Poverty Bay Herald PUBLISHED EVERY EVENING GISBORNE, TUESDAY, AUGUST 2, 1938. BORROWING BY THE STATE

Poverty Bay Herald, Volume LXV, Issue 19698, 2 August 1938, Page 4

Poverty Bay Herald PUBLISHED EVERY EVENING GISBORNE, TUESDAY, AUGUST 2, 1938. BORROWING BY THE STATE

The financial operations of the Government, except in the case of public loan issues, are generally clouded in mystery insofar as the general public is concerned, but in recent years there has been more secrecy and confusion than usual. This has been due, firstly, to the fact that there have been no ordinary public loans and, secondly, to the loose talk and loose thinking about the use of public credit. There are some facts which are made clear by recent official documents, and these are deserving of closer public attention. In the financial year 1936-37, the amount of public debt domiciled in New Zealand increased by £7,785,000, and in 1937-38 new borrowing, all within the Dominion, amounted to £7,500,000. With one trifling exception, the Government did not go on the open market for any of this money. It was not secured, however, by any mysterious use of the public credit, but by the simple expedient of borrowing departmental funds. The greater part came from the increased deposits in the Savings Bank, which rose by ,more than £5,000,000 a year in each of the two years under review. Of new borrowing totalling £15,250,000, all but £5,000,000 came from the Savings Bank, and the balance could reasonably have been provided by other State departments, so that up to the present there has been nothing unorthodox or mysterious about the raising of State loans. In some quarters it is still believed that the Reserve Bank is financing the activities of the Government and, in particular, that it is providing cheap money for housing. It is now made clear, however, that at March 31 last the only advances by the Reserve Bank were on account of marketing, and that the State Advances Comporation, which is financing housing, secured its funds in the ordinary way. With the exception of about £750,000, the corporation's loans, totalling more than £41,500,000, have been raised at a rate of 33 per cent, and the loans have from 22 to 37 years still to run. This is sound and orthodox finance with which there is little occasion to find fault—the adoption of the principle of borrowing for long terms when money is cheap. Since the corporation is paying 3g per cent, however, it is difficult to understand how it lends to local bodies for housing at 3 per cent, and other loans to local bodies at 3i per cent leaves the corporation little margin for its own expenses. Another point which invites comment, although it may be subject to explanation, is that accumulated sinking funds of £2,263,000 which existed at March 31, 1937, have disappeared, and that in the refinancing of loans no provision has been made for the creation of sinking funds. Two exceptional items in the list of corporation loans are one of £500,000 at I 4 per cent, which fell due on June 30 last, and the source of which is not explained, and another of £263,000 at 3.1 per cent maturing in 1944. The latter is of particular interest because it apparently indicates the public response to the only appeal by the Government to the open market. The corporation, it will be recalled, went on the market for funds at 3 per cent and 3', per cent; it has not secured one penny piece at 3 per cent, which is not surprising, and little more man £250,000 at 3.5 per cent. This response, or rather the lack of it, suggests that under existing conditions the Government could not expect to raise any substantial amount at less than 3J per cent, and this fact has a special significance. During the current financial year, the Government plans to raise more than £14,000,000 by way of lqans and, in addition, it has a London loan of more than £17,000,000, issued at 31 per cent, falling due on January 1. Clearly, this loan cannot be transferred to New Zealand, and the present indications are that to convert it in London would require an offer of at least 4 per cent interest, thus adding to the annual overseas interest bill.

The internal position is no less unsatisfactory. During the past two years it has been possible to raise £15,000,000 of new money only because there has been such a steady accumulation of funds in the Savings Bank. That accumulation continues, but at a diminishing rate. For the first two months of the current financial year the excess of deposits was only £350,000, compared with £l,llf>,ooo in the same months last year. This means that in two months alone there was £750,000 less available to 'he Government for borrowing. This year, however, the Government plans to raise new loans totalling more than £14,000,000. It is obvious that it cannot possibly rely on Government departments, so that a public loan issue is inevitable. The experience of the State Advances Corporation shows that money is not available in large sums at 3\ per cent, so that any loan to succeed must offer greater inducements to investors. The difficulties do not end there, because part of any subscriptions to a public loan must come from Savings Bank deposits, and this means a further diminution of the funds available to the Government from that source. If the drain is sufficient to cause an excess of Savings Bank withdrawals, it means that a further loan will be required to make good the deficit. The warning that is sounded by both the internal and the overseas position is that here is a

real danger of the State's demand for money in the next few months resulting in a forcing up of interest rates in every direction, and it is from this point of view that the situation needs to be closely watched.