DOMINION FINANCES

Southland Times, Issue 20174, 10 May 1927, Page 8

DOMINION FINANCES

AN OPTIMISTIC SURVEY

STATEMENT BY HON. W. DOWNIE STEWART.

At Feilding last evening, the Minister of Finance (the Hon. W. Downie Stewart) delivered the following resume of the Dominion’s financial position, and whilst admitting the depression of the period, struck on the whole an optimistic note.

The Government has been criticised lately for the infrequency with which Ministers speak, and we have been called in some quarters the Silent Ministry. It is true that we do not talk as freely or as frequently as was the practice at one time. I can remember when the Ministers of a previous Government were criticised for travelling round speech making and banqueting, instead of working. But if I am called upon to justify the present practice I would say that in these modern days all the information necessary to enable the public to form a judgment as to the state of the country and its production, trade, commerce and finance is furnished in great detail, and hence there is not the same n**ed for public speeches. But anyone can see from a casual glance at the trade figures, the banking returns, the unemployment figures, the bankruptcy statistics, and other items, that we are passing through a depression similar to what occurred in 1921. You will remember that we recovered from the 1921 depression with astonishing rapidity, but it is not so clear that our present difficulties will be so soon overcome. These rapid fluctuations of prosperity and adversity are a well known feature of post war conditions and were forecasted by all economists as certain to occur. REVENUE AND EXPENDITURE. I am plad to say that the effects of the present depression did not reflect themselves in the public finances for the year just closed to anything like the extent I had anticipated. I have already made public the fact that there was a surplus of revenue over expenditure of £587,000. That is a modest surplus compared to some we have had, but it is a satisfactory one under present conditions and better than I had hoped for. In the Budget I calculated that the revenue and expenditure would just about balance. But an unexpected feature of the Customs revenue was mainly responsible for my good fortune in having a surplus. The Customs revenue did not fall in proportion to the decreased imports. We had anticipated that the imports would drop by £6,250,000. which would decrease the revenue by £900,000. Actually they dropped by £4,833,000, which should have produced a drop in revenue of £725,000. Yet, in fact, the Customs revenue only fell short of the previous year by £131.000. This curious and unexpected windfall was partly due to the English coal strike which forced importers to buy from foreign countries when they could not fill their orders in England. Hence they had to pay the higher duties which are payable on goods from foreign countries. There were other factors which influenced the results which I will deal with in more detail in the Budget. But at any rate when we look abroad at the frequency of deficits instead of surpluses which mark so many Budgets of other states and countries I think we may congratulate ourselves on the New Zealand results. A few details as to principal increases and decreases in revenue and expenditure as compared with the previous year are as follows — REVENUE. Increases— Postal and Telegraph • . £148,800 Income Tax . . . • 53,700 Interest on Railways—Capital Liability ...» 130,100 Departmental Receipts • • 57,400 Decreases — Customs . • • • • 131.300 Land Tax • • • • 37,500 EXPENDITURE. Increases - Vote Naval Defence . . . 85,800 (Increase due to expenditure on H.M.S. Diomede for whole year.) Vote Defence .... 33,900 (Increase mainly due to purchase big gun ammunition.) Vote Education • • • 99,800 Decreases— Vote Post and Telegraph Working Expenses . . 63,300 Vote Industries and Commerce 56,500 Vote Electoral .... 91,400 Some critics have complained that this surplus is too large and some say it is too small and some seem doubtful whether it exists at all. Those who say it is too large mean that we purposely under-estimated the revenue in order to avoid giving effect to any policy of reducing taxation. But I have already shown that the Customs revenue was larger than we looked for owing to circumstances that no one could foresee, and that under normal circumstances there would have been no surplus on which to reduce taxation. Those who say it is too small mean that the expenditure has been too high. But the expenditure is only £130,000 in excess of the appropriations for main and supplementary estimates approved by Parliament, which is a fairly close calculation on a Budget expending about 24 millions.

So far as expenditure on departmental services is concerned, this totals £10.094,000, which shows a decrease of £434,000 compared with the amount appropriated for the year and an increase of only £llO,OOO over the actual expenditure for 1925-26. Increases in certain votes such as Education are inevitable, being dependent largely on population and in view of this and an increased expenditure for Naval Defence the figures show that departmental expenditure has been kept under close control. Practically the whole of the increase in expenditure compared with that for last year is to be found under the heading of Permanent Appropriations, that is, interest, pensions, etc., the expenditure under which totals approximately £14,260,000 as against an estimate of £13,693,000 and compared with an expenditure for the previous year of £13,587,000. Details of the expenditure have not yet been finalised, but will be available when the annual accounts are published. Those who are sceptical as to whether any surplus exists, mean that we may not have made all proper charges against the revenue. In reply to them I may say that the subsidy to the Railway Department on account of losses on branch lines and isolated sections is included in the ordinary expenditure for the year. Certain redemptions of debt, such as the annual sum required for the repayment of the funded debt and the statutory contribution to the Public Debt Repayment Account, which are fixed annual charges, are also included in the year’s expenditure. Accumulated surpluses are used for further redemptions of debt and details of the transactions for the year will appear in animal accounts when published. No transfer was made to the Public Works Fund during the year.

All legitimate expenditure charges against the year’s revenue have been made. Whenever prices fail and national income shrinks, critics demand an immediate contraction of public expenditure. But public expenditure cannot be expanded and contacted jriih the same eaee as a eonceruaa

without intensifying unemployment and serious dislocation of public services. When the Government cut down expenditure by some millions during the previous slump I did not observe that the public followed the good example of the Government. In fact, the moment the depression showed signs of lifting everyone seemed to assume that we had turned the corner. I issued a note of warning in 1923 and said that the recovery was only temporary, and that owing to the fluctuations of post-war conditions we would certainly be faced with another drop within two or three years. The critics discounted my statement and said that I could not have been fully reported as the recovery was too obvious to give ground for the note of caution which I struck. However, we see the position as it exists to-day. PUBLIC DEBT. Turning now to the Public Debt and the Loan Expenditure, in the last Budget I expressed the opinion that we should seek to curtail the increase in the Public Debt and taper off in our borrowing. In this respect I think the public will also be pleased with the curtailment effected. For, in 192526 the nett addition to the Public Debt was £11,000,000, whereas for 1926-27 it fell to £6,900,000. It is only fair to say, however, that in the £11,000,000 was included a large part of the special loan raised to try to catch up on the applications for loans from the State Advances. REPORTS AND IMPORTS. Speaking on the question of the Public Debt and Government borrowing, I must reply to a criticism made lately by Mr W. J. Polson, President of the New Zealand Farmers’ Union, as his statement has been endorsed by some newspapers as correct. He alleged that during the period from 1920 to 1927 the country had failed to pay its way by £80,000,000, and in effect that we had gone to the bad to that extent. He said , that our total exports for that period have j only brought in £327,000,000, whereas our I imports and interest on loans have amounti ed to the gigantic sum of £408,000,000. The : fallacy underlying this reasoning is the 1 failure to distinguish between imports of capital and ordinary imports purchased out of our national income. It is true that our exports must pay for our imports, and should also show a sufficient surplus to pay our interest bill on overseas loans. It is also true for the last two years our imports exceeded our exports by £6,838,601. But no inference can be drawn from this that we are not paying our way. It is wellknown that when loan monies are raised abroad they come into New Zealand in the form of imports. But if it were correct that our exports must in each year pay for our imports, whether such imports represent loan monies or not, then it would mean, to take an extreme case, that if in any year we borrowed £100,000,000 our exports would have to be sufficient, not merely to pay our interest bill and current expenses, but also to repay the whole of the loan monies in the same year as they were borrowed. One might just as well argue that if 3 business man raises £50,000 to develop his business, then his revenue for the year must not only pay his current expenses and interest on the £50,000, but also the £50,000 as well. It is quite correct that the interest payable abroad has to be met out of the proceeds of the sale of exports, but on the other hand the loans raised abroad can only be shifted to New Zealand in the form of goods that go to swell the imports. So that when Mr Polson states that “we are living at the rate of £lO,OOO, 000 a year more than our income, and borrowing £5,000,000 to help to keep up appearances,” his statement has no foundation in fact. So far as the Government is concerned, it is living within its income. It seems to me a serious thing that men occupying responsible public positions in New Zealand should make such comments on our financial position without due consideration, as they are calculated to seriously injure our credit outside New Zealand without having any real justification on a true interpretation of the figures. DO WE PAY OUR WAY? Another similar criticism appeared in the Dairy’ Produce Exporter by a writer signing himself “Economist,” and he raised the question as to whether we were paying our way nationally. He quoted the exports and imports for the last six years, and claimed | that the surplus of exports had only been £16,000,000, and the interest bill overseas for the same period was £33,000,000, and he argued that we had failed to pay our way by at least £17,000,000. The same fallacy underlies this argument as is contained in Mr Polson's speech. The writer overlooks the fact that the imports include imports of capital or loan monies and that those imports of capital should be deducted before any calculation is made as to w’hether there is a sufficient surplus in our exports to pay our overseas interest bill. If we are not paying our way out of revenue then we must be paying it out of loan monies. But if we are paying it out of loan monies our critics ought to show some item in the public accounts which has been charged to loan account, and which ought to have been paid out of taxation or other revenue. So far from that being the case an examination of the public accounts will show that over a series of years we have transferred surplus revenue to the Public Works Fund and thus substantially contributed to the creation of large public assets out of revenue which we might reasonably have created out of loan capital. This is a wise precaution because some of these great public undertakings, such as railways, do not always earn a full market rate of interest in their construction. Hence the use of surplus revenue towards their completion allows a margin that can be written off if the capital cost is greater than the enterprise can earn interest on. When critics say that we are living beyond our means it may be that the community as a whole is living more extravagantly than the national income warrants, and if we suddenly stopped borrowing the Government would have to pay off many men who are employed on public works. But the statement is entirely incorrect if it is intended to mean that the public Treasury is not paying its current expenses out of current revenue. On the contrary, it is abundantly clear that it is paying its way, and each year making substantial contributions towards the reduction of its dead weight debt; that is to say, the war debt and other items which are not productive. By this process the war debt has been decreased m the last four years by over £6,500,000. When, therefore, critics say, what is the use of paying off debt annually when you are at the same time borrowing more than you are paying off? The answer is that the is being paid off is dead weight debt that does not earn any interest, and the fresh loans which are being raised are expended as far as possible so as to earn their own interest and not be a burden on the taxpayer. To show how self-supporting the debt is, apart from the war debt, I may mention that the annual charge on the non war debt amounted to £7,193,000. and jet. of this amount tho tUr

payer as such was only called upon to find £1,656,000. This proves conclusively that excluding the war debt the public debt is financially productive to the extent of 77 per cent. WHY DO WE BORROW? People ask the question: How long are you going on borrowing and when will these great public undertakings be finished? My answer is that it would be possible to stop borrowing at any time if the people of New Zealand decided that they no longer wished as a matter of national policy to extend their own hydro-electric works, their own railways, and other public utilities, and if they decided that it was no longer the duty of the Government to assist in solving the housing problem or to lend cheap money to farmers. Not only so, but if the people of New Zealand went one step further and decided to get rid of the public ownership of these undertakings, we could without doubt reduce the debt within 12 months to about one-third of its present magnitude. So far, however, from any tendency in this direction year by year there is a more insatiable demand for further expenditure by the Government. Everyone is tending more and more to lean upon the State and to regard the Government as the only moneylender and the only house-builder. It is impossible for us to go on raising unlimited millions for these purposes even if the money is wisely and carefully administered. Nevertheless, applicants for loans are most indignant when we suggest that the resources of the department are not unlimited, and that some reliance must still be placed upon the private builder or the private money-lender. In the State Advances Department, which has already lent out about £35,000,000 we have thousands of applicants waiting for loans, both from the country and cities. If we add to this what the Public Trustee, the Discharged Soldiers’ Settlement Account, the State Insurance Department, and other departments have lent in various ways the aggregate loans will amount to about £75,000,000, which is surely an enormous sum for the State to lend to a population the size of New Zealand. It is true that the London financiers regard New Zealand as a sound investment. But we should not in borrowing be tempted by what London is willing to lend, but rather limit ourselves to the lowest amount necessary to complete public works and to see that the money is wisely expended. This precaution is especially needed in New Zealand because our prosperity depends on factors over which we can only exercise a very limited control. If world prices stay at a fairly high level our burden is easy. But any steep and permanent or prolonged fall in prices is likely to make our path very difficult. Pastoral and agricultural countries have not the liquid reserves with which to resist a serious onslaught on their economic life. They react slowly and painfully to shocks which an older industrial country like England with a lower general standard of living but with accumulated wealth of centuries would scarcely notice. But assuming a Minister of Finance took office and decided to stop all borrowing at once. What would we find? Great schemes like Arapuni and the irrigation works in Central Otago would have to be left half finished or else constructed slowly over a long series of years out of tax revenue. But everyone knows that once such great works are undertaken the sooner they are finished and revenue earning the better; otherwise you have vast sums tied up earning nothing. The next few years are peak years of expenditure in finishing our hydro-electric schemes and railway lines and improvements. But after that, unless some new programme is put forward, I see no reason why our loan expenditure should not be reduced to such small dimensions that we can give up oversea borrowing. STATE ADVANCES. Complaint is rife that applicants for loans are kept waiting for many months for their loans. That complaint can only be remedied if the Government is prepared to borrow far more heavily than at present. Private financial institutions and individuals have become extremely reluctant to lend money on farms for various reasons—partly on account of fluctuations in land values and partly because local bodies are continually offering securities at attractive interest rates. I can remember when private investors w’ould lend on nothing but broad acres and would wait a long time for such an investment rather than take city securities. But the whole position is now changed, quite apart from the fact that State advances are more popular with borrowers because of the instalment system of re-payment. But in any case whoever lends the money, borrowers will always complain that the valuations are too conservative. However, everyone must see how difficult it is to assess the real value of land with prices fluctuating so rapidly as they have done in recent years. If prices could only be stabilised at even a moderate figure it would make every one’s position more satisfactory. Another complaint often made by farmers is that too much money is being lent for building houses in the towns instead of helping the farmer to develop and improve his land. To remedy this complaint, when I took control of the State Advances Department we restricted the limit for each city loan for housing to £l2OO (or £l5OO in special cases) instead of £3500 as was previously the case. It seemed to me that if a man wanted to borrow more than £l2OO to build a house he was well enough off to borrow privately. Furthermore, we arranged that no loans should be granted in city or suburbs to pay off existing loans. The reason for this was that anyone who merely wanted to pay off a private loan to get easier terms from the State Advances was not in so urgent a plight as a man with no house at all. We also decided not to lend money to buy existing houses except under special circumstances, as such a course did not help to solve the housing problem. Now’, turning to country applications, we find that even with the restrictions I have mentioned on city borrowers we get about three times as many applications from town as we do from the country. But we try to see that country settlers get their fair share of the money available, and in recent years it has been about half and half. We also expedite the country loans so that some time ago we were only three months in arrear, but with the tremendous pressure we have now dropped back again. But in my view the position is not satisfactory even with regard to country loans, as far too large a proportion of the applications are to pay off existing loans. It is surely more important that loans to develop land, to clear bush, to apply fertilisers, should take precedence, but these applications form a small part of the total. Is there any way in which this enormous demand for millions to finance farmers and houses can be met without adding to the public debt, and incurring the criticism which follows on each increase, even though such debt is no burden on the taxpayer? We are trying out an experiment in this direction under the Rural Advances Act, which came into force on April 1. RURAL ADVANCES ACT. That Act was based on the report of the Rural Credits Commission. lire Act provides for the raising of money on bonds secured on mortgages of rural lands instead of being raised by way of Government loan charged on the revenues of the Dominion. That is the central idea of the Commission’s report, and we use the machinery of the State Advances Department to operate it. The Commission did not get back to New Zealand until well on in last session, when we were working under great pressure, and had any attempt been made to legislate fully on all the recommendations made by the Commission it would have been impossible to legislate at all. We therefore (jid the best we could in the time at our disposal. For the purposes of the Act we have appointed Mr Polson as a member of the board. As the bonds cannot be floated until there are sufficient mortgages to support them we made a temporary advance to this department of £500,000. As quickly as possible we will try out the bonds on the market and to do so we are transferring some of the applications for loans already in the ordinary Advances Department to the Rural Advances Department instead of waita mg for fresh applications to- coma in, As

soon as a sufficient number of mortgages have been granted to make it worth while testing the market we will try a bond issue, either in New Zealand or abroad, secured not on the revenue of the State but on the security of the mortgages already in existence. As you are aware, the special features of this branch are, first, that it allows advances up to £5500 instead of £3500, which is the amount for each loan allowed in the ordinary department, and, secondly, as the bonds are secured on the mortgages and not to the State revenues, it avoids the criticism that we are increasing the public debt, and lastly we advance up to two-thirds instead of three-fifths as at present. I hope that when the bond issue is made the public will readily subscribe at a price which will enable us to lend money at approximately the same rate as it is now lent by the State Advances Department. If these bonds are freely subscribed for it will enable us to expand the operations of the department, and if the bonds are taken up in New Zealand it will avoid the creation of further oversea liabilities. THE HOUSING PROBLEM. If these bond issues under the Rural Advances Act prove successful they should take the strain off the State Advances Department so far as rural finance is concerned. There still remains, however, the problem of coping with the housing difficulty in the cities, and here again we have applications in for loans to the extent of millions more than we can hope to grant in any reasonable time. In each of the large centres those citizens who take an interest in housing and the prevention of slums are anxious to carry out a heavy house building programme. If the Rural Advances scheme proves successful I do not see why a similar scheme should not be inaugurated for the housing problem in the cities. There is undoubtedly a good deal of money in each centre available for investment, and if a strong citizens’ committee in each centre were to make a patriotic appeal to its own citizens to subscribe funds for housing purposes, I think the difficulty could be coped with without the Government raising more millions to be added to the public debt. The scheme could be worked out on the analogy of the Rural Advances Act by the State Advances Department. That is to say, a' temporary advance could be made to build houses on the understanding that later on a citizens’ committee would appeal to citizens to take up bonds secured on mortgages of the houses, and if they were willing to lend their money at about 5| per cent, the house could be built at a cost which would enable working men to pay a reasonable rent and sinking fund. The advantage of such a scheme would be that each city would take a pride in grappling with its own problem, and the State Advances Department could be used as the channel for controlling the bonds and administering the Act without the bonds forming part of the public debt. As an illustration of the inconsistent attitude of our critics I quote from a recent interview with a deputation from a branch of the Farmers’ Union—these are actual extracts condensed from the interview:— “The first matter is the necessity of getting money at cheaper rates. We suggest that the State Advances Department be quickened up and strengthened by more capital being put behind it. The second matter is we view with alarm the extent to which Government borrowing has increased and we strongly urge the reduction of Government borrowing. The next matter is that we urge the early completion of the railway line in our district.” This interview took place only last month! If this scheme of long-term bonds does not prove satisfactory we will have to fill up the coffers of the State Advances again. For it is quite clear that there are many farmers who have good security whom the private lender has ceased to cater for. The money is available, but it has to be collected and lent out through some State Department. I am well aware of the fact that this will arouse more hostile criticism for borrowing from Farmers’ Unions, Chambers of Commerce and other organisations whose members collectively denounce the Government for borrowing on the one hand, and yet individually implore the Government to lend them money. In my view this question of farm loans is one of the most urgent and important national questions of the day. springs of finance which formerly supplied the farmer have dried up, and if I saw any prospect of inducing them to supply the want I would urge the State to hold back. But at present it does not appear any reduction of taxation on money invested in mortgages or other expedients will in the near future draw out private funds on the long terms that are necessary for the farmer. All we can do is to absorb private funds into the State coffers and lend them out on the amortisation principle; otherwise they will go into other channels which are of less importance from a national standpoint. THE TARIFF AND WAGES. I would like to have spoken on the general question of our Customs tariff, knowing how apprehensive the farmers are as to the effect of any revision. In my mind, vastly more important than any question of tariff revision is the need for a complete inquiry into our whole wages system, the Arbitration Court and the relation of wage fixation to production. There appear to be two schools of thought developing on this question: One in Australia and New Zealand, and another in America and in England. It is quite possible that we have got on to the wrong track, and that we might pay higher wages and yet get a bigger product under another system. It is too big a question for me to discuss at present, but, speaking for myself, I believe as a first step towards a review of our national policy on this question it would be well worth while to call a conference at which representatives of the Farmers,’ the Manufacturers’ and the Trade Unions would be present; in fact, a sort of industrial parliament, where different sections of the community could freely and frankly exchange their views on this important question. I do not believe that such a discussion would lead to any immediate result, but it would open up the whole question and an exchange of ideas would pave the way to a further consideration of the matter. PROSPECTS. There is no doubt the year we are now in will be difficult. We see on the one hand falling revenue, lower bank deposits, increased bank advances and on the other hand increased expenditure for unemployment, family allowances and other items. There has been a sudden contraction of our general purchasing power by the sale of our exports producing less than the previous year. The banking figures are significant as showing the trend of decrease in purchasing power. A decrease in the bank deposits means less purchasing power at the command of the public and less prosperity in business. The present depression is a direct result of this fall in our export prices. Hard times and good times come to all Governments alike whether they be Liberal, Labour or Reform. The rain falls on the just and the unjust, but in that case, there is only Providence to blame or bless, whereas bad times are always charged as the fault of the Government. Mr Baldwin said once that the English people always grumble but they never worry, whereas foreigners worry but do not grumble. In New Zealand at the present time it looks as if people are doing both—they are worrying about low prices and grumbling at the Government.

But one thing is clear—when prices fall the farmer is the first to feel the change and from him it reacts gradually on the whole community. But it is, I think, easier for most other sections of the people to adjust themselves to falling prices. It is particularly easy in New Zealand from the trade figures and the banking returns to read the trend of events and the merchant can often protect himself by curtailing his imports and reducing his stocks. But the fanner not only feels the effects of a depression first, but is the least able to guard against it, as his capital is not liquid and his market dis-