THE OTAGO DAILY TIMES SATURDAY, AUGUST 28, 1920. THE RATE OF INTEREST.

Otago Daily Times, Issue 18026, 28 August 1920, Page 8

THE OTAGO DAILY TIMES SATURDAY, AUGUST 28, 1920. THE RATE OF INTEREST.

On more than one occasion during tlio present session Mr Massey has referred to the coming Loan Bill, but all his references have been exceedingly indefinite. His unvarying optimism m this matter is as refreshing as it is unsatisfying, and the time is rapidly approaching when he must be more definito and specific. It would be unreasonable to insist that the Minister of Finance should straightway announce the full terms of the projected loan, but it must at the samo time be admitted that ii< is, not at all clear from his references in Parliament that he fully appreciates the financial obligations which face the dominion. In the first place a sum of over £7,000,000 is required for interest and sinking fund on existing debt, but the matter with which we are most closely concerned to-day is the amount of loan money required during the current year. No less a sum than £24,800,000 is required to be raised by loan, of which £10,100,000 is for the renewal and conversion of loans falling due. The rate of interest is therefore a matter of the most vital importance. The last New Zealand loan prospectus was issued on June 1 for £2,000,000 at 5 per cent., and wo are not aware of any authoritative pronouncement as to the total amount subscribed. It ma) be assumed that Mr Massey's somewhat cryptic statement in the House last week had reference to this loan. "It has been said that we havo little prospect of raising loans at 5 per cent, or 5h per cent, free of income tax," said Mr Masssey. " Let me tell honourable gentlemen that since the House met we have raised some hundreds of thousands of pounds from outside at 5 per cent, without any freedom from income tax." The term " outside " is ambiguous, but possibly means outside the Government departments. A clear and full statement would have been much more to the point, though the Finance Minister's declaration that in tie coming

Loan Bill he would movo to in- si crease the rate of inteiest shows at least n some appreciation of the real position. a Much interest exists as to the response c to the last and the information s would bo some guide to the future post sibilities. Concurrently with the last t dominion, loan New South Wales raised a one for a similar amount at 5J per c cent, free of State and Federal income t tax. The British Government was then g paying OA per cent, on its Treasury Bills c and its Exchequer Bonds were reported \ to be yielding over per cent, to the y investor. Flat loans then returned £6 r 9s 6d per cent. It will be seen, there- g fore, that Mr Massey has been exceed- I ingly fortunate if he secured the full ; £2,000,000 at 5 per cent, from " out- j side." The rato generally foreshadowed 5 for the new loan is per cent, subject f to income tax. It will be noted thai < there has been considerable discussion ] on the continuance of the compulsory I clauses in the new Loan Bill. During : periods of great emergency compulsion ! may be necessary, but an extension of 1 the principle to normal periods is open to grave objection. Every Finance 1 Minister should be ready to pay a fair and reasonable rate of interest for the accommodation required and should also be able to give a guarantee that the money will be wisely and economically expended. Gladstone's dictum that Good finance consists more in the spending than in the collecting of revenue" should be the motto of all Finance Ministers. It cannot be suggested that a-rate of interest of per cent, is at all extravagant. Indeed in certain cases it would appear to be inadequate when taken in conjunction

with existing taxation. For instance, an investor paying 7s 6d in the £ income tax would receive £55 on an in- : vestment* of £1000. The deduction foi taxation would be £20 12s 6d, leaving a net return on the investment of £34 7s . 6d, equal to £3 8s 9d per cent. It is clear that certain companies could not afford to invest in the loan on thai basis, and it has been suggested in financial circles that if all taxpayers were placed on an equal footing in respect to the interest they received from their loan investments it would improve the prospects of the coming loan. If that plan was adapted and the interest from the loan investment subjected to a tax of 10 per cent., such investors in the loan would receive a return of £4 19s per cent. That rate cannot he said to be a fair return for money invested at the present time, but it would be much more likely to attract investments from companies than would a uniform rate of interest fixed at 53r per cent, subject to income tax. . The task of all Treasurers in all countries is an unenviable one. The British Chancellor of the Exchequer has recently passed through a violent fire of criticism directed at his Budget. Like Mr Massey, however, his Government majority is substantial and he won through. He has now issued a new Government bond and at the present time the terms have an intimate interest for the people of the dominion. According to the Economist

the scheme may be described as " aii attempt to convert floating debt into debt which will be rather less floating." 1 The rate of interest on the new bond will be 5 per cent., but the rate will be increased in ratio to the selling price of Treasury Bills. If those ; bills are sold at an average rate of dis- : count exceeding 5g- per cent, and under per cent, then an additional 1 per cent, interest is added, and if bills are sold at over 6J per cent, an additional rate of 2. per cent, is added. The first interest payment on November 1 next will be at the rate of 5 per cent, plus additional interest at the rate of 2 per cent, per annum, —i.e., per cent, for the half year. By this means it is hoped to protect bondholders against capital depreciation and at the same time.protect the interests of the general taxpayer. To come nearer homo the Commonwealth has just issued the prospectus of its second peace loan of £25,000,000 at 6 per cent. Every applicant for bonds or stock in this loan has the right to convert his holdings in any previous war or peace loan into bonds or stock of the present loan at par. As the stock of many of the loans is now at a discount and they carry a lower rate of interest than 6 per cent, it will be seen that the Australian investor is fairly liberally dealt with. Notwithstanding the very favourable terms offered to Australian investors it has been deemed necessary., in order to stimulate interest in the loan, to run a war trophies train through the country as well ] as to engage airmen to tour the States. A general survey of the money market clearly indicates that the Finance Minister of this dominion will be more fortunate than most Treasurers ( if he can secure money at 5J per cent., j to say nothing of the hundreds of thousands of pounds at 5 per cent.