BUDGET PERILS

Taranaki Daily News, 1 February 1933, Page 7

BUDGET PERILS

MR. STEWART’S REASONS COST OF RISE IN EXCHANGE NEED TO BALANCE FINANCE ENORMOUS DIRECT EFFECT DEBT REPAYMENT REMOTE By Telegraph.—Pres. Association. Wellington, Last Night. Every gallery in the House of Representatives was crowded to-night when Mr. W. Downie Stewart, speaking during the second reading debate on the Banks Indemnity (Exchange) Bill, explained the attitude he had taken up on the exchange question and gave his reasons for resigning the portfolio of Minister of Finance. Lady Bledisloe occupied « seat in Mr. Speaker’s ladies’ gallery. Referring briefly to the amendment moved by the Leader of the Opposition (Mr. H. E. Holland) that the Bill be not accorded a second reading, Mr. Stewart said he could not support it because it adoption would add political instability to exchange instability. One was bad enough without the other. If the amendment were adopted Mr. Holland would find himself in office, but not in power. "The indemnity proposed by this Bill raises the whole question whether it is wise for the Government in the present circumstances of New Zealand to alter arbitrarily the value of currency by exchange depreciation,” Mr. Stewart said. "I wish' to state briefly the reasons that led me to the conclusion that raising the exchange to 25 - per cent, is contrary to the best .interests of New Zealand. “It is common knowledge that a rise i'in the exchange rate, whether natural or artificial, gives a bounty to export industries. The question whether this bounty is a merely temporary stimulant or of permanent value > to the farmer depends upon what steps are taken at the same time to keep internal costs from rising, but whether the bounty is temporary or not it is agreed that exporters receive it, in the first place from the rest of the community—it comes from the taxpayer and the consumer of imported goods in the first instance. ITEMS OF COST TO BUDGET. Mr. Stewart said the immediate additional cost to the Budget as a result of raising the rate would be nearly £4,000,000,. made up as follows: Extra cost of external debt charges, £1,050,000; allowed cost of exchange on surplus hank funds in London, £1,000,000; decrease of Customs revenue, say, £1,250,000; decrease in income tax and other items of revenue, estimated by Treasury at £500,000; total, £3,800,000. That was - exclusive of the cost of the 10 per cent, exchange already existing, which added to the .Budget about £BOO,OOO. The burden on the Budget, therefore, of the 25 per cent, exchange, would be about £4,600,000. - The Minister of Finance' (the Rt. Hon. J. G. Coates) estimated that after resort to every possible, expedient in the way of economies, reserves and taxation, he could bring the prospective deficit of £9,850,000 down to £4,500,000; in other words, if all these. remedial measures were successfully applied and at the same time exchange were allowed to remain at 10 per cent., the deficit would largely disappear. "What I had assumed was that if excharige were left at 10 pier cent, and all the economies, reserves and taxation above referred to were applied we would end next year with a. deficit of under £1,000,000,” Mr. Stewart said. “There is 'all ‘the difference in the world between this deficit and one of £4,500,000. “The extra burden thrown on the Budget by the higher exchange is direct, immediate, enormous and inescapable. The possible recovery from the increased tax revenue from increased national income is distant, doubtful and speculative.” • Mr. Stewart said his policy had been to try to keep. the deficit down to a manageable amount this year. It would be about £700,000. He had thought this not unreasonable because in the iirsf place the aggregate of deficits for the past three years (including this year) did not exceed the unrealised reserves which the Dominion held and which-had been built up out of surplus revenue. In the second place the Dominion had actually paid off under the debt repayment scheme during the same year £1,300,000. In the third place so long as this process could continue and reserves were not exhausted it was not advisable to insist on strict Budget equilibrium, because to do so would necessitate extracting the last taxable resources of the people and thereby would accentuate the depression and delay any prospect of recovery. i “But m my opinion the whole picture is altered when we artificially depreciate the value of our currency and in the process end up with a deficit of £4,500,000. I ■ have always understood that if a country is depreciating its own currency it is an absolute imperative necessity that it should be at the same time or at a near date within sight of a balance of its Budget.” PROPHECY NOT UNDERSTOOD. Mr. Stewart said if the prophecy of economists proved true —that exchange depreciation would produce more taxable revenue and thus in a short time balance the Budget—no one would be more pleased than • himself, but he was at a loss to know how this could come about. If the gap between farmers’ costs and prices was 40 per cent, and it was proposed to close the gap only to. the extent of 25 per cent., how could this do more than lessen their losses and how could this help the Budget? To sustain the Budget required industries working not at a loss but at a profit. “I hold it to be dangerous to combine a policy of artificial exchange depreciation with one of unbalanced Budgets, because in such circumstances deficits would cease to be manageable. A policy of artificial exchange depreciation must therefore involve as its correlative and corrective a series of balanced Budgets. But < the ' additional burden thrown on the public finance by the additional artificial exchange, together with the unknown liability undertaken for indemnifying the banks, would totally prevent balancing the Budget or keeping the deficit down to limits well Within the margin of unrealised reserves. DANGEROUS FLOATING DEBT. “To carry out its policy the Government must rely on Treasury bills taken up by the banks, thus creating a floating debt which may easily get out of hand and’ which at best would require to be funded and -added to the national debt since the prospect of repaying it from future revenue surpluses is remote. I could not therefore accept responsibility for such a policy. “The differences therefore between

the Government and myself turn mainly on the Budget. I agree we have reached a point where further measures of economy, taxation, etc., must be adopted by the Government on the lines indicated by the Minister of Finance, but if these measures are accompanied by a rise in the exchange rate costing £4,000,000 they produce a deficit far in excess of what can be regarded with- equanimity.”' . Discussing other methods of relief, Mr. Stewart said an export bonus had the’ same effect as higher exchange, but it at' least had this merit, that it did not involve (1) indemnity to the banks for surplus funds, estimated to cost for exchange £1,000,000; (2) loss of Customs revenue estimated at £1,250,000; (3) increased cost of imported goods owing to higher exchange; (4) shaking confidence by a sudden serious upheaval in the course of mercantile business. BONUS AND INFLATION. : It was argued that if a bonus were continued from year to year it would produce internal inflation and as thus costs would rise the advantage of the bonus would disappear, but the same argument applied to the exchange bounty so long as it was paid for out of borrowed money. Artificial inflation caused by exchange depreciation . would be, owing to the deficit in finance, gradually replaced by normal inflation. “But whether that is so or not,’-’ Mr. Stewart said, “I come back to my main contention that if the exchange is to be depreciated the Budget at all costs must be balanced if we are to avoid disaster. To achieve this the taxpayer would have to submit to burdens far beyond anything contemplated in the statement of the Minister of Finance.” DETERMINING FACTOR. Mr. Stewart said the question of what policy New Zealand should adopt depended on what financial resources it possessed and on what view was taken as to the future of prices. In the hope that sterling prices might soon rise it was reasonable to help the farming industry to the utmost of the country’s resources by concessions on rAtes, railway freights, fertilisers, unemployed labour and so on,, but once it became clear that further relief could come only from bonuses, bounties or exchange depreciation and' that millions of pounds were required for this purpose and that these millions could,not be secured from surplus revenue or taxation, ..but only from borrowed money, then he disagreed with such a policy. More especially was this so if prices were not likely to rise substantially. Indeed, what seemed certain was that competitive currency depreciation might prevent world prices from rising at the very time when a rise in sterling prices was th? only thing that could .really help us. . “If this increase is not to take place, however we seek to postpone the day of reckoning the time must come when mortgagee and mortgagor must get together and discover for themselves a new basis of values having regard to the earning capacity of the farm in relation to world prices; otherwise no amount of legislation will enable the farmer to make his job a payable one. “These matters may be matters of dispute,” Mr. Stewart added, “but one point which is not in dispute and which I insist on witji all the emphasis in my power is that to adopt a policy of exchange depreciation without at the same time imposing whatever burdens are required to balance the Budget is not a safe nor a sound policy.”