PUBLIC FINANCE.

Otago Witness, Issue 3514, 19 July 1921, Page 5

PUBLIC FINANCE.

HOW THE SURPLUS IS APPLIED,

STATEMENT BY ACTING PRIME MINISTER.

(From Our Wellington Correspondent.) WELLINGTON, July 12. A statement prepared some time ago regarding the finances of the dominion by Sir Francis Bell, Acting Prune Minister and Minister ot Finance, is now available for publication : 1 mink it Potter to begin this statement by emphasising the distinction between the Consolidated Fund (ordinary revenue account) and the Public Works Fund —a distinction between income and capital. The Consolidated Fund is a revenue fund pure and simple. Into that iund passes the annual tevenue from all sources, and out of it is paid the cost of the public service. I he credits of the public works consist of borrowed money, the only exception being the occasional payment into the Public \\ orks Fund by authority of Parliament, of surpluses from the Consolidated Fund. Out of the Public Works Fund is provided the capital expenditure of the country on railways and road construction, buildings of all kinds._ capital additions to railway plant and lines, post office, and telegraph buildings, telegraph and telephone extensions, and other capital expenditure of a similar nature Out of Consolidated Fund the interest and sinking fund on moneys borrowed for the Public Works Fund are paid Since the war there has been the wa. expenses account, into which the huge sums borrowed for the war have been paid, and out of which the charges of the war have been defrayed. The interest and sinking lend on Lie moneys borrowed for war purposes are paid out of the Consolidated Fund The annual revenue in the Consolidated I : nd is charged with the salaries and wages of I he publ.c service, with all pensions, and with the whole interest an<l sinking fund on the Public Debt. Apart from the territorial revenue from rents and interest and some similar receipts, the whole annual revenues of the Consolidated Fund are derived from taxation direct or indirect. Anthorit es for borrowing money for capital purposes are to be found in many of our statutes, each authority being granted for a specific purpose. For example, authority to borrow for electric supply is still unexhausted to the extent of about nine millions. The Hauraki Plains and Ran.gitaiki Land Drainage Acts contain authority tc. borrow for their specific purposes, and there ore the large authorities of the Discharged Soldiers Settlement Act, Swamps and Land Drainage Act, and, last but not least, the Education Loins Act. It will be understood that 1 am here quoting only a few examples of statutes granting authority! to borrow money, apart from the general pub,lie works and railways loan-authorising statutes. Authority to borrow may exist to an unlimited extent, but from whom, and how, is the money to be borrowed? It is not, I believe, fully understood that this do minion has not bornowed for any public works purpose on tbe London market since the year 1914. It has raised in New Zealand for war purposes during that period no less a sum than £55,198,000, and in addition a large sum for discharged soldiers’ settlement. Notwithstanding that wholly unprecedented strain upon the finance of the dom nion, it has been able since the year 1914 to borrow within the dominion practically the whole of the moneys req ired for and expended on public works and for the special works for which authority is given under the various statutes. War loans and discharged soldiers’ settlement loans were raised by direct subscription from the public and also from financial institutions, upon which the Government, had been accustomed to rely for provision of capital money from time to time. It must be obvious that the present extraordinary fall in the value of our staple products has created financial conditions under which surplus capital moneys accumulated in the hands of institutions willing to advance moneys on the securities of Government, loans are no longer available to the same extent as in previous years. The balances at the credit of all loan accounts, except the discharged soldiers’ settlement account and the war cx penses account, are insignificant; but expenditure is necessarily going on upon each account, and credit balances can only be maintained by the provision of such moneys as can from time to time be borrowed, supplemented as far as possible from the credit balance of the Consolidated Fund. I turn now to the Consolidated Fund and its surplus. The surplus of any year con sists of the amount by which the ordinany revenue of the year exceeds the expenditure of the year (exclusive of capital expenditure) plus the amount brought forward as the surplus of the preceding year. Two large sources of revenue, land tax and the income tax, are collected late in the year, and it follows that in the earlier months of the year the expenditure in each month exceeds the revenue. A considerable part of a surplus existing at any 51st of March is required to keep the Consoli dated Fund in credit during the earlier months of the next year, and that part is not available for any other purpose. Towards the end of the year the cash credit accumulates, and the question at that time arises in each year (I am here writing not of the past year only, hut; of a practice existing for many years), whether borrowing powers should be exercised by raising money elsewhere and paying interest, or whether parts of the credit balance at the. Consolidated Fund should be utilised by investing temporarily in authorised loans and so saving interest. Part of the credit balances is so used to save interest. Such moneys 6o invested are still to the credit of the Consolidated Fund, though not at credit of its account at its bankers, and, if it be possible to raise money later, the borrowed money can be applied in purchase of the investments of the Consolidated Fund, which, upon that sale, will have again restored to its credit, at its bankers the amount invested. Perhaps this process may bn more readily followed by considering the alternative process of investing in securities other than Government securities, when it is obvious that the temporary investment gains interest and does not deplete the actual balance eventually. The difference between the two processes is that investment upon Government securities is a depletion until the Government is able to

borrow money elsewhere to redeem those securities. The process of investment results m this, that the surplus existing on the 31st March of any year consists partly of cash at credit of the Consolidated Fund, and partly of moneys temporarily invested out of that fund prior to the 51st of March. But there is another class of investment of the moneys of the Consolidated Fund made in London in liquid securities, to me,,?; our engagements there. There are two credit balances of cash—one in New Zealand and one in London. And the London credit balance and investments must always amount to a large sum. We have to pay in London not only the interest on our debt due in England, but »a'l sorts of accounts of large amounts for material and plant purchased in England. We have, no doubt, the permanent reserve investment of two millions in London on realisable securities to meet exceptional emergencies; but, if an emergency should arise requiring the use of that fund, we should have immediately to replace the investments temporarily realised. The two-million investment is security which no one but a lunatic would treat as available for the finance of any year. The above explanation is necessary to vendor intelligible the figures at the 31st March last, with which I now deal. The actual surplus of the Consolidated Fund, ’ncluding the surp'us of the preceding year brought forward, is correctly stated to be £8.591.208. But the cash balance at ered't of the Consolidated Fund at its bankers in New Zealand on the 31st, of March last was £4,475.000. The London investments in realisable securities and the cash at credit n London amounted together (of course excluding the two-million reserve fund) to £2,131,000. That, amount in London is less than is required, and must be supplemented later. Antecedent to the 31st March the Treasury hud invested in Government securities m New Zealand under authorising Acts, partly to enable the public works to be carried on, and partly in redemption of loans falling due, a sum of £1,167,000. There was also over £BOO,OOO outstanding in London and New Zealand in the hands of improstees, practically all of which has been expended, and a small portion only of which will be recoverab e. During the two months which have expired since March 31, as is usual, the ordinary current expenditure has largely exoedc-d the revenue. But the Treasury during those two months has paid in New Zealand for interest on New Zealand loans £1,540,000, and has paid in London for interest on English loans £1,322,000. The Treasury has further, in consequence of the extreme difficulty of obtaining loan moneys for capital works, found it necessary since March 31 to invest, in authorised Government securities no less a sum than £1,032,000 from the Consolidated Fund credit. Large sums are out in the hands of imprestees, practically all of which have been expended. There are some small credit balances at each of the several capital accounts, but most of them will require supplement at a very early date. The balance at the credit of the Consolidated Fund to-day (June 9) is £571.000, to which has to be added the sum of £500,000 placed on fixed deposit maturing at an early date. It must not be supposed for a moment that the dominion’s financial position is not absolutely sound. There is full provision for the performance of all its annual obligations. But it must be clear to every reasonable person that the real strain is in procuring capital moneys for further expenditure upon public works. There are still some sources from which very limited funds for those purposes can be obtained within New Zealand. My principal object in this statement is to make it clear to the public that there is no possibility of further subvention of loan moneys from the Consolidated Fund. Bo far as concerns the ordinary accounts of the country, and its payment of interest to its creditors, and salaries and wages to its servants, the finance is absolutely sound and assured; but with regard to the provision for capital expend-tura on public works, the financial conditions render the procurement of loan moneys in New Zealand exceptionally difficult.”