REMOVAL OF SUBSIDIES

Otago Daily Times, Issue 27385, 10 May 1950, Page 4

REMOVAL OF SUBSIDIES

Method Considered Open To Question

ECONOMIST’S COMMENT By Dr G. C. Billing, Professor of Economics at the University of Otago In general, it is desirable that the prices of commodities should reflect the cost of the factors of production used in making them. From this point of view, and assuming a satisfactory distribution of income and that people are sufficiently educated in the use of protective foods and other essential articles of consumption, the complete removal of subsidies is a good thing. Efficiency may be stimulated and waste prevented. What is open to question is the method adopted for the abolition of subsidies and the relation of the action to the national finances and the working of the economy. Before further announcements are made it is impossible to see clearly and in full what is being attempted. A reasonable deduction from the Prime Minister’s broadcast is that .a likely rise of 4 per cent, in the cost of living will be followed by an appropriate increase in general wages and salaries throughout the country. That is roughly what happened when reductions in subsidies were made in 1947, and in the following year, while money wages rose, the cost of living rose still more, so that real wages decreased slightly. The object of the wage increase was then, and is now, to compensate the low-income groups in particular for the higher costs of the commodities affected by the removal of the subsidy. What is ultimately to follow is not so clear, and it is possible t,o speculate in different ways about it. Future Action If the initial rise in the price of Ihese essential goods, that bulk largely in the housewife’s budget, is followed by full compensation by means of wage increases, then the secondary effect of a general rise in wages, according to our experience in New Zealand over many years, will be an increase in the cost of almost all goods and services—another rise in the cost of living—a move in the direction of an old enemy, continued, if controlled, inflation. What would the Government do then? If it granted another general wage increase the tendency would surely become cumulative and perpetual, and any benefit through reduced Government expenditure on the subsidy account would be swallowed up in complications and difficulties of an inflationary situation which has been declared to be intolerable. Another possible interpretation and forecast of the trend of events might be this. The compensating wage increase might, as part of a long-run construction policy, be one designed to enable the Government—shall we say? —to remove subsidies and place the economy on an even keel. Its second step would then be to resist demands for wage increases and to force the community, by exercising appropriate economies, to absorb the shock occasioned initially by the removal of the subsidies. If. at the same time, price control were removed and collective bargaining allowed to play its part in the working of the wage system, labour might be directed to the most efficient industries and the processes of competition force a reduction in the prices of at least some commodities. Export industries have so far been lent out of account: Compensation for rising internal costs and the general higher level of prices could, in this situation, be provided by an alteration of the rate of exchange in their favour. At the same time pressure towards lower rather than higher prices for some commodities could be provided by a lowering of the import tariffs. The result would test the relative efficiency or inefficiency of many of the industries which have grown up under the shelter of import selection and control. These would be heroic measures, but something like them, in part or whole, seems the only logical conclusion if the events now’taking place are not to lead to a continuance of an inflationary experience. Alternative Policy Was there any alternative policy? I would have preferred myself that the removal of the subsidies had awaited the Budget speech. It could then play its part in the constructive picture of financial adjustment. Further upward disturbance of our price and wage structure might be avoided if attention were given to possibilities of compensation by means of remissions of sales tax, wages tax and by increase of family benefits to maintain in the hands of the housewife her power to buy protective foods. If only a part of the £12,000,000 in dispute were saved in this way and the difference needed to finance capital expenditure raised by loan- the result would seem more worthwhile than the possible spur to inflation, or the involved operations some of whose difficult features have been sketched above.