Government Reveals Deficit of Five and a Half Millions

Manawatu Times, Volume LVI, Issue 7067, 28 January 1933, Page 4

Government Reveals Deficit of Five and a Half Millions

New Taxation of Two and a Half Millions

Policy Statement in House

-flrhon the House met in Wellington at 11 o’clock this morning the Prime Minister (Mr Forbes ) and the Minister for Finance (Mr Coates) made lengthy statements of policy which will be found below. Mr Coates intimated that so rapid had been the country’s decline that a gap between revenue and expenditure of nearly ten millions had to'be bridged. The Government’s remedial measures include fclio imposition of additional taxation of £2,400,000. Summarised Mr Coates’s figures were as follow: —

£3,600,000

Mr Forbes’ speech was as follows: "Honourable members will recollect that on December Ist last, in intimating that it was proposed to move the adjournment of Parliament until tho 26th January, I stated that the intention was to allow Cabinet to give a fuller and more thorough examination of proposals affecting the general economic position of the Dominion and particularly the difficult condition of the farming industry owing to the further drop in prices of export produce in our external markets than was possible while Ministers were closely engaged in Parliamentary work. After the House adjourned on the 9th December, the Government lost no time in making the necessary arrangements to have tho fullest information supplied as to the effect of the low prices on the budgets of the fanning community, and in this connection Dr. Hight and Professors Belshaw and Tocker wore asked to come to Wellington to make a report upon tho 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 in compliance with this request has been most holpful to the Government, especially in arriving at the decision of Cabinet to bring about an increase in the rate of exchange. FARMERS RAPIDLY SLIPPING BACK. The information supplied by farmers’ agencies and by the various State lending departments showed that the fanner borrowers had slipped back very seriously in their payments of principal and interest during the last twelve months. "To give hon. members some idea of the magnitude of the arrears outstanding on loans to settlors in respect of the Stato Advances Department and the Lands Department, I quoto tho following figures: At the 31st March, 1931, the amount owing by settlers to the State Advances Office was £411,740. At the 31st March, 1932, it was £835,760, and at 30th September, 1932, the total had increased to £1,056,830. In the Lands Department, £1,622,137 was due for rent and interest in arrears at the 30th September last, and in addition the postponements of rent and interest amounted to £283,650.

lions. These figures represent a decline of 40 per cent, in exports and 53 per cent, in imports. The heavy fall in imports is of course the direct effect of the contraction in exports. THE NATIONAL INCOME. "I will now take production in relation to national income. Tho estimate of national income is approximately made by adding about 20 per cent, to the official estimates of total production. The following table sets out in millions sterling the position:

Taking 1928-29 as equalling 100, there is thus a fall in national income of 35 per cent. It may therefore bo concluded that tho national money income, which constitutes the purchasing power of the community, has declined by at least one third of tho 1928-29 income.

"Again in regard to internal trade and finance, it is inevitable that a decline of this magnitudo should be reflected in the volume of internal trade. The best available indication of internal business is the return of total debits per wook to all Bank accounts in the Dominion published by the Government Statistician. Those show that in 1929 the average debits were £20.9 millions and in 1932 £13.5 millions, or a decline of 35 per cent, in the total volume of financial business in the country.

CUMULATIVE DECLINE.

“The figures I have given to the House present a striking record of the decline that has occurred in New Zealand’s income and trade. The effects of tho depression have been cumulative., Felt first by the farmers, they have passed on to tho 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 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 tho cities and towns must be felt more severely. STEPS TO RECOVERY. “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. Tho expansion of production. The absorption of the unemployed. The increase in purchasing power and in demand, and The revival of general business activity. All these must depend on tho creation of such conditions as will permit profits to reappear. “Profits depend on the relation of costs to prices. Since 1929 export prices have declined by 49 per cent. Retail prices have fallen by only 19 per cent., wliolosalo prices by 14 per cent, and wages (nominal) by ,18 per cent. COSTS MUST BE REDUCED 35 PER CENT. “A reduction of intornal pricos and costs of about 35 per cent, is required to bring about the same relationship to export prices as existed in 1929. Tho main problem is to reduce the disparity .between costs and, gelling

“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 in the Dominion. “The growth of these arrears on the part of the fanning community has been particularly rapid during the last few months owing to their credit and Tesorves becoming exhausted, and the more recont decrease in tho prices of their products, especially dairy produce, will !no doubt accelerate this slide. It will be roadily seen that a serious position has arisen which will soon become a further problem for the already over-weighted Consolidated Fund. EXPORT PRICES PROGRESSIVELY WORSE. “The review of tho economic position submitted by the Economic Committee showed that it had become progressively worse sinco their report in February last. Tho following figures will illustrate this: Taking the index figure of all New Zealand export prices for the period 1909-1913 as 100, whilst in 1928 it. had increased to 168, in November, 1932, it had fallen as low as 86, or a doorcase of 49 per cent., in four years. I may mention in passing that tho further recent decline in dairy produce is not taken into account in these figures. “In overseas trade, in 1928, tho value of exports was £56.2 millions, whilst in 1932 it was £33.6 millions. The value of our imports for the same years was £44.1 millions sad £22.8 mil*

"To lot matters drift and allow misdirected deflation to have full sway would bo obviously unthinkable and could not be countenanced by the Government. Such a policy would dangerously aggravate our already serious difficulties.

"Cabinet in its consideration of tho position has examined various suggested, romedies 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 fund or bonus to 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 £llO to £125 would be more advantageous to the country as a whole than any other method in easing our present difficulties. BANKS TO BE INDEMNIFIED. "The Government approached the banks and requested them to take the necessary action to give effect to this decision. In their arrangement with the banks the Government have undertaken to Indemnify them against any loss that may ho incurred on the sale of exchange purchased at the new figure, and a Bill will he introduced accordingly to obtain the necessary Parliamentary authority to give effect to this undertaking. BENEFITS CLAIMED. "I do not in this statement propose to deal in detail with tho various arguments for and against this decision. Ample opportunity will bo afforded to honourable members for discussing the subject. I will briefly mention some of the advantages which may bo expected to accrue. Tho national income and the national spending power will be proportionately increased. It is estimated that the proportion of costs likely to increase with a rise in exchange is small. At the present time industry and trade aro (being contracted and unemployment has not decreased because much business cannot he conducted on a profitable basis. With production contracting as it is at present because of the maladjustment of costs and prices, a rise in exchange which increases prices more than costs iVill certainly tend to arrest the decline and may stimulate an,increase. "It may bo urged that tho primary effect of a rise in exchange is to increase Budget expenditure through the increaso in tho cost of overseas interest payments and to reduce Customs rovenue temporarily, but the secondary and more important effect is to prevent an appreciably greater fall in taxable capacity and non-tax receipts. It is confidently anticipated that the net benefit to tho Budget from tho ineroase in exchange rates will not bo long delayed.

FULL DEPRESSION EFFECTS NOT YET FELT.

"The full effects of the presont depression have not yet been fully felt, but it is quite certain that unless further adjustments aro made the national income and taxable capacity will fall further.

WHY EXCHANGE WAS NOT LEFT TO BANKS.

“It will be remembered that a short time ago I expressed tho opinion that the-question of exchango was ono that should bo properly determined by tho Banks. Sinco that date and consequent upon a close examination of the position the Government came to the conclusion that the matter had become one of serious national importance and could not be left to outsido 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 the course of action they deem best in the interests of the country. What I stated on the occasion to which I have roferred was my opinion in the light of conditions then existing. These conditions have unfortunately become more unfavourable and rendered action, on the part of tho Government imperative, APPEAL TO OPPONENTS. “I recognise that the action of the Government in bringing about an increase in the rats of exchange does not find favour with those engaged in the import trade and in otheg 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 policy of extreme deflation with all its attendant evils were allowed to hold sway. “SAD STATE OF AFFAIRS.” Two of tho outstanding factors which appealod to the Government were the existence of a distressed farming community and the unfortunate position of tho 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 wo renicmher this fact I feel certain that the pressing nature of tho problem must be brought home to everyone of us. I would ask our critics to regard the position in tho same spirit as actuated the Government in coming to its decision. If orthodox methods fail to find a solution in times of gravo emergency then I claim that the Government is justified in resorting to other moans in. order to lighten the burdens of the, people.

“I feel eonfidont that with the stimulation which will now be given to both primary and secondary industries wo may look forward to a gradual but certain absorption of a largo number of those who are at present unemployed. • Tho importance of this aspect of prosont conditions can in tho view of the Govornmont no longer bo ignored. “It is the responsibility of tho Government to decide the course to be adopted. This wo have done and. we aro confident that the wisdom of raising tho exchange will ,ere lomz be anoarant-

MR COATES’S STATEMENT.

PROPOSALS TO BRING DOWN COSTS.

LOWER INTEREST RATES.

EFFECTS OF HIGHER EXCHANGE,

In the course of his statement, tho Minister of Finance, Rt. Hon. J. G. Coates, deals with tho position of the farmers and says that, if some effective action is not taken, a greatly reduced volume of production must assuredly follow. What has been done foil far short of what was required to bridge the gap between costs and prices. Unfortunately hopes of a recovery of world prices have not been realised; prices have fallen still further, and particularly so in regard to New Zealand’s staple exports. The full benefit of tho agreements made at Ottawa have not yet been received. CANNOT WAIT FOR WORLD CONFERENCE.

"I am confident that following the World Economic Conference stops will bo taken by tho great Powers to remove some of tho principal underlying causes of tho 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 tho situation that we cannot afford to wait any longer for assistance from these sources We must immediately take steps of a far-roaching naturo to assist our primary industries. 1 ‘ Choice must be made between cither roducing costs or increasing prices —otherwise and less accurately, the choice is said to Mo bctwcon “ deflation’ > and “inflation.” Our view is that with tho choice of reducing costs or increasing monetary receipts tho country should deliberately proceed by both methods. The gap to bo bridged is a wide one. By approaching tho problem from both ends by deliberately planning to increase receipts and where possiblo to reduce costs, wo shall bring adjustment with less dislocation than if wo seek to obtain adjustment by one method alone. NO WAGES C?T. “I may say at once that a further reduction in the rate of wages and salaries in tho Govemmont employment is not contemplated and this in itself is 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 and the direct issue of credit by the Government wore carefully considered, but the raising of the exchange rates was deemed preferable to all other methods. WHAT BANKS INDEMNITY MEANS “The Government have agreed to safeguard the Banks against loss arising out of exchange dealing at the new rates. This in effect means that the Government will purchase any surplus London credits bought by tho Banks at tho 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 such surplus amount can be used to pay off debt abroad with funds borrowed in New Zealand. The net effoct apart from exchange is thus a transfer of debt from abroad to New Zealand. PRESENT RATE WILL BE MAINTAINED. “The Government recognise 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 tho present rate of exchange fro a reasonable period, and T may say that it will not be departed from lightly. INTEREST CHARGES. “With the fall in prices and the decrease in the values of business, the burden of fixed charges is particularly acato in the business of farming, and the question of lowering interest charges must bo a major item in any scheme for adjustment of costs. The Government are anxious to bring about lowor market rates of interest on a jound basis. If this can bo achieved it will bo of much greater and of more lasting benefit to all sections of the community than a simple cut in existing charges.” Mr Coates referred to the fall in interest rates in London and Australia. “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 of the large volume of existing securities. The Government consider it essential that interest rates on existing securities should be brought down to a lower level and at present we are discussing ways and means of achieving this object. “I am not in a position at this stage to make any dofinite statement, but I Jiopo in due course to bo able to bring forward comprehensive proposals for doaling with the whole problem and as far as possible on a voluntary basis. “ Any reductions brought about in the intorost rates on lpcal body debts, in so far as they exceed the benefits 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, too of direct assistance in lowering the fixed charges of exporters and other producers. . STAMP DUTY MAY BE REMOVED. “If the more comprehensive proposals can be successfully arranged the present 10 por cent, stamp duty, which is somewhat irksome to bondholders, will be abolished. ‘ ‘ Concurrently with the reduction of interest on Government and local hodv securities wjs kasa fi!s>

to consider deposit rates and overdraft rates.

"Discussions in regard to these mattors aro well in hand and I am hopeful that arrangements can be completed to lighten tho cost of these items. "Finally there is the problem of mortgage rates.

“As lion. 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 tlio Mortgagors Adjustment Commissions and the courts. In so far as statutory reduction is concerned, I do not think it would bo in the interests of borrowers to go any further in this direction for it must bo recognised that if industry is to be carried on, the conlldcnee of investors must be retained. PRIVATE MORTGAGES. “Tlio existing powers for tho review of individual cases are already very extensive and no further major amendments of the law appear to be necessary. Moreovor it should not be overlooked that if tho rates of interest on Government and local body securities and on deposits can bo brought down, this in itself must make mortgage investments relatively moro 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 boneiit all • borrowers, as it will permeate through the whole field of investment. RAILWAY FREIGHT CHARGES TO BE REDUCED. As a further step towards bringing down costs, arrangements are being mado with tho Railway Board for a reduction of about 15 per cent, in freight charges covering a fairly -wide rauge of commodities. This will add to our budgetary difficulties perhaps to the extent of £IOO,OOO in the first year, although increased traffic at tho lower rates may later reduce the amount of the loss involved. CUSTOMS TARIFF TO BE OVERHAULED. Mr Coates said New Zealand is committed under tho Ottawa agreement to conduct au inquiry into customs tariffs and furthermore those are a very important factor in tho general cost of living. “Tho Government have no intention of exposing to unreasonable competition any industry which can function on an economical and. efficient basis. On the other hand the country cannot afford to maintain tariffs which increase costs of production and living unless a real benefit accrues to the community therefrom. It is intended to set up a small body which will review the whole position and make recommendations with respect to the tariff rates. “Under Article 8 of -the Ottawa agreement United Kingdom producers will have au opportunity of putting forward their views. BUDGETARY POSITION. “The various proposals outlined will for tho most part accentuate, rather than relieve, the Budgetary position, but taking a broader view it cannot be gainsaid that-if wo 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 tho national income has been such as seriously to diminish the taxable capacity of tho country. A justification of the increased exchange rate from the viewpoint of tho 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. “Tho Budgetary situation for the current financial year may be regarded as satisfactory in that in general tho estimated results for the year will be fairly closely realised. DEFICIT OF £700,000. “I may say that our expectation is that with the utilisation of resorves amounting to £2,500,000 the year will close with a deficit in tho 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 add to this £700,000 the further anticipated shrinkages in tho revenue and any unavoidable increases in expenditure. “While the raising of the exchange rates will be of immdiatc benefit to the primary producers, it will bo some time beforo the beneficial reaction can be felt by tlio rest of the community or be reflected in the Budget. In fact it is anticipated that the immediate effect on. the Budget will be an adverse j one pending the time when business generally can bo adjusted to tho changed conditions. Accordingly so far as next financial year is concerned it is considered advisable to allow for a further falling off in revenue and particularly in Customs revenue. “In addition to the effects of tho increases in the exchange rates and the other proposals which I have already outlined, the revenuo would inevitably have, been further affected by the continuance of the slump conditions, the offccts tending to bo cumulative. In addition, in estimating tlio Customs revenuo we have also to allow for the fact that-tho concessions given following tho Ottawa Conference will be operative for the, full year. Apart from all, these special considerations tho difficulty of forecasting the budgetary position for 1933-34 is increased -by many .uncertain, factors over which wo have no control, for instance the trend of. ovorsoas prices fqr primary products and any steps that may be taken following the world economic conference may materially affect our estimates. GAB OF NEARLY TEN MILLIONS TO BE BRIDGED. Hr Seated ikai javiewfid. m sjgtgjl

the prospects of falling off in revenuo in Customs, Income Tax, Stamp and Death Duties, Intcrost receipts on Railways by reason of freight reductions, Post and Telegraph profits, and general items.

This year’s revenue will include £2,500,000 to be derived from the liquidation of resorvos invested in Discharged Soldiers Settlement Mortgages. The largest expenditure increase will undoubtedly bo under the heading of exchango due to the fact that a considerable amount of the funds required in London for the current financial year were remitted during tho closing months of last financial year, under the exchange pool arrangements. The expenditure on exchange for this year will not exceed £350,000. For next financial year even at tho 10 per cent, rate this item would have been doubled, involving an increase of £350,000 in the sum required. Tho increase in the exchange rate adds a further £1,050,000 to the cost in New Zealand currency of remitting payments duo 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 poT cent, of the exchange surplus). “We have no precedent in N.Z, by which the possible accumulation of funds in London by reason of the altered exchango rate may be accurately forecast and with tho general uncertainty in external conditions it would be hazardous to attompt any precise estimate. . . . However the estimate of £1,000,000 is taken as a working figure for tho purpose of present calculations.

“The estimated increase in Public Works expenditure is estimated at £350,000, and in ponsions of £50,000.

“It will bo remembered that, as a 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. “To sum up the prospective Budgetary position it would appear that we are faced with a gap in the finances of £9,560,000. REMEDIAL MEASURES. “In the past two years,” continued Mr Coates, “large gaps in the public finances have had to bo bridged in one way or another and as time goes on the possibilities of further remedial measures become more limited. RIGID ECONOMIES IN EXPENDITURES. “With the sources of revenue seriously depleted there is the clearest need for rigid oconomy in public expenditure and to this the Government are giving constant attention. During the past two years drastic cuts have been made in the expenditure.” Mr Coates wont on to deal with economies already effected: A further saving would come about next year from the recommendations of the National Expenditure Commission already adopted. Departmental economies since 192930 totalled £9,490,090, briefly made up as follows: Savings and reductions in salaries and wages £2,310,000; suspension of war debts (net saving), £137,000; reduction 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; adjustments and abolition of Unemployment subsidy £950,000, benefit from motor taxation £500,000; other adjustments £330,000; total £9,490,000. “Some of the adjustments admittedly represent only a transfer of tho bur- ( den to other accounts but they do provide additional relief to the general Budget.” Ho indicated 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 bo made of all revenues to the State. The Government expected a saving of £400,000 if the interest reduction was brought about and £2,500,000 would be drawn on from the accumulated past surpluses, now invested in Discharged Soldier Settlement mortgages, and a further £2,000,000 next financial year, tho total amount invested therein being £10,500,000. FURTHER TAXATION CONTEMPLATED. “For the rest, to bring the prospective deficit down to what may be regarded as a safe amount, I ■ am afrid there will be no alternative but to havo further recourse to additional taxation. Details of this cannot be given at present as the proposals have not yet been finalised, but it may bo necessary to find ways and means of raising up to £2,400,000, which, with tho other items I have mentioned will be sufficient to bring tho 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 tho net increase in debt as a result of the prospective shortage will not bo much in excess of £300,000, which amount may be considered as safe, that is to say it will not bo large enough to in any way endanger the financial stability of the country, which must bo safeguarded at all costs. "The Government have felt obliged in tho general interests 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 tho decision made is amply justified."

REVENUE REDUCTIONS, £ Equivalent of current year’s shortage Revenue decreases — £ Customs ........ 1,400,000 Income Tax 750,000 Stamps and Death Duties 260,000 Interest receipts 220,000 P. and T. Profits 470,000 Other Items ' 260,000 Reserves 2,500,000 5,750,000 EXPENDITURE INCREASES. Extra cost of external debt charges— Pull year at £110 .. 350,000 Increase to £125 1,050,000 Cost of exchange on surplus Bank funds, London 1,000,000 • 2,400,000 Additional interest 350,000 Motor Taxation payable to Main Highways Pund 500,000 . Pensions 50,000 000,000 £9,850,000 SAV3N&S AND REVENUE. Interest Reduction Reserves from Soldier Settlement Investment Taxation

Estimated Value of Total Production. 1928-29 1932-33 £ £ Parm products ... . 82.1 49.0 Other products ... . 41.2 82.5 Total Production 123.3 81.5 National Income. 1928-29 1932-33 £ £ 150 98