“A PLAN FOR N.Z. AT LAST.”

Star (Christchurch), Volume XLIV, Issue 365, 5 March 1932, Page 8

“A PLAN FOR N.Z. AT LAST.”

Lower Salaries and Reduction of all Fixed Charges. Economists Issue Independent Report. What purports to be a definite plan to lift New Zealand out of the depression has been put forward by a group of North Island economists.* The proposals were formulated and in the hands of the printer before the setting up of the expert economic committee, whose report was published yesterday, but publication was delayed in order that the report of the Government committee might be presented first. The economists responsible for this report are: — H. BELSHAW, M.A., Ph.D., Professor of Economics and Dean of the Faculty of Commerce, Auckland University College. • D. O. WILLIAMS, M.A., Lecturer in Economics, Massey Agricultural College. L. W. HOLT, M.Com., Lecturer in Accountancy, Auckland University College. H. R. RODWELL, M.A., Lecturer in Economics, Auckland University College.

F. B. STEPHENS, M.A., 8.C0m., Lecturer in Economics, Auckland University College.

W E ARE NOW CONVINCED, say the authors, that a reduction of, say, 20 per cent, should be made in all fixed charges, and that legislation should be framed to this end. The following principles should apply if the proposal is to be effective: 1. —The measure should apply to all internal long-term obligations, interest on mortgages, debentures and national and local body loans, leases of buildings and ground rents. If the cut is partial it will lead to an artificial diversion of funds from one purpose to another. We do not commit ourselves at this stage to the precise form the legislation should take. Obviously the procedure may be expected to differ in different cases, as, for example, in respect of public and private obligations. At the present stage we urge only the necessity of reduction and believe that the essentials of a workable and equitable plan can be devised. But certain principles should be embodied. Provision must be made for complete or partial exemption where the creditor can show evidence of undue hardship, and in certain circumstances evidence that a substantial reduction had already been made should be accepted as evidence of hardship. But too wide a discretion must not be left to judicial authorities, who, as good lawyers, will be predisposed to favour the maintenance of existing contracts. Lower Overdraft. 2. —lf the lower rate of fixed interest is to have any degree of permanence, it should be associated with a reduction in overdraft rate and on new short-dated loans. The Government should therefore arrange with commercial banks, the Post Office, the Public Trust and Trustee Savings Banks substantially to reduce deposit rates and 44 over-the-counter rates,” and arrange for a reduction in overdraft rates, the average reduction being of the amount required in other cases. There is, however, the danger that deposits may be transferred to non-banking institutions which accept deposits and with which very considerable sums are on deposit. Such institutions should be given statutory power to reduce deposit rates, and it should be provided that after a stated period such concerns shall not be permitted to vary their deposit rates by, say, more than i per cent from the rate offered by the Post Office or commercial banks, and should furnish full returns to the Treasury. This would increase the ability of the banks to control the credit situation and bring about interest reductions. If the problem were primarily one of assisting the budget, it might be sufficient to achieve the same object by a special direct tax on interest; but this would not benefit debtors. In fact, it would be prejudicial to their interests since a tax on interest would be passed on.

Wages and Salaries. In view of the fact that there has been a direct loss in national income of about 20 per cent and of the growing volume of unemployment, we believe that further reductions in wages and salaries are unavoidable, including those of Civil Servants. We suggest a reduction of 10 per cent, which, in conjunction with the 10 per cent already made, will be roughly, the same as the reduction proposed in regard to fixed charges. The effect will be further to reduce costs, which will encourage a downward movement of internal prices. The immediate effect will be a reduction in real ■wages, but eventually this will be offset wholly, or in part, by a downward tendency in house rents and other retail prices. We wish to state emphatically, however, that to reduce wages further without a reduction in fixed incomes of the order contemplated would be an inequity which should not be supported for a moment.

In any case, to reduce wages without reducing fixed charges would impede greatly the fall in the cost of living, and would lead to a very much greater curtailment in expenditure on current needs so that demand for goods and services would fall off. A reduction in fixed costs not only permits of a greater fall in the cost of goods and services, but also assists in the maintenance of the current expenditure of workers and salaried men by lowering their fixed expenses. The Problem o£ the Budget.

An essential part of any plan is to balance the Budget. If this is not done, progressive inflation or default is unavoidable. On the other hand, it is clearly impossible to balance the Budget next year by economies alone. To meet a prospective deficit of over £5,000,000 by economies would mean a reduction in adjustable expenditure by about 35 per cent, which is too great to be attempted in any one year.

To offer anything in the way of a detailed plan, or to do more than indicate approximately the order of magnitude of the problem is not possible without detailed information on departmental expenditure, and all that we can do is to indicate broadly the policy which should be followed. If we accept as a working basis a deficit of £5,250,000 for next year, this could be reduced to £3,250,000 if the economy proposals suggested above were carried out, i.e., a total of somewhat over £2,000,000 inclusive of a cut of 10 per cent on Civil Servants’ salaries. The possibility of some further saving through a cut in pensions and superannuation payments might also be explored. It is questionable whether a case can be substantiated for exempting superannuation or pensions if other contractual incomes are reduced.

The further cut of 10 per cent in the salaries of Civil Servants is as much as can in equity be demanded. Treasury Bills Needed.

A deficit of, say, £3,250,000 still leaves a difficult problem to be faced. We do not think it possible to meet the deficit by increasing existing tax rates. Such deficit as results should be met by the issue of Treasury bills or by other forms of internal borrowing. If the plan herein proposed is accepted substantially as it stands it may be possible to balance the Budget by 1933-34, and a serious attempt should be made toward this objective. Obviously it would be necessary for the Government to continue to maintain careful scrutiny over Government expenditure to achieve this end.

These proposals would still not completely remove the disparity between internal and external prices, but they would have a sufficiently appreciable effect to open up to farmers, traders and producers generally the prospects of profit margins which are now disappearing or have already disappeared. If they are adopted, we shall be in a position to emerge from the depression with a drop in real national income of possibly 15 per cent. If drastic action along these lines is not taken, we are in very serious danger that the Government and local authorities will be unable to avoid default, that the national income and the volume of production will be very seriously curtailed and unemployment increased.

Whatever action is taken, some increase in unemployment during the coming winter appears inevitable, for the downward momentum cannot be checked at once. The plan proposed does, however, provide the basis for the re-employment of idle labour by making such re-employment profitable. The Whole Plan Necessary.

The recommendations cannot be taken singly. They must be adopted as a whole if they are to make any substantial impression on the crisis and to achieve some approximation to economy equity. If the plan is adopted as a whole, the apparent hardship to one income group from one portion of the plan, finds some compensation from other parts of the plan. The economic danger is that the least resistant income groups, particularly wage-earners and salaried workers, including Civil Servants, may be called upon to bear the main brunt of an attempted readjustment without compensation in their outgoings.

(*“Tiie Crisis in New Zealand and the Problem of Reconstruction,” a pamphlet published by the “ New Zealand Dairy Exporter and Farm Home-Journal.”)