and at the same time borrow more with the other—in each case nt snm< quite appreciable expense—seems to the ordinary man to be a rather futile proceeding, the net result being not quite so good as a revenue “surplus” applicable to public works. However, the great captains ol finance seem to know differently, and to their verdict we must bow in all the humility of confessed ignorance. It may be, of course, that the fart of there being a fund ni frequent operation buying up the national securities will make these more acceptable to the in resting public, and possibly this is what to some extent actuates public financiers in setting up sinking funds before they have stopped borrowing more than they pay off. Tn this respect our scheme of 1925 holds a decided advantage over that of 1910, Proh ably, too, as an afterthought, the taxpayer unwittingly submits without special protest to the levy for a sinking-fund forming part of established annual outgoings, when he would squeal horribly at the proproduction of a “surplus” of equal amount. That is the ‘'psychological'' aspect of the inevitable squeezing