INCREASE IN TAXATION

Taranaki Daily News, 28 January 1933, Page 7

INCREASE IN TAXATION

GOVERNMENT ANNOUNCES POLICY EXCHANGE WILL REDUCE REVENUE LOWER FREIGHTS AND TARIFFS ADDITIONAL taxation to the extent of £2,400,000 is an • important item in the policy of the Government which was submitted to the House qf Representatives yesterday. In consequence of its decision to raise the exchange rate from 10 to 25 per cent, the Government anticipates substantial decreases in revenue, especially from Customs, in addition to its liability under its guarantee to the banks to purchase surplus exchange. The Minister of Finance, the Rt. Hon. J. G. Coates, after dealing with the disastrous fall in the price o£ primary produce, told the House that it was proposed to attack the farmers’ problem from both ends —to increase income and reduce costs. Higher exchange was the main item. It was further proposed to reduce railway freights by 15 per cent., to set up a board to recommend reductions in tariffs in accordance with the agreement at Ottawa, to utilise £2,500,000 from the soldiers’ settlement reserve, and to repeat the diversion of £500,000 from the highways fund for the use of the Consolidated Fund. “For the rest,” Mr. Coates said, “to bring the prospective deficiency down to what might be regarded as a safe .amount, I am afraid there will be no alternative but to have further recourse to additional taxation. Details of this cannot be given at present as the proposals 7 have not yet been finalised, but I think it will be necessary to find ways 'and means of raising up to £2,400,000.?

TO MEET FARMERS’ NEEDS

MINISTER SUBMITS POLICY ATTACK FROM BOTH SIDES ■ ' '' - / USE OF HIGHWAYS FUNDS (Government Memo.) Wellington, Last Night. The Government has again taken a thorough stock of the economic position of the country and has considered ways and means of meeting the situation, said the Rt. Hon. J. G. Coates in his statement in the House of Representatives to-day. In particular the Government has been concerned about the plight of the primary industry, which is the basis of the whole economic structure of the Dominion. During 1932 there was a further heavy fall in export prices, and the general level of these prices, as shown by the index numbers, is now little more than one-half of what it was in 1929. Comparing the position as shown by the Government Statistician’s index of prices in 1914 and in November, 1932, we have: Export prices 21 per cent, below 1914, farm expenditure (year 1931) 49 per cent, above 1914, retail prices 39 per cent, above 1914, wholesale prices 21 per cent, above 1914. The notable feature, and the one calling for urgent action, is the fall in export prices. This fall in prices is disastrous, and it renders the financial position and the outlook of a large proportion of farmers increasingly difficult They have been able to carry on and to maintain production only by failing to meet their fixed charges and by living on capital, but farm maintenance is suffering, and in many cases stock is being sacrificed. If some effective action is not taken a greatly reduced volume of production • must assuredly follow. During the past year much, was done in one way and another in the direction of relieving the situation, but it fell far short of what was required to bridge the widening gap between costs and prices. New Zealand, in common with other countries has been looking to a recovery of world prices. HOPES NOT REALISED. Unfortunately, these hopes have not been reailsed. On the contrary, as is well known, prices have fallen still further. The fall has been particularly severe in those products which are the exports of New Zealand. We have not yet received the full benefit from the arrangements made at Ottawa, and I am confident that, following the World Economic Conference, steps will be taken by the great Powers to relieve some of the principal underlying causes of the depression, and to bring about a rise in world prices. These measures will assist the Dominion, but the Government is satisfied, after a searching examination of the situation, that we cannot afford to wait any longer for assistance from these sources. We must immediately take steps of a farreaching nature to assist our primary industries. At the outset the general of line of approach favoured by the Government in bringing costs and prices into line may be indicated. It is frequently said that an initial and fundamental choice must be made—the choice between either reducing costs or increasing prices. Otherwise, and less accurately, the choice is said to lie between “deflation” and “inflation.” Our view, with the choice of reducing costs or increasing monetary receipts, is that the country should deliberately proceed by both methods. The gap to be bridged is a wide one. By approaching the problem from both ends, by deliberately planning to increase receipts, and where possible' to reduce costs, we shall bring adjustment with less dislocation than if we seek to obtain adjustment by one method alone. NO WAGES REDUCTIONS. Presently I shall refer to certain directions in which the reduction of costs, as well as the increasing of receipts, is to be sought, but at once I may say that further reduction in the rates of wages and salaries in the Government employment is not contemplated, and this is itself a reason for our taking in hand adjustments of an alternative kind.. All suggested methods, such as bounty on exports, remission of rates and land tax exemption of farm loans from income tax and the direct issue of credit by the Government were carefully considered, but the raising of the exchange fates

was deemed preferable to all Other methods, and, as members are aware, action has already been taken in this direction. Arrangements have been made with the Associated Banks, whereby the exchange rate for telegraphic transfers New Zealand on London has been raised from £llO to £125 for £lOO in London, and other rates have been raised correspondingly. This action has been taken by the banks at the request of the Government and as' a question of economic adjustment. This being so, it is reasonable that the banks should be safeguarded against loss in giving effect to the Government’s policy. Accordingly the Government has agreed to safeguard the banks against loss arising out of exchange dealing at the new rates. This, in effect, means that the Government wiU purchase any surplus London credits bought by the banks at the new rates of which they are unable to dispose at the current rate. In this way the Government may be called upon to purchase more exchange than is actually needed for current requirements, but any such surplus amount can be used to pay off debt abroad with funds borrowed in New Zealand. TRANSFER OF DEBT. The net effect, apart from exchange, is thus a transfer of debt from abroad to New Zealand. While some surplus exchange may have to be purchased during the first year, it is considered that this is but a temporary phase, as conditions will soon adjust themselves to the new position. 'The Government recognises that, whatever the rate of exchange may be, stability is a most important factor in the interests of all sections of the community. This being so, it is proposed to maintain the present rate of exchange for a reasonable period, and I may say that it will not be departed from lightly. It is, of course, impossible to fix any definite period, as we cannot foresee the course of events either in New Zealand or abroad. A Bill to give effect to the arrangement with the banks will shortly be introduced. INTEREST CHARGED. With the fall in prices and the decrease in the volume of business fixed charges have become a serious problem in practically all businesses. As the prices of primary products have fallen most severely the burden of fixed charges is particularly acute in the business bf farming. Thus the question of lowering interest charges must be a major item in any scheme for the adjustment of costs. The Government is anxious to bring about lower market rates of interest on a sound basis. If this can be achieved it will be of much greater and. of more lasting benefit to all sections of the community than a simple cut in existing charges in London interest. Rates in the short term loan market have fallen to a very low level, and following the recent British conversion long term rates are also coming down fairly rapidly. In Australia comprehensive steps were taken to reduce the rates of interest on all existing securities of the Government and local bodies, and this, together with other measures, has led to lower market rates of interest in New Zealand. Our market rates of interest continue to be relatively high, and it would appear that the situation is influenced by the rates on the large volume of existing securities.

The Government considers it is essential that interest rates on existing securities should be brought down to a lower level, and at present we are disdissing ways and means of achieving this object. I am not in a position at thig stage to make any definite statement, but I hope in due course to be able to bring forward comprehensive proposals for dealing with the whole problem and, as far as possible, . on a voluntary basis. This is a difficult matter, particularly insofar as local bodies’ debts are concerned, because there are too many local authorities with securities on tire market, and any reductions brought about in the interest rates on local body debts, insofar as they exceed the benefit at present derived from the 10 per cent, stamp duty,-would enable local authorities to give further relief to ratepayers. Any such relief would, of course, be of direct assistance in lowering the fixed charges of export-, ers and other producers. If the more comprehensive proposals can be successfully arranged the present 10 per cent, stamp duty, which is somewhat irksome to bondholders, will be abolished concurrently with the reduction of interest on Government and local body securities. We have also to consider deposit rates and overdraft rates. Discussions with regard to these matters are well in hand,

and I am hopeful that arrangements can be completed to lighten the cost of these items.

Finally there is the problem of mortgage rates. As members are aware, legislation is already upon the Statute Book providing for a 20 per cent, reduction and for the review of individual cases by the mortgagors adjustment commissions and the Courts. Insofar as statutory reduction is concerned I do not think it would be in the interests of borrowers to go any further in this direction, for it must be recognised that if industry is to be carried on the confidence of investors must be retained. The existing powers for the review of individual cases are already very extensive and no further major amendments of the law appear to be necessary. Moreover, it should not be overlooked that if the rates of interest on Government and local body securities and on deposits can be brought down this in itself must make mortgage investments relatively more attractive than they are at present, and consequently will induce more investments in this direction. In fact, a lowering of interest rates on gilt-edged securities must benefit all borrowers, as it will permeate through the whole field of investments. ’ RAILWAY FREIGHTS CHARGES. As a further step towards bringing down costs arrangements are being made with the Railway Board for a reduction of about 15 per cent in freight charges covering a fairly wide range of commodities. This will add to our budgetary difficulties perhaps to the extent of £160,000 in the first year, although increased traffic at the lower rates may later reduce the amount of the loss involved. In any case. it is considered that the reduction is warranted from the more important viewpoint of assisting to reduce working costs. It has been the practice of New Zealand Governments during .the last few years to hold periodic inquiries into the Customs tariff. Such inquiries were held in 1921 and 1927, and the time would in the ordinary course be ripe for a further investigation. The need for . such an investigation is all the more urgent owing to the existing economic and financial crisis, which has had such a catastrophic effect on the world’s prices. In New Zealand more particularly the tariff should be overhauled owing to the fact that our export trade depends almost wholly upon our primary products and the lower prices obtainable have made it necessary to reduce costs of production to the lowest possible level consistent with an orderly economic and industrial development. No-one will question the fact that the incidence of Customs taxation is a very imjfortant factor in connection with such costs, and with the general cost of living of the whole community. Apart from these considerations New Zealand is committed under the Ottawa agreement to conduct such an inquiry, the question having been there approached from the viewpoint of facilitating trade with the United Kingdom in return for valuable concessions given to the Dominion. - . , The Government has no intention oi exposing to unreasonable competition any industry which can function on an economical and efficient basis. On the other hand, as I have indicated, the country cannot afford to maintain tariffs which increase costs of production and the cost of living unless a real benefit accrues to the community therefrom. It is intended to s?t up a small body which will review the whole position and make recommendations with respect to tariff rates. It is proposed that the inquiry should commence as soon as possible. It will be remembered that under Article 8 of the Ottawa agreement it was arranged with United Kingdom producers should have an opportunity of putting forward their views at the tariff investigation. The Government is m communication with His Majesty’s Goveminent in the United Kingdom with a view to ascertaining when the producers there will be in a position to furnish the necessary information. When a reply is received an indication will be given as to the date on which the inquiry will commence. The personnel of the investigating body will be made known at as early date as possible after the closing of Parliament BUDGETARY POSITION. The various proposals outlined will for the most part accentuate rather than relieve the budgetary position, but taking a broader view it cannot be gainsaid that if we fail to take steps to enable our primary industries to carry on and to maintain a high state of efficiency our budgetary position will before long be still more seriously affected. Already the shrinkage in the national incopie has been such as seriously to diminish the taxable capacity of the country. A justification of the increased exchange rate from the viewpoint of the Government’s Budget is that the increase which this action should produce in our national income as measured in New Zealand money must later strengthen also our taxable capacity. The budgetary situation for the current financial year may be regarded as satisfactory in that in general the estimated results for the year will be fairly closely realised. The position will be reviewed in more detail later when the figures for the first nine months of the year have been audited and are available for publication. In thd meantime I say that our expectation is that with the utilisation of reserves amounting to £2,500,000 the year will close with a deficit in the vicinity of £700,000. For the next financial year, if the revenue and the expenditure were the same as is now anticipated for this year, we would, of course, come out with a deficit of a similar amount. Unfortunately our problem is not as simple as that, and to obtain the prospective shortage we have to add to this £700,000 the further anticipated shrinkages in the revenue, and any unavoidable increases in expenditure. While the raising of the exchange rates will be of immediate benefit to the primary producers, it will be some time before the beneficial reaction can be felt by the rest of the community or be reflected in the Budget. In fact, it is anticipated that the immediate effect on the Budget will be an adverse one pending the time when business generally can be adjusted to the changed conditions. Accordingly, so far as next financial year is concerned, it is considered advisable to allow for a further falling off in revenue, and particularly in Customs revenue.

In addition to the effects of the increase in the exchange rates and the other proposals which I have already outlined, the revenue would inevitably have been further affected by the continuance of the slump conditions, the effects tending to be cumulative. In addition, in estimating the customs revenue we have also to allow for the fact that the concessions given following the Ottawa Conference will be operative for the full year. Apart from all these special considerations the difficulty of forecasting the budgetary position for 1933-34 is increased by many uncertain factors over which we have no control—for instance, the trendy of overseas prices for primary products—and any steps that may be taken following the world economic conference may materially affect our estimates. Having regard to all these considerations, it is at present anticipated that the Customs revenue for the next financial year will show a falling off com-

pared with the probable receipts for this year of £1,400,000. Income tax, which will be based on this year’s trading operations, will undoubtedly be less, but at present it is difficult to gauge the extent of the shrinkage. Tentatively a comparative decrease of £750,000 is being allowed for. Stamp and death duties revenue has been well maintained during the current year. Next year, however, decreases in valuations will adversely affect death duties, while there is likely to be a further decline in other items, particularly duty on instruments and racing revenue. The net decrease in the revenue is estimated at £250,000.

Receipts from the railways will be directly affected by the proposed reduction in freight charges, and with a further probable decrease in the receipts from other investments the net shrinkage is estimated at £220,000. POST AND TELEGRAPH.

The post office revenues continue to reflect the general slackness in business, but, on the other hand, if services are to be maintained there is a limit to the extent to which falling revenue can be offset by savings in expenditure. For these reasons, on the present indications the post office estimates that it will not be able to do more than make ends meet next year, so that no revenue is likely to be received under the heading of Post and Telegraph profits. This will increase the revenue shrinkage by the amount anticipated to come to hand this year—£47o,ooo. The remaining items of revenue will all be more or less affected by the continuance of the present conditions, and a net decrease of £260,000 has been put dovp for such items. This year’s revenue will include £2,500,000 to be derived from the liquidation of reserves invested in discharged soldiers’ settlement mortgages. Special arrangements have been made for the liquidation of these mortgages by way of hypothecation of the securities. With the possibility of obtaining any further assistance under this heading I Will deal shortly in reviewing the possible remedial measures, but in the meantime the item is being deducted to arrive at the net budgetary shortage. On the other side of the accounts we have to consider what additional items of expenditure have to be provided for. Based on the anticipated results for this year, the largest expenditure in-, crease will undoubtedly be under the heading of exchange. Due to the fact that a considrable amount of the funds required in London for the current financial year were remitted during the closing months of last financial year under the exchange pool arrangements, the expenditure on exchange for this year will not exceed £350,000. For the next financial year, even at the 10 per cent, rate, this item would have been doubled, involving an increase of £350,000 in the sum required. The increase in the exchange rate adds a further £1,050,000 to the cost in, New Zealand currency of remitting payments due on loans contracted in the United Kingdom. In addition the Treasury estimate allows for a contraction of imports to such an extent that the exchange surplus in London will total £4,000,000, and that the extra exchange costs under the indemnity arrangement will amount to £1,000,000 (that is, 25 per cent, of the exchange surplus). It is to be added that we have no precedent in New Zealand by which the possible accumulation of funds in London by reason of the altered exchange rate may be accurately forecast, and with the general uncertainty in external conditions it would be hazardous to attempty any precise estimate, LOSSES RECOVERABLE. Indeed, there are authorities who consider that the accumulation of funds in London will fall short of the stated figure, and that any temporary loss will, be recoverable later. However, the estimate of £1,000,000 is taken as a working figure for the purpose of present calculations.

As indicated in the Budget, a very drastic reduction was made in the borrowing for capital works for the current financial year. It would appear that the amount that can be provided will be still less, although a small amount will be necessary for carrying on essential works. The debt charges, however, will be considerably increased. Owing to the necessity for relying upon Treasury bill finance to cover past deficiencies and financing general requirements during the year, and the prospective shortage for next year, the estimated increase in expenditure under this heading is £350,000. This estimate makes no allowance for a resumption of the funded debt payments to the British Government. Payments under this item have been suspended during the current financial year, pursuant to the arrangements made with the British Government, but if no further action is taken the half-yearly payment will fall due on December 1 next. It appears likely, however, that some action in regard to war debts will be taken before then, so that to some extent this item may be regarded as a contingent one. If the instalment is paid the net cost to the Budget will be about £825,000. HIGHWAYS REVENUE. It will be remembered that as part of the Budget for the current financial year provision was made to retain in the Consolidated Fund up to £500,000 of the revenue that would otherwise have been transferred automatically to the main highways account. This provision was for the current year only, and if it is not extended the result will be a comparative increase of, that amount in the expenditure of the Consolidated Fund. Normally this is a progressive increase in the cost of pensions, but owing to the depression the increase for oldage pensions and family allowance will inevitably be larger than is usual. Accordingly provision will have to be made for a further £50,000 for the cost of pensions. To sum up the prospective Budgetary position, it would appear that we are faced with a gap in the finances of £9,850,000, made up as follows:— Equivalent of current year’s shortage: £700,000. Revenue Decreases. Customs, £1,400,000. Income tax, £750,000. Stamp and death duties, £250,000. Interest receipts, £220,000. Post and Telegraph profits, £470,000. Other items, £260,000. Reserves, £250,000. Total, £5,850,000. Expenditure Increases. Extra cost external debt charges on account of full year at £llO, £350,000. Extra cost of external debt charges by reason of exchange increase to £125, £1,050,000. Allowed for cost of exchange on surplus bank funds, London, £lOO,OOO. Total, £2,400,000. Additional interest and other debt charges, £350,000. Motor taxation payable to main highways fund, £500,000. Pensions, £50,000. Total, £3,300,000. Grand total, £9,850,000. REMEDIAL MEASURES. In the past two years large gaps in the public finances have had to be bridged in one way or another, and as time goes on the possibilities of further remedial measures become more limited. With the sources of revenue seriously depleted there is the clearest need for

rigid economy in public expenditure, and to this the Government is giving constant attention. During the past two years drastic cuts have been made in the expenditure, and during the present year the Government has had detailed reports of the National Expenditure Commission to work upon. Of the recommendations that have already been given effect to, a further net saving estimated at £lOO,OOO will be obtained next year arising out of the fact that the economies will be operative for the full year. Of the total recommendation of the commission the items not yet given effect to amount to £1,150,000, but £BOO,OOO of this is bound up in three items—naval defence (a reduction to one-cruiser standard), £200,000; reorganisation of hospital system, £300,000; 'reduction in expenditure on agriculture (cancellation of subsidies on lime and fertiliser, etc.), £300,000. As a matter of policy it is not considered advisable to adopt the first item, and the position of the primary 'producers precludes any possibility of adoption of the last. As for the reorganisation of the hospital system, this is a matter that has not been overlooked, but it is obviously a proposition that would take some time to obtain any relief to the expenditure. The remaining recommendations of the commission are now being gone into, but the most that can be hoped to be obtained from them is £200,000. While on the question of economies I would like to recall the efforts that have been made since the depression developed to meet the situation by economies and adjustments in the expenditure of the Consolidated Fund. Towards the close of the financial year 1929-30, right at the commencement of the trouble, efforts were made to keep down departmental expenditure, and for that year, a saving of £260,000 was made in the votes. 'ln the following year savings and adjustments totalled £1,360,000. As the depression, deepened in 1930-31 savings aggregating £4,320,000 were effected. As for the current financial year the economies and adjustments to be .effected are summarised in the Budget, and amount in the aggregate to • £3,550,000. The grand total to the relief to the Consolidated Fund from these savings and adjustments since the depression developed amount to no less than £9,490,000, briefly made up as follows:— Savings. Reductions in salaries and wages, £2,310,000. Suspension of war debts (net saving), £1,370,000. Reductions in grants and subsidies, £440,000. General reductions in departmental votes, £1,760,000. Reduction in railways and Post and Telegraph expenditure, £1,530,000. <t, Reductions in pensions, £300,000. Total, £7,710,000. Adjustments. Abolition of unemployment subsidy, £950,000. Benefit from motor taxation, £300,000. Other adjustments, £330,000. Total, £1,780,000. Some of the adjustments admittedly represent only a transfer of the burden to other accounts, but they do provide additional relief to the general Budget. It will, I think, be generally recognised that huge savings cannot be obtained without drastic action, and. the figures I have mentioned give some indication of the efforts made by the Government to meet the situation by effecting economies in public expenditure. HIGHWAYS REVENUE. From the general position I have outlined I think it will be clear to all that the assistance being received this year from the main highways revenue will have to be continued next year, for the position is such that the best possible use must be made of all revenues to the State. As I have already indicated, arrangements for dealing with interest on Government and local bodies’ securities have not yet been finalised, but if our proposals can be successfully carried a net saving of about £400,000 will accrue to the Budget. LIQUIDATION OF RESERVES. The present book value of past surpluses invested in the discharged soldier settlement mortgages is £10,500,000; £2,500,000 will be drawn upon for the current financial year, and we will doubtless eventually have to write off substantial losses. Even so, an ample margin will remain, and I hope to arrange to liquidate up to a further £2,000,000 to augment the revenues for next financial year.

For the rest,, to bring the prospective deficiency down to, say, what may be regarded as a safe amount, I am afraid there wall be no alternative but to have further recourse to additional taxation. Details of this cannot be given at present as the proposals have not yet been finalised, but I think it will be necessary to find ways and means of raising up to £2,400,000, which with the other items I have mentioned will be sufficient to bring the deficit down to about £4,500,000. .This will mean increasing our floating debt by that amount, but against that it should not be overlooked that the expenditure will include provision for £1,400,000 under the statutory debt repayment scheme.

This will mean that the net increase in debt as a result of the prospective shortage will not be much in excess of £3,000,000, which amount may be considered as safe. That is to say, it will not be large enough to in any way endanger the financial stability of the country, which must be safeguarded at all costs. . The Government has felt obliged in thfe general interest of the Dominion to takp a course of action of an unprecedented character. This has been done with a clear realisation of the implications and of the difficulties in the way. We are confident that the country will recognise as the days pass that the decision made is amply justified.