THE LONDON LOAN

New Zealand Herald, Volume LXXVI, Issue 23411, 29 July 1939, Page 10

THE LONDON LOAN

(VERY SERIOUS BURDEN INCREASED TAXATION ' TERMS UNDULY ONEROUS AN ECONOMIST'S REVIEW !' BY H. H. RODWELL The terms under which the £17,000,000 of loans, which fall due in London on January 1, 1940, are to be refinanced can only be regarded as un-.! duly onerous, and their full effect upon the economy of both New Zealand and Great Britain cannot be fully estimated until thfS currency of the £9,000,000 Credits recently granted is known. Assuming that these will not have a currency of more than five years, New Zealand will have to find £25,000,000 sterliiig within tho next five years. This will undoubtedly prove a very serious burden. . There are three ways in which the necessary funds could be raised in New Zealand:. by taxation, by public borrowing ifi New Zealand, or by borrowing from the Reserve Bank. Assuming that the repayments of the £25,000,000 sterling are spread evenly over the five years, £6,250.000 in New Zealand currency will have to be found each year. If the taxation method is used the Budget will have to be increased by 17 per cent on the figures for 1937-38 and 1938-39. The revenue figures in these two years were the highest on record. Customs revenue was swollen by the' large volume of imports, which amounted to £58,100,000 in New Zealand currency in the year ending March 31, 1938, and to £54,400,000 in New Zealand currency in the following year, as compared with £47,600,000 in New Zealand currency in the year ending March 31, 1937, and £37,400,000 in New Zealand currency a year earlier. Drastic Fall in Revenue in view of the drastic reduction in imports which the repayments in London will entail, customs revenue must fall heavily from now. on. Inctfme tax revenue will also fall from the high level of over £9,000,000 in New Zealand currency'in the last two years, in view of the curtailment in business that reduction of, imports will cause. Sales tax will also fall for the same reason. The real,burden of the increase in taxation necessary to meet the London pay-ments-would thus be greater than is indicated by a. 17 per cent increase on present tax receipts. It would seem, therefore, that it would be very difficult to, meet the payments out of revenue,, especially in view of the fact that the non-adjustable part of budj getary expenditure is a high proportion of the total. Borrowing from private lenders to pay off the London loan is equivalent to transferring the loan to New Zealand. But it is doubtful whether sufficient funds wuuld be forthcoming in view of the response to the £4,000,000 loan recently issued here. The terms offered would have to be more favourable ,to the investor than those on which the London loan has been floated and .this would mean an increased burden on the Budget in the future. But the raising of so large an amount in New Zealand would markedly reduce the funds available for development here.' ' Sudden Heavy Call New Zealand has long depended on imported capital, and although to-day there is jess need than there used to be to draw upon overseas supplies, yet so sudden and so heavy a call upon her own resources may well have a paralysing effect upon her economy. s The third method of raising the necessary • funds is by borrowing from the . Reserve Bank. Such a method would result in a very decided tendency for prices to rise in New Zealand. The funds thus made available to the Government' would be used to purchase overseas / funds, which would therefore not be available to finance imports'. While the exporters would continue to receive in New Zealand the full pro-, ceeds of their sales abroad, there would be a drastio curtailment in the amouni of goods available through the reduction in imports. This could only result in a hardening of prices. The use ol Reserve/Bank advances by the Gov ernment to purchase overseas fundsWould have the same effect on prices ai the use of such advances to expand public works, although in the former ease the rise in prices, would, be'due to a reduction in the supply of goods while in ;the latter it would be due to an expansion of purchasing power. 5' Continued Import Control c-,The reduction in imports could not be made good by the expansion of production in New Zealand quickly enough to prevent price increases, even if production ,here could be carried on at costs commensurate with those ruling overseas. .-'But whatever method is used there must be a reduction in imports for the next five years at least, and this will involve a continuation of the present svstem ,of import control, especially if the last method of raising funds is resorted to. Taxation and borrowing from the public would reduce the volume of purchasing power available in New Zealand and, would thus automatically reduce imports, but such a method would also prevent the expansion of home production. - From the point of view of Great Britain herself, the terms of the loan seem unfavourable. The curtailment of imports into New Zealand will be a blow to- British exporters, who have been very insistent in urging an easing of the New Zealand import restrictions. The action of the British Government Has rendered it impossible for New Zealand to accede to their requests, and in the' long run may well result in forcing the development here of industries which directly compete with industries' in Great Britain. ■ ■ 5