GOVERNMENT'S POLICY

Manawatu Standard, Volume LIII, Issue 51, 27 January 1933, Page 7

GOVERNMENT'S POLICY

PRESENTED TO PARLIAMENT

STATEMENTS SUBMITTED

BY MESSRS. FORBES AND COATES WELLINGTON, Jan. 27. In the House of Representatives this morning, after..the formal business bad been transacted, statements of a comprehensive nature relating to the Government’s policy were presentedby Rt. Hon. G. W. Forbes and Rt. Hon. Jl G. Coates. Figures were given showing the decline in the value of trade and of the national income, and the decision to raise the exchange rate was defended. The effect of the alteration in the exchange was fully explained. Mr Coates said that it is proposed to maintain the present rate of exchange for a reasonable period. In the course of his statement Mr Coates said that a further reduction in the salaries of Government employees was not contemplated.

POSITION OFFARMERS. REVIEW BY PRIME MINISTER

EXTENSIVE STATEMENT.

The statement by the Prime Minister was as follows: Honourable members will recollect that on Ist December last, in intimating that it was proposed to move the adjournment of Parliament until 26th January, I stated that the intention was to allow Cabinet to give a fuller and more thorough examination of the proposals affecting the general economic position of the Dominion, and particularly the difficult condition of the farming industry—owing to the further drop in the prices of export produce in our external markets — than was possible while Ministers were closely engaged in Parliamentary work. After the House adjourned on 9th December the Government lost no time in making the necessary arrangements to have the fullest information supplied as to the effect of the low prices on the budgets of the farming community, and in this connection Dr. Hight and Professors Belshaw a.nd Tocker were asked to come to Wellington to make a report upon the changes that had occurred since the compilation of the report of the Economic Committee, of which they were members, in February, 1932. The report which they have furnished, m compliance with.this request, has been most helpful to the Government, especially m arriving at the decision or | Cabinet to bring about an increase I; in the rate of exchange. The mforma--1 tion supplied bv farmers’ agencies and | by the various State lending departjra ments showed that the farmer borrowH ers had slipped back very seriously m pi their payments of principal and mB'terest during the last twelve months. ARREARS ON LOANS. || To give honourable members some iff: idea of the magnitude of the arrears if' outstanding on loans to settlers m f respect of the State Advances Depart- ' merit and the Lands Department, I ' quote the following figures.—At 31st March, 1931, the amount owing by settlers to the State Advances Office was £411,740; at March 31, 1932, it was £835,760, and at September 30, 1932, the total had increased to £l,056,830. In the Lands Department £1,522,137 was due for rent and interest in arrears at September 30 last, and in addition the postponements oi rent and interest amounted to £283,650. I think members of the House will agree that the figures supplied by these two State departments furnish a fair index as to the position of mortgaged farmers generally m the Dominion. The growth of these arrears on the part of the farming community lias been particularly rapicl during the last few months owing to their credit and reserves becoming exhausted, and the more recent decrease in the prices of their products especially dairy produce, will no doubt accelerate this slide. It will be readily, seen that a serious position has arisen which will soon become a further problem for the already overweighted Consolidated Fund. The review of the economic position submitted bv the Economic Committee showed that it had become progressively worse since their report *n I ebruary last. Taking the figures of all New Zealand export prices for the period 1909-1913 as 100, m 1928 it had increased to 168; in November, 1932, it had fallen as low as 86, or a decrease of 49 per cent, in four years. I may mention, in passing, that the further recent decline in dairy produce prices is not taken into account in the figures I brave just quoted. trade return.

Now as to the external trade. The most obvious effects of this decline in export prices may be seen in the overseas trade return. In nno° value of our exports was £06,200,000, whilst in 1932 it was £33 600,000. The value of our imports for the same years was £44,100,000 and £22,800,000. These figures represent a decrease ot 40 per cent, in the value of our exports and 53 per cent, in imports. The heavy fall in imports is, of pour.se, the direct effect of the contraction in exports. , . , I will now take production m relation to national income. llie estimate of the national income is approximately made by adding about 20 per cent, to the official estimates of the total production. The following table sets out the position ESTIMATED VALUE OF TOTAL PRODUCTION. 1928-29 1932-33 £ £ Farm nroducts .... 82,100,000 49,000,000 Other 'products ...■■■ 41,200,000 32,500,000 Total production . 123,300,000 81,500,000 NATIONAL INCOME. IQ9R-29 1932-53 £150,000,000 £98,000,000 The year 1928-29 equals 100; 193233—£65,000,000, equals 60. There is thus a fall m the national income of 35 per cent. It _ may, theie fore, be concluded that the national money income, which constitutes the purchasing power of the community has declined by at least one-tlmd of the 1928-29 income. , , , Again, in regard to the internal tiade and finance, it ie inevitable that a decline of this magnitude should be reflected in the volume of internal tiade. The best available indication of the internal business is the return of total debits per week to all bank accounts in the Dominion published hy the C . eminent Statistician. These show that] in 1929 the average debitis ’ »e,e £20,900,000 and m 1932 £I3,SUU UUU. or a decline of 35 per cent, in the total volume of the financial business in the country. The figures I have given to the House present a striking record of the decline that has occurred m New Zealand’s income and trade effects of depression. The effects of the depression have been cumulative. Felt first by the farmers, they have passed on to the

producers of local goods and services of all kinds. The full extent of these effects, however, is only now beginning to be felt in internal trade. The farmers, in their efforts to maintain production, have drawn upon their resources of capital and credit. Now largely they have to depend solely, on the income from the sale of their products. As the resources ' upon which they can draw become progressively exhausted, their purchasing power must decline further, and the effect on the cities and towns must be felt more severely. ESSENCE OF DIFFICULTY.

It becomes apparent, therefore, that the essence of the present difficulty is in the progressive disappearance of profits and in the increase of losses. The restoration of sound business conditions, the expansion of production, the absorption ot the unemployed, the increase in purchasing power and in the demand and the revival of general business activity—all these must depend on the creation of such conditions as will permit profits to reappear. Profits depend on the relation of costs to prices l . Since 1929 export prices have declined by 49 per cent.; retail prices have fallen by only 19 per ceiit.; wholesale prices by 14 per cent., and wages by 16 per "cent. A reduction of internal prices and costs of about 35 per cent, is required to bring about the same relationship to export prices as existed in 1929. COSTS 'AND SELLING PRICES.

The main problem is to reduce the disparity between costs and selling prices. To let matters drift, and allow undirected deflation, to have full sway, would be obviously unthinkable and could not be countenanced by the Government. Such a policy would dangerously aggravate our already serious difficulties.' SUGGESTED REMEDIES.

Cabinet, in their consideration, of the position, have examined various suggested remedies having for their objective the increasing of prices, such as a rise in the rate of exchange, various forms of internal credit expansion, including a grant or bonus to the primary producers, and also a grant or subsidy to farmers financed by taxation. After mature deliberation, the Government came to the conclusion that an increase in the rate of exchange from 110 to 125 would be more advantageous to the country as a whole than any other method of easing our present difficlties. The Government approached the banks and reouested them to take the necessary action to give effect to this decision. In tlieir arrangement with the banks the Government have undertaken to indemnify them against any loss that may be incurred on the sale of exchange purchased at the new figure and a Bill will be introduced accordingly to obtain the necessary Parlia--1 mentary authority to give effect to this undertaking. I do not in this statement propose to deal in detail with the various arguments for and against this decision. Ample opportunity will be afforded to honourable members for discussing the subject. I will briefly mention some of the advantages which may be expected to accrue from the course that has been decided upon. The national income and the national spending power will be proportionately increased. Xt is estimated that the" proportion of costs likely to increase with a rise in the exchange is small. At the present time industry and trade are being contracted and unemployment has not decreased because much business cannot be conducted on a profitable basis. With production contracting as it is at present, because of maladjustment of costs and prices, a rise in the exchange which increases prices more than costs will certainly tend to arrest the decline and may stimulate an increase. It may be urged that the primary effect of a rise in the exchange is to increase the Budget expenditure through the increase in the cost of overseas interest payments and to reduce the Customs revenue temporarily, but the secondary and more important effect is to prevent an appreciably 'greater fall in the taxable capacity and not tax the receipts. Tt is confidently anticipated that the net benefit to the Budget from the increase in exchange rate will not be long delayed. The full effects of the present depression have not yet been fully felt, but it is quite certain that, unless further adjustments are made, the national income and taxable capacity will fall further. It will be remembered that a short time ago I expressed the opinion that the question of exchange was one that should be properly determined by the banks. Since that date, and consequent upon a close examination of tlie position, the Government came to the conclusion that the matter had become one of serious national importance and could not be left to outside agencies. If the country had been able to continue without an alteration in the rate of exchange no one would have been better pleased than myself, but in the history of all countries grave emergencies arise when it becomes necessary for a Government to interpose and place upon their own shoulders the responsibility for tlie course of action they deem best in the interests of the country. REASON FOR CHANGE.

What I stated on tlie occasion to 1 which I have referred was liiv opinion |in the light of the conditions then I existing. These conditions have unfortunately become more unfavourable and rendered action on the part of the Government imperative. I recognise that the action of the Government in bringing about an increase in the rate of exchange does not find favour with those engaged in the import trade and in other business circles, but I would earnestly ask those who are loudly criticising the Government to view the position from a national standpoint and consider what would happen if a

ECONOMIOJPOSITION. MEETING THE SITUATION.

BUDGET FIGURES EXPLAINED

policy of extreme deflation, with all its attendant evils, were allowed to hold sway. Two or the outstanding factors which appeared to the Government, were the existence of a distressed farming community and the unfortunate position of the unemployed. It is, indeed, a sad state of affairs -when 68,000 Of our citizens are out of employment at a time usually regarded as the busiest, season of the year. When we remember this fact, I feel certain that the pressing nature of the problem jnust be brought home to everyone of us. I would ask our critics to regard the position in the same' spirit as actuated the Government in coining to its decision. If orthodox methods fail to find a solution in times of grave emergency, then I claim that the Government is justified in resorting to other means in order to lighten the burden of the people. STIMULATION OF INDUSTRIES EXPECTED. I feel confident that with the stimulation which will now be. given to both primary and secondary industries we may look forward to a gradual but certain absorption of a large number of those who are at present unemployed. The importance of this aspect of tlie present conditions can, in the view of the Government, no longer he ignored. There are those who hold different opinions from the Government in regard to the policy of raising the rate of exchange to relieve what all must agree is a very serious position, but it is the responsibility ot the Government to decide the course to be adopted. This we have done and we are confident that' the wisdom of this step will ere long be apparent.

In liis statement to the House Rt. Hon. J. G. Coates, Minister of Finance, said:—- i TJ . Since the adjournment of the House the Government have again taken thorough stock of the economic position of tlie country and have considerod ways and means of meeting the situation. In particular the Government have been concerned about the plight of the primary industry which is the basis of the whole economic structure of this Dominion.

COSTS AND PRICES DURING 1932. There was a further heavy fall in the export price, and the general level of these prices as shown by the index numbers is now little more than onehalf of what it was in 1929. Comparing the position as shown by the Government Statistician’s Index of Prices in 1914 and in November, 1932, we have export prices 21 per cent, below 1914; farm expenditure (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 outlook of a large proportion of farmers increasingly difficult. They have been able to carry on and to maintain Eroduction only by failing to meet tlieir xed charges and by living on capital, but farm maintenance is suffering and in many cases stock are being sacrificed. If some effective action is not taken a greatly reduced volume of production niugt assuredly follow. During the past year much was done in one. way and another in the direction of relieving the situation, but it all fell far short of what was required to bridge the widening gap between costs anti prices. New Zealand, in common with other countries, has been looking to recovery of world prices. Unfortunately, these hopes have not been realised. On the contrary, as is well known, prices have fallen still further. The fall has been particularly severe in those products which are tlie exports of New Zealand. We have not yet received the full benefit from the agreements made at Ottawa, and I am confident that, following the World Economic Conference, steps will be taken by the great Powers to remove some of the principal underlying causes' of tlie depression and to bring about a rise in world prices. These measures will assist the Dominion, but the Government are 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 industries. At the outset the general line of approach favoured by the Government in bringing costs and prices into line may be indicated. CHOICE TO BE MADE.

It is frequently said that an initial and fundamental choice must be made, the choice between either reducing costs or increasing 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 he Bridged is a wide one. By approaching the problem from both ends, by deliberately planning to increase receipts and, where possible, to reduce costs, we shall bring adjustment with less dislocation than if we seek to obtain adjustment by one method alone.

Presently I shall refer to certain directions in which the reduction of costs as well as the increasing of receipts is to be sought, but at once I may say that a further reduction in the rates of wages and salaries in Government employment is not contemplated, and this is itself n reason for our taking in hand adjustments of an alternative kind. METHODS CONSIDERED. All the suggested methods such as a bounty on exports, remission of rates and land tax, exemption of farm lands from income tax, and the direct issue of credit by the Government were carefully considered, but the raising of the exchange rates was deemed preferable to a.ll other methods, and, as honourable members are aware, action lias already been taken in this direction. Arrangements have been made with the Associated Baides whereby the exchange rate for telegraphic transfers, New Zealand on London, has been raised from £llO to £125 for £IOO in London, and the other rates have been raised correspondingly. This action has been taken by the banks at the request of the Government, and as a. method of economic/ adjustment. BANKS SAFEGUARDED.

This being so it is reasonable that the banks should be safeguarded against loss in giving effect to the Government’s policy. Accordingly, the Government have agreed to safeguard the banks against loss ariving out of exchange dealings at the new rates. This, in effect, means that the Government will purchase any surplus London credits bought by the banks at tlie new rates of which they are unable to dispose at the current rates. In this way the Government may be called upon to purchase more exchange than is actually needed for current requirements, but any suc ,h surplus amount can be used to pay off the debt abroad with funds borrowed in New Zealand. The net effect, apart from the exchange, is thus a transfer of debt from abroad to New Zealand. While some surplus exchange may have to be purchased during Hie first year, it is considered that, this is but a temporary phase as conditions will soon adjust themselves to the

DEPOSIT AND OVERDRAFT

new position. The Government recognise that, at whatever the rate exchange may be stabilised, it is a most important factor in the interests of all sections of the community. k This being so, it is proposed to maintain the present rate of exchange for a reasonable period, and I may say that it will not be departed from lightly. It is, or course, impossible to fix any definite period as we cannot foresee the course of events either in New- Zealand or abroad, a Bill to give effect to tlie arrangement with the banks will shortly be introduced. INTEREST CHARGES. With fne fall in prices of the decrease in the volume of business/ fixed charges have become a serious problem in practically ail businesses, and as the prices of primary products' have fallen most severely the burden of fixed charges is particularly acute the business of farming. Thus the question of lowering interest charges must lie a major item in any scheme for adjustments of costs. Tlie Government are anxious to bring about lower market rates of interest on a sound basis. 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 out in the 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 longterm, rates are also coming down fairly rapidly in Australia. Comprehensive steps were taken to reduce the rates of interest' on a.li existing securities of the Government and local bodies, and this, together with other measures, lias led to lower market rates of interest in New Zealand. Our •market rates of interest continue to be relatively high and it- would appear that the situation is influenced by the rates on the large volume of existing securities. The Government consider it essential that the interest rates on existing securities should be brought down to a lower level, and at present we are discussing ways and means ot - achieving this object. I am not in a position at this stage to make any definite statement, but 1 hope in 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 insofar as local body debts are concerned, because there are so many local authorities with securities on the market. Any reductions brought about in the interest rates on local' body debts insofar as they exceed the benefit at present derived from the 10 per cent, stamp duty would enable local authorities to give further relief to the ratepayers. Any such relief would, of course, be of direct assistance m 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.

RATES. Concurrently with the reduction of interest on Government and local bod 3’ securities we have also to consider deposit rates and overdraft rates. The 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 hon. members are aware, legislation is already upon the Statute Book providing for a 20 per cent, reduction and for the review of individual cases by the Mortgagors Adjustment Commissions and the Courts. Insofar as a statutory reduction is concerned, I do not think it would be in the interests of the 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. Tlie existing powers for the review of individual cases are 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 be brought down, this in itself must make mortgage investments relatively more attractive than they are at present and consequently will induce more investments in this direction. In fact, a lowering of interest rates on gilt edged securities must benefit all borrowers as it will permeate through the whole field of investment. RAILWAY FREIGHT CHARGES.

As a further step towards bringing down costs arrangements are being made with the Railways Board for a reduction of about 15 per cent, in freight charges, covering a fairly wioo range of commodities. This will add to our Budgetary difficulties, perhaps to the extent of £I6O,OCX) in the first year, although increased traffic at thq lower rates may later retn.ee the amount of the loss involved. In any case, it is considered that the reduction is warranted from tlie more important viewpoint of assisting to reduce working costs. ■

THE TARIFF. It has been the practice of New Zealand Governments during the past few years to hold periodic inquiries into the Customs tariff. Such inquiries were held in 1921 and 1927, and the time would, in the ordinary course, be ripe for a further investigation. The need for such ail investigation is all the more urgent owing to_ the existing economic and financial crisis wliicli has liad such a catastrophic effect on world prices. In New Zealand, more particularly, the tariffs should De overiiuuied owing to Che fact that our export trade depends almost wholly upon our primary products, and the lower prices obtainable have made it necessary to reduce the costs of production to the lowest possible level consistent with an orderly economic and industrial development. No one will question the fact that the incidence of Customs taxation is a very important fnctor in connection with such costs, and with the general cost of living of the whole community. OTTAWA AGREEMENT. Apart from these considerations New Zealand is committed under the Ottawa Agreement to conduct such an inquiry, the question having been there approached from the viewpoint of facilitating trade with the. United Kingdom in return for valuable concessions given to this Dominion. The Government have no intention of exposing to unreasonable competition any industry which can function on an economical and efficient basis. On tlie other hand, as I have indicated, the corntry cannot afford to maintain tariffs which increase the costs of production and the cost of living unless a real benefit accrues to the community therefrom.

INQUIRY TO BE MADE. It is intended to set up a small body, which will review the whole position; and make a recommendation with respect to tariff rates. It is proposed that the inquiry should commence as soon as possible. It will be remembef,.l.l mat., muler article 8 of the Ottawa Agreement, it was arranged that the United Kingdom predueers should have an opportunity of putting forward their views at the tariff investigation. The Government are. in communication with His Majesty’s Government in the United Kingdom with a view to ascertaining when the producers there will be in a position to

PROSPECTIVE BUDGETARY POSITION. *

furnish the necessary information. When a reply is received, an indication will be given as to the date on which the inquiry will commence. The personnel of the investigating body wih be made known at as early a date as possible after the rising of Parliament.

The various proposals outlined will, for the most part, accentuate rather than relieve the budgetary position, but, taking a broader view, it cannot be gainsaid that if we fail to take steps to enable our primary industries to carry on, and to maintain a high state of efficiency, our budgetary position will before long be still more seriously affected. Already the shrinkage in the national income lias been such as seriously to diminish the taxable capacity of the country. A justification of the increased exchange rate from the ' viewpoint of the Government’s Budget is that the increase which this action should produce in our national income, as measured in New Zealand money, must later strengthen also our taxable capacity. The budgetary situation for the current financial year may bfi regarded as satisfactory in that in general the estimated results for the year will be fairly closely realised. The position will be reviewed in more detail later when tlie figures for the first nine months of the year have been audited and are available for publication. DEFICIT FOR CURRENT YEAR. .In the meantime, I may say that our expectation is that with the utilisation of reserves amounting to £2,500,000 the year will close with a deficit in the vicinity of £700,000. - For next financial year, if the revenue and the _ expenditure were the same as is now anticipated .for this year, we would, of course, come out with a deficit of a similar amount. Unfortunately, our problem is not as simple as that, and to obtain the prospective shortage we have to acid to this £700,000, the further anticipated shrinkage's in the revenue, and any unavoidable increases in expenditure. While _ the raising of the exchange rate will be of immediate benefit to the primary producers, it will be some time before tlie beneficial reaction can be felt by tlie rest of tlie community or be reflected in the Budget. In fact, it is anticipated that the immediate effect on tlie Budget will be an adverse one pending the time when business generally can bo adjusted to the changed conditions. NEXT FINANCIAL YEAR.

Accordingly, so far as tlie next financial .year is concerned, it is considered advisable to allow for a further falling off in the revenue and particularly in the Customs revenue. In addition to the effects of the increase in the exchange rates and the other proposals which I have already outlined, the revenue would inevitably have been further affected by the continuancse of the slump conditions, the effects tendering to he cumulative. In addition, in estimating tlie Customs revenue, we have also to allow for tlie fact that the concessions given, following tlie Ottawa Conference, will be operative for tlie full year. Apart from all these special considerations, tlie difficult}' of forecasting the budgetary position for 1933-34 is increased by many uncertain factors over which we have no control; for- instance, the trend of overseas prices for primary products and any steps that may be taken following tlie World Economic Conference may material}’ affect our estimates.

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

Interest receipts.—The interest receipts from the railways will be directly a fleeted by tlie proposed reduction in freight charges, and with a further probable decline in the receipts from other investments the net shrinkage! is estimated a.t £220,000. Post and Telegraph profits.—The Post Office revenues continue to reflect tlie general slackness in business, but on the other hand if the vices are to he maintained there is a limit to the extent to which the falling revenue can be offset by savings in expenditure. For these reasons, on tlie presem, indications the Post Office estimates that it will not be able to do more than make ends meet next year so that no revenue is likely to be received under the heading of Post and Telegraph profits. This will increase the revenue shrinkage by tlie amount anticipated to come to hand, this year, viz., £470 000. . , Other Items. —The remaining items of revenue will all be more or less affected by the continuance of the present conditions, and a net decrease of £260,000 lias been put down for such items.

Reserves.—This year’s revenue will include £*2,500,000 to he derived from the liquidation of the reserves invested in discharged soldiers’ settlement mortgages. Special arrangements have been made for the liquidation of these mortgages by way of hypothecation of the securities. With the possibility of obtaining any further assistance under this heading I will deal shortly in reviewing tlie possible remedial measures, hut in the meantime the item is being deducted to arrive at the net budgetary shortage. On tlie other side of tlie accounts, we have to consider what additional items of expenditure have to be provided for.

Exchange.—Based on the anticipated results for this year, the largest expenditure increase ivill undoubtedly be under the heading of exchange, due to the fact that a considerable amount of the funds required in London for the current financial year were remitted during the. closing months of last financial year. Under the exchange pool arrangements the expenditure on exchange for this year will not exceed £850,000. For the next financial year, even at the 10 per cent, rate, this item would have been doubled, involving an increase of £350,000 in the sum required. The increase in the exchange rate adds a further £1,050,000 "to-'the cost in New Zealand -currency of remitting payments due on loans contracted in the United Kingdom. In addition, the Treasury estimates allow for a contraction of imports to such an extent that the exchange surplus in London will total £4,000,000 and that the extra exchange costs under the indemnity arrangement will amount to £1,000,000 (that is 25 per cent, of the exchange surplus!. t It is to be added that we have no precedent in New Zealand by which the possible accumulation of funds in London, by reason of the altered exchange rate, may bo accurately fore-

cast, and with the general uncertainty in external conditions it would be hazardous to attempt any precise estimate. Indeed, there are authorities who consider that the accumulation of 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 the present calculations. DEBT CHARGES. As indicated in the Budget a very drastic reduction was made in the borrowing for capital works for the current financial year. For next financial year it would appear that the amount that can be provided will be still less, although a small amount will be necessary for carrying on essentia] works. The debt charges, however, will be considerably inei-eased owing to the necessity for relying upon Treasury bill finance to cover past deficits and financing general requirements during the year and the prospective shortage for next year. 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 arrangements made with the British Government, but if no further action is taken the half-yearly payment will fall due on December 1 next.

It appears likely, . however, that some action in regard to the 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 net cost to the Budget will be about £825,000. BENEFIT FROM HIGHWAYS REVENUE.

It will be remembered that, as part of the Budget for the current financial year, provision was made to retain in the Consolidated Fund up to £500,000 of revenue that would otherwise have been transferred automatically to the Main Highways Account. This provision was 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 Fund. PENSIONS.

Normally there 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.

Equivalent of current year’s shortage 700,000

Revenue Decreases — Customs 1,400,000 Income tax 750,000 Stamp and death duties Interest receipts 220,00 f Post and Telegraph profits ... Other items 260.000 Reserves 2,500,000

Total £5,850,000 EXPENDITURE INCREASES. Exchange— Extra cost external debt charges bn account of full year at 110 350,000 Extra. cost external debt charges by reason of exchange increase to 125 1,050,000 Allowed for cost of exchange on surplus bank funds in London : 1,000,000 Total £2,400,000 Other Items — Additional interest and other debt charges _ 350,000 Motor taxation payable t 0... Main Highways Fund 500,000 Pensions 50,000 Total £3,300,000 Grand total £9,850,000 REMEDIAL MEASURES. In 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 of further . remedial measures become more limited.

ECONOMIES IN EXPENDITURE. With tlie source of revenue seriously depleted, there is the clearest need for rigid economy in the public expenditure, and to this the Government are giving constant attention. During the past two years drastic cuts have been made in "the expenditure, and during the present year the Government have had the detailed report of the National Expenditure Commission to work upon of the recommendations that have already been given effect to. 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 recommendations" 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; reduction in expenditure on agriculture, cancellation of subsidies on lime, and fertilisers, 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 adopting the last item. As for the reorganisation of the hospital system, this is a matter that has not been overlooked, but it is obviously a proposition that would take some time to obtain any relief to the expenditure. The remaining recommendations of the Commission are now being gone into, but the most that can be hoped to be obtained from them is £200,000. ECONOMIES AND ADJUSTMENTS. 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 by economies and adjustments in 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 £261). 1 was made in the votes. In the following year the savings and adjustments totalled £1,360,000. As the depression deepened in 1931-32 savings aggregating £4,320,000 were effected. As for the current financial year, the economies and adjustment to be effected are summarised,in the Budget and amount in the aggregate to £3,550,000. The granted total of the relief to the 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 and wages, £2,310,000; suspension of war debts (net sa.ving). £1,370,000; reductions in grants and subsidies, £440,000; general reductions in departmental votes, £1,760,000; reductions in Railways and Post and Telegraph expenditure, £1.530,000; reductions in pensions, £300,000; total — £7,710,000. Adjustments. —Abolition of unemployment subsidy, £950.000; beuefit from motor taxation, £300,000: other adjustments, £330,000; total, £1,780,000; grand total, £9,490,000. Some of tlie adjustments admittedly represent only a transfer of the burden to other accounts, but they do provide additional relief to the general Budget. It wiTl, 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 Gqevrnment to meet the situation by effecting economies in the public expenditure. HIGHWAYS REVENUE. From the general position I have outlined, I think it will be clear to all that the assistance being received this year from the main highways revenue will have to be continued next year for the position is such that the best possible use must be made of all revenues to the State. SAVINGS IN INTEREST. As I have already indicated, arrangements for dealing with the interest on Government and local body securities have not yet been finalised, but if our proposals can be successfully carried through a net saving of about £400,000 will will accrue to the Budget. LIQUIDATION OF RESERVES. The present book value of past surpluses invested in the Discharged Soldiers’ Settlement mortgage is £10,500,000. The sum of £2,500,000 will be drawn upon for the current financial year, and we will doubtless eventually have to write off substantial losses. Even so, an ample margin will remain, and I hope to arrange to liquidate up to a further £2,000,000 to augment the revenues for the next financial year. TAXATION.

For the rest, to bring the prospective deficit down to say what may be regarded as a safe amount, I am niraid mere will be no alternative but to have further recourse to additional taxation. Details of this cannot be given at present as the proposals have not yet been finalised, Lhid 1 think it will be necessary to find ways and means of raising up to which, with the other items I have mentioned, will bo sufficient to bring the deficit down to about £4,500,000. This will mean increasing our floating debt by that amount, but against that it should not be overlooked that the expenditure will include provision for £1.400,000 under the statutory debt repayment scheme. This will mean that the net increase in the debt as a result of the prospective shortage will not be much in excess of £3,000,000 which amount may be considered as safe. That is to say, it will 'not be large enough to in any way endanger the financial stability of the country, which must be s-afoguarded at all costs. The Government .have felt obliged, in the general interest, of the Dominion, to take a course of action of an unprecedented character. This has been done with a clear realisation of the implications and of the difficulties' in the way. ~We are confident that the country will recognise as the days pass that the decision made is amply justified.

After the Ministerial statement had been read, Mr Forbes intimated that he expected the Banking Indemnity Bill would be ready for presentation at 2.30. He suggested that the House should be adjourned until then, and this course was adopted, the House adjourning at 11.25 o’clock.

FORMER MINISTER. ASKED TO FORM NEW PARTY. DEPUTATION TO MR STEWART. (By Telegraph—Special to Standard.) WELLINGTON, Jan. 27. Five of the strongest opponents to the Government’s exchange policy made overtures yesterday afternoon to Mr W. Downie Stewart, ex-Minister of Finance, to take his courage in both -hands and accept the leadership of the new group which Mr Stewart was informed could be formed to combat the effects of the rural dominion in the Cabinet. Those comprising the deputation were Messrs A. J. Stallworthy, A. Harris, R. A. Wright, W. A. Yeitch and H. Holland, and a full statement of their views was placed before the ex-Minister. It is understood that it was intimated that offers had already been received from professional and business interests in Wellington to guarantee the organisation of a party such as they proposed. Mr Stewart was reminded of the unmistakable call for his services in leadership which at the present time was resounding from one end of New Zealand to the other. Tire members concerned declined when approached to even discuss the nature of their interview so it is not clear whether Mr Stewart gave a definite promise to consider their representations. It is assumed that his answer was indefinite because his previous statement was tliat his reason for leaving the Ministry was to avoid causing the Government embarrassment. At- the same time the expectation is that a great deal more in a positive sense will he heard of the new movement before the session proceeds much further, especially in view of the activities in the cities which will take definite shape at a conference of delegates in Wellington on February 8. The Parliamentary atmosphere is full of rumours, the .most extraordinary being that the Prime Minister intended to resign. Although the absurdity of the rumour was perhaps obvious, and hardly worthy of official denial, it was, nevertheless, conveyed to Mr Forbes, who promptly described it as rubbish. “I don’t run away from my job,” lie declared. "The harder it is, the more I consider it my duty to remain oil deck, and if necessary go down with the ship.”