ECONOMIC COMMITTEE’S REPORT.

Star (Christchurch), Volume XLIV, Issue 364, 4 March 1932, Page 7

ECONOMIC COMMITTEE’S REPORT.

Disparity Between Export Prices and Costs Main Cause of Slump. WAGE REDUCTION ADVOCATED. (Special to the “ Star.’ ) WELLINGTON, March 4. THE REPORT of the Economic Committee set up to examine the budgetary position of the Dominion was laid before the House of Representatives by the Prime Minister, the Right Hon G. W. Forbes, to-day. The report gives as the basis of past prosperity the high volume of external trade. The course of prosperity was determined largely by the movement of export prices and by overseas borrowing. It states that the fal l in the net income of farmers had a serious effect on business in general. The main problem in New Zealand was to remove the disparity between export prices and internal prices, and to adjust the level of overseas borrowing. A reduction of wages by another 10 per cent, and a maintenance of parity with sterling rather than with gold are suggested factors in overcoming the present gap between export prices and internal costs. The general problem to be faced is staled as: (1) To remove price disparities by increasing the receipts of farmers, or decreasing internal costs, or by a combination of both; (2) to spread the loss resulting from the depression more evenly over the community; and (,'i) to balance the national and local body Budgets. Two sections of the report containing confidential information will be released when the Financial Statement is laid before the House at an early date.

After surveying the causes of prosperity in New Zealand, of which the two most important are the influences of rising returns for export and the volume of overseas borrowing, the report examines the causes of the depression and its effects on the private and public finances of the Dominion. “In discussing the readjustment of economic conditions in New Zealand to the new situation the money and the real losses of income must be distinguished,” the report states. “We have estimated the real loss as from 10 per cent to 15 per cent of the national income in 1929. It follows that, whatever the internal price level of the immediate future may be, the average standard of living will fall from 10 per cent to 15 per cent so long as export prices remain low. We are not unmindful of the possibilities of increasing productivity, but the loss of real income has been so great that a fall in the general standard of living is inevitable in the immediate future. Should productivity increase, the community will benefit. Whilst every effort to this end is to be encouraged, we feel that the situation is such as demands a speedy adjustment to existing conditions, and that the country cannot afford to wait upon the slower processes of ordinary or normal productivity improvement or risk its future on chance movements of prices Lower Price Level. “ We have also taken as a basis the present level of export prices. There can be no doubt that a level of world prices lower than that to which we have been accustomed must be accepted. We do not suggest that there may not be some i;npro\ cment in world prices. On the contrary, we hope that export prices will rise to some extent, so as to bring to a rapid conclusion the process of readjustment through which the community must pass. We must, however, emphasise the fact that the present depression differs from any that New Zealand has experienced during the past forty years—a period when world prices were tending upwards or remaining relatively stable at a high level. The process of recovery from the depression will therefore be delayed, because an improvement in world prices of the order of magnitude experienced in previous depressions is not to be counted upon. New Zealand, in common with other Dominions that maintain their currencies on a sterling basis, will not benefit to the full extent cf the rise in international prices. Just as the depreciation of sterling has acted as a buffer between the catastrophic fall in gold prices and New Zealand export prices so, will the appreciation of sterling in terms of dollars keep down the New Zealand export price level rhould the international level rise. We feel it necessary to draw attention to this fact in order to discount the assumption often made that an improvement in world conditions alone will lift the depression in New Zealand. Overseas Borrowing.

It is equally important to consider the change in the national economv of New Zealand on account of the decline and the possible cessation of overseas borrowing. We have shown that overseas borrowing was too heavy in the post-war period, and it is desirable in the interests of the country that the process should be gradually eliminated. This should not preclude recourse to the London market for the purpose of completing existing public works and easing the process of adjustment. No relief, however, can be expected from this source unless the community faces the task of internal readjustment with determination. When the process of readjustment is completed, external borrowing will be brought to an end, except where it can clearly be demonstrated that the projects financed by such loan operations are profitable. \\ e may restate the assumptions upon which we have considered the problem of readjustment. These assumptions are—

(J) Little increase in productivity per head in the immediate future. * (2) The maintenance of the existing export price level. (3) The ultimate cessation of overseas borrowing with some recourse to the external market during the process of readjustment. We have confidence in the soundness of the last condition. The task of readjustment is so great that any possible increase in productivity or in the export price level will expedite the process of recovery, but cannot obviate the necessity for fundamental leadjustment. “ Upon these assumptions we may state the general problem of readjustment as follows: At the present time export production is bearing a heavy burden on account of the fall in export prices greatly exceeding the tall in other prices and farm costs. The spending-power of the farmers has been greatly reduced, and their demand for the goods and services of the sheltered and protected industries has

declined; thus these industries suffer a contraction of demand and of output, which will continue until the spending-power of the export producers is restored either by an improvement in prices or by a cut in the costs of production and of internal services generally. When this., happens the export producers will be able to purchase with their diminished money income the same quantity of goods and services as before, and industrial output will therefore be restored to its former level. Without this adjustment, how can the community deal effectively with the problem of unemployment, balance the Budget, and restore and maintain sound financial conditions? Progress to Date. “ Some progress towards readjustmen has already been made.” The following are the measures of adjustment in operation to date:— (1) A fall in internal prices and in the cost of living of the order of 10 per cent. (2) A rise in the exchange rate to 10 per cent, bringing relief to export producers. (3) A contraction of imports from £45 m. to £24 m. (4) A reduction in wages of 10 per cent ordered by the Arbitration Court. (5) A reduction of 10 per cent in wages and salaries in the Public Service, and other economies in public expenditure. (6) The passage of legislation to enable mortgagors to secure relief from both interest and principal under certain conditions, and special consideration to mortgagees by all State lending Departments. (7) Taxation relief nad increased subsidies to the farming industry. (8) A reduction of interest on Government and local body loans for new issues, and on bank overdraft and deposit rates. (9) Special taxation on gilt-edged income. (10) Increased land development and settlement, and unemployment relief. (11) Legislation for a co-ordination of transport to limit unnecessary and wasteful competition, and the placing of the railways under a non-political board. (12) The utilisation of reserve funds. (13) The conduct of special investigations—viz., into Government expenditure, by a Royal Commission; : nto banking and currency, with special reference to a central bank for New Zealnad: and into the whole incidence of local bod}’ taxation and the expenditure of all local bodies, including Hospital and Charitable Aid Boards. “ Whilst helpful, these measures are inadequate to deal with the situation. We now proceed to consider in detail what other measures arc possible, and what effect they will have if adopted. The Gold Standard. The possibility of the restoration of the gold standard is considered, and the following conclusion is reached: “Wc have no hesitation in coming to the conclusion that, in view of the present level of gold prices parity with sterling is preferable to parity with gold. It means a higher money income, a readjustment of less magnitude, the maintenance of the values of securities, less financial disturbance, and, finally, a less disturbing budgetary situation. Having reached this conclusion, we now consider the economic effects of a rate above sterling.” The maintenance of the present 10 per cent exchange i.ite is advocated as a means of increasing the returns to farmers, and eaang debt payments. “It is clear, there fere,” states the report, “ that the 10 per t ent exchange involves a net gain to the budgets of local bodies and the Government as a whole. This benefit is not immediate. It accrues as economic adjustment proceeds, and the full benefit is not realised until the process of adjustment is completed. During the transition period the additional exchange cost on the Budget is stabilised at £0.7 m. The 10 per cent exchange rate, however, prevents the national income from falling as much as it otherwise would. Therefore from the outset it sustains revenue at a higher level ";han would otherwise be possible. The additional revenue, however, is not immediately £2.5 m., but substantially lower than this sum.” Higher Exchange Rate. The effects of a higher exchange rate, say, at 40 per cent, are estimated, and the conclusion drawn that a high rate might be befieficial. “ A similar result might be achieved in another way,” the report continues. "Let a primage duty of 20 per cent be placed on all imports, to yield £5 m., and the extra £2 m. be raised from the taxpayer as under the higher exchange proposal. There would then be £7 m. available with which to pay a bounty on export. In these conditions ail the effects would be similar to those caused by a higher exchange. The prices in New Zealand currency of export and

import goods would tend to be 20 per cent higher, taxation for interest 20 per cent higher, the money value of the national income and the taxable capacity of the people \would in the long run be raised in similar degree, and the same transfer to exporters from other sections of the community would be made. “ The higher exchange has the advantage that it would be automatic, more certain in its working, and, if necessary, easily capable of permanent adoption by devaluation. The primage duty would be less certain, more difficult to administer, and open to political interference, but it would enable the bounty to be distributed according to need. If the primage duty were regarded as a temporary measure it might not sustain security values. But the far-reaching effects of allowing matters such as these to become the subject of political pressure points to the danger of deciding them on grounds o 1 political expediency.