NEW ZEALAND’S POLICY

Southland Times, Issue 23650, 27 October 1938, Page 12

NEW ZEALAND’S POLICY

INTERNAL SPENDING POWER STEADY DRAIN ON LONDON FUNDS The policy of the New Zealand Government has aimed at< promoting employment for all, and a high level of internal spending power, wrote Professor D. B. Copland in The Sydney Morning Herald just before the New Zealand General Election.

This has expressed itself in (a) a big programme of public works, (b) a guaranteed price for the principal export, dairy products, (c) restoration of wages to pre-depression standards where possible, (d) increased social services, provision for education, public health and pensions of all kinds, (e) greater protection of secondary industries. The Government has spread its net very widely, and in the process has increased the scope and intensity of State control, though not, directly of State ownership.

This programme, combined with the influence of world economic recovery, has had pronounced effect on national income, which rose from £9om. in 1932-33 to £lo3m. in 1934-35 and probably £lsom. today. The rise in income has naturally been accompanied by. an increase in imports. From only £N.Z.24.6m. in 1932 they rose to £36m. in 1935" and £s6m. in 1937. This in itself is-a good indication of the reactions on spending power. Exports have also expanded, having moved from £33m. in 1932 to £66.7m. in 1937. , , For the seven months ended July 1938 exports were £4lm. compared with £46m. for the same period of 1937, and imports were £33m. compared with £37m. in the first seven months of 1937. • EXPORT PRICE LEVELS The increase in imports and the expansion of internal spending power have not been accompanied by a corresponding rise in export prices. From 1934 to 1937 export prices rose by 30 per cent., but in June of this year they had receded a little to 26 per cent, above the 1934 level. This raises the fundamental problem that confronts all countries when they indulge in an expansionist policy. New Zealand is going ahead with her policy in the current year, and her Budget provides for a public works programme of £20.7m., which on standards of wealth and population is equivalent to a programme of at least £6om. in Australia. Meanwhile, the surplus in the balance of trade is not sufficient to meet interest and other net payments overseas. The result is that the London funds of the banking system are falling. They were at the high level of £stg.36m. in June 1936. They fell to £stg.3om. in June 1937 and still further to £stg.2lm. in "June of this year. This reduction of £stg,lsm. in two years is very heavy, but at £stg.2lm. they are equivalent to between £stg.6O and 70m. for Australia. f.. Nevertheless, the steady drain of London funds has caused some concern as to the continuance of the present policy if export prices do not rise. The leaders of the present Government announced before the last election that, if elected, they proposed to reduce the exchange rate which stood at £N.Z.125 to£stg.lOO. , , , It has remained at that level. _ Any change would have been inconsistent with the general economic and social policy of the Government and is far less practicable now that the Government is heavily committed to a programme of expansion and London funds are so much lower. Two elements of the economic and banking policy are of special importance in view of the present situation. First, in its amendment to the Bank Act in 1936 it defined the function of the Reserve Bank as “to give effect, as far as may be, and within the limits of its powers, to the monetary policy of the Government, as communicated to it from time to time by the Minister.” THE GUARANTEED PRICE Second, in an amendment to its legislation for fixing a guaranteed price for butter it instructed the committee fixing the price to pay regard (among other things) to:—(a) The costs involved in the efficient production of dairy produce; and (b) the general standard of living of persons engaged in the dairy industry in comparison with the general standard of living throughout New Zealand. \

If export prices fall, or remain relatively low, the value of exports will fall, and, at the same time, there will be pressure to fix a price for butter that will sustain the standard of living of the producer. With public works spending at a high level and satisfactory incomes in local surrency guaranteed to the producer there is a possibility of the balance of payments remaining adverse. Imports will be relatively high in these circumstances, and the account of the dairy marketing authority at the Reserve Bank will be overdrawn. All this is contingent on export prices not improving and the guaranteed price for butter being fixed above world parity. For many years Australia has maintained a local price for butter above world parity, but our method is to subsidize exports by charging consumers a higher price for local consumption. The costs are diffused throughout the community. In the New Zealand case, any subsidy to exports would for the moment come out of credit expansion. But if export prices are not high enough to sustain a favourable balance of payments sufficient to prevent a drain on London funds the cost in the New Zealand case might come out of a depreciation of the New Zealand currency, or special exchange regulations that would support a generally higher local price level, or, in other words, an over-valued currency. All these difficulties would disappear if export prices rose again, but in that case the guaranteed price would be unnecessary.