Poverty Bay Herald PUBLISHED EVERY EVENING GISBORNE, SATURDAY, FEB. 5, 1938. LOCAL BODY LOANS

Poverty Bay Herald, Volume LXV, Issue 19551, 5 February 1938, Page 4

Poverty Bay Herald PUBLISHED EVERY EVENING GISBORNE, SATURDAY, FEB. 5, 1938. LOCAL BODY LOANS

The experience of the Poverty Bay Power Board in being unable to borrow necessary loan funds for the extension of its activities, far from being unusual, is typical of the difficulties encountered by other local bodies in this district and throughout the Dominion. The problem Has become a national one of major importance and it is essential that it should be faced by the Government without further delay. The ostensible cause of tl.f position is the refusal of the Minister of Finance to sanction the payment cf interest at a higher rate than 3£ per cent, on the plea that it is the desire to prevent interest rates from vising, but there are various other factors which require to be taken into consideration and which, paradoxically' enough, have had the effect of forcing interest rates «to an unnecessarily high level. The absurdity of the position is shown by the fact that while the Minister refuses to sanction ordinary loans at a rate higher than 3J per cent he is, at the same time and in the same circumstances, allowing the same local bodies to borrow from the trading banks at a rate of 4£ per cent. The present policy, therefore, is penalising the local authorities and the small investor to whom these securities are generally attractive and forcing remunerative business in the way of the banks. Clearly, this is not the real aim of the Government, and it becomes necessary to search for other reasons motivating its policy.

In the first place, it is clear that 3J. per cent is not a reasonable rate of interest judged by existing market conditions. Government securities can be bought on the open market at prices which will return to the investor approximately 33 per cent, while Australian Government loans offer a slightly higher return. It is generally recognised that local body loans need to can-y a higher rate of interest than Government ones and this consideration and the market values generally fix approximately 4 per cent as the interest required td make local body securities attractive to investors. Another important influence is the fact that the Government is prepared to pay 3 per cent for money placed at call with the Savings Bank, thus attracting funds which might otherwise go into other and more necessary channels. Here there is another inconsistency, for while the Minister proclaims his intention of keeping interest rates down the Government is still paying the same rate through the Savings Bank as was offered when the local body rate was fixed at 4,j per cent. The result is that investment funds, as distinct from savings, are finding their way into the bank and other borrowers are unable to obtain their requirements. The obvious remedy for the

situation is to reduce the Savings Bank rate, but there are various reasons why the Government is reluctant to adopt this course. A minor consideration, perhaps, is that the many small investors who use the Savings Bank would resent a reduction of the earnings on their funds, while a reduction in the volume of deposits would rob the Government of the opportunity of quoting the •figures as evidence of prosperity. Under normal conditions, local body borrowing is at the rate of between £2,000,000 and £3,000,000 a year and it is clear that if this avenue of investment had not been closed by Government action the Savings Bank figures would have been considerably diminished. The real explanation of the policy, however, undoubtedly lies in the fact that the Government itself requires all the money it can secure iff order to provide the funds which are being spent on an unprecedented scale. In the light of its pre-election declarations, it is not desirous of borrowing on the open market and thus drawing attention to its activities, but prefers the indirect method of using the funds entrusted to the Savings Bank. This procedure, of course, is nothing new, but the present position differs materially because it has resulted in other borrowers being shut out of the market and driven to obtain funds from the trading banks at unnecessarily high rates of interest.

The policy now being followed has several inherent dangers. The member for the Bay of Plenty stated recently, in defence of the heavy borrowing by the State, that the Government was compelled to use the funds lodged with the Savings Bank. If it were true that the Government was embarrassed by excessive deposits the position could speedily be adjusted by a reduction of the rate of interest, and this would immediately give much-needed relief to local bodies. The inference is that the Government wants all the funds it can attract to the bank. This policy alone is dangerous for it means that many millions of pounds are being borrowed at call and if, for any reason, there was an excess of withdrawals the Government would have to approach the market at what clearly would be an unfavourable time from the point of view of the borrower. It is significant, also, that local body applications are being rejected by other State departments, so that, here again, the Government is appropriating all availalble funds. The cumulative effect of the present policy is that large sums are being sent overseas for investment and what remains, as a result of various steps taken by the Government, is made available for use by the State. This means, in the first place, that money is not obtainable in the required sums for the development and expansion of industry and, secondly, that the Government, by seeking to disguise the extent of its borrowing, is creating a position which may cause serious difficulties in the national finances. The problems of local bodies is probably only a minor issue in the complicated situation that has been brought about by the Government’s policy.