THE COALITION POLICY

Waipukurau Press, Volume XXVIII, Issue 30, 27 January 1933, Page 5

THE COALITION POLICY

MINISTERIAL STATEMENTS TO-DAY PRESENTED IN HOUSE OF REPRESENTATIVES DOMINION’S ECONOMIC POSITION REVIEWED THE CASE EOU HELPING THE PRIMARY PRODUCERS PARLIAMENT BUILDINGS, This Day. TN Parliament this morning Ministerial statements relating to 1 ‘the Government’s policy were presented by the Prime Minister (Rt. Hon. G. W. Forbes) and the Minister of Finance (Rt. Hon. J. G. ( Coates), the chief of them being the decision to raise the rate of exchange to ‘-25 per cent.

THE PRIME MINISTER SPEAKS | REASON FOR THE ADJOURNMENT The Rt. Hon. G. W. Forbes said: — Hon. Members will recollect that on the Ist December last in intimating that it was proposed to move the adjournment of Parliament until January 26, I stated that the intention was to allow Cabinet to give a fuller and more thorough examination of proposals affecting the general economic position of the Dominion and particularly the difficult conditions of the farming industry owing to the further drop in prices of export produce in our external markets than was possible while Ministers were closely engaged in Parliamentary work. I Professors Called In After the House adjourned on December 9, the Government lost no time in making the necessary arrangements to have the fullest information supplied as to the effect of the low prices on the budgets of the farming community, and in this connection Dr. Hight and Professors Belshaw and Tocker were asked to come to Wellington to make a report upon the changes that had occurred since the compilation of the'report of the Economic Committee of which they were members in February, 1932. The report which they have furnish in compliance with this request has been most helpful to the Government. especially in arriving at the decision of Cabinet to bring about an increase in the rate of exchange, the information supplied by farmers agencies and by the various State lending departments, showed that the farmer borrowers had slipped back very seriously in their payments of principal and interest during the last 1 2 months. Plight Of Primary Producers To give Honourable Members some idea of the magnitude of the arrears outstanding on loans to Settlers in respect of the State Advances Department and the Lands Department I quote the following figures: — At March 31, 1931, the amount owing by settlers to the State Advances Office was £411,740; at March 31, 1932, it, was £835,760, and at September 30, 1932, the total had increased to £1,056,830; in the Lands De- j partment £1,522,137 was due for rent and interest in arrears at the 30th September last, and in addition the postponements of rent and interest amounted to £283,650. I think members of the House will agree that the figures supplied by these two State Departments furnish a lair index as to the position of mortgaged farmers generally in the Dominion. The growth of these arrears on the part of the farming community has been particular ly rapid during the last few' months, owing to their credit and reserves becoming exhausted, and the more recent decrease in the prices of their products, especially dairy produce will no doubt accelerate this slide. A Serious Position It will be readily seen that a serious position has arisen, which will soon become a further problem for the already over-weighted consolidated fund. The review of the economic position submitted by the Economic Committee showed that it had become progressively worse since their report in February last. The following figures will illustrate this. Export Prices Taking the index figures of all New Zealand export prices for the period

1909/1913 as 100, while in 1 928, it had increased to 168, in November, 1932, it had fallen as low as 86, or a decrease of 4 9 per cent.' in lour years. I may mention in passing that the further recent decrease in dairy produce prices is not taken into account in the figures I have just quoted. External Trade Now as to external’trade the most obvious effects of this decrease in export prices may be seen in the overseas trade returns. In 1928 the value of our exports was £56.2 millions, whilst in 1932 it was £32.6 millions. The value of our imports for the same years was £44.1 millions and 22.8 millions. These figures represent a decline of 40 per cent, in the value of our exports and 53 per cent, in imports. The heavy fall in imports is, of course, the direct effect of the contraction in exports. Fall In National Income I will now take production in relation to national income. The estimate of national income is approximately made by adding about 20 per cent, to the official estimates of total production. The following table sets out the position:—Estimated value of - total production of farm products 1 928/29, £82.1 millions; 1 932/33, £49.0 millions; other products, 1928/29, £41.2 millions; 1932/33, £3“z75 millions; total production 1928/29, £123.3 millions; 11)32/33, £81.5 millions. There is thus a fall in national income of 35 per cent. It may, therefore, be concluded that the national money income, which constitutes the purchasing power of the community, has declined by at least one-third of the 1928/29 income. Internal Trade Again, in regard to internal trade and finance, it is inevitable that as a decline of this magnitude should be reflected in the volume of inteinal trade. The best available indication of internal business is the return of total debfts per week to all bank accounts in the Dominion, published by the Government Statistician. These show that in 1929 the average debits were £20.9 millions and in 1932 £13.5 millions, or a decline of 35 per cent, in the total volume of financial business in the country. ; The figures I have given to the house present a striking record of the decline that has occurred in New Zealand’s income and trade. Effects Of Depression The effects of the depression have ' been cumulative; felt first by the ! farmers, they have passed on to the I producers of local goods and services of all kinds. The full extent of these effects, however, is only now beginning to be felt in internal trade. The farmers in their efforts to maintain production have draw’n upon their resources of capital and credit. Now, largely, they have to depend solely on income from the sale of their products; as the resources upon which they can | draw become progessively exhausted, I their purchasing power must decline | further, and the effect on the cities and towns must be felt more severely. It bcomes apparent therefore that the essence of the present difficulty is in the progressive disappearance of profits and in the increase of losses. ’ What Revival Depends On j The restoration of sound business ’ conditions, the expansion of production, the absorption of the unemployed, the increase in purchasing power and in demand, and the revival of general business activity, all these must depend on the creation of such

conditions as will permit profits to reappear. Profits depend on the relation of costs to prices. Since 1929 .export prices have declined by 4 9 per cent., retail prices have fallen by only 19 per cent., wholesale prices by 14 per cent., and wages (nominal) by 16 per cent. The Main Problem A reduction of internal prices and costs of about 35 per cent, is required to bring about the same relationship to export prices as existed in 1929, the main problem is to reduce the disparity between costs and selling prices. To let matters drift and allow undirected deflation to have full sway would be obviously unthinkable, and could not be countenanced by the Government. Such a policy would dangerously aggravate our already serious difficulties. Various Avenues Examined Cabinet, in its consideration of the position, has examined various suggested avenues, having for their objective the increasing of prices, su.ch as a rise in the rate of exchange, various’forms of internal credit' expansion, including a grant or bonus to producers, and also a grant or subsidy to farmers financed by taxation. After mature deliberation the Government came'to the conclusion that an increase in the rate of exchange from 110 to 125 would be more advantageous to the country as a whole than any other method in easing our present difficulties. The Government approached the banks and requested them to take the necessary action to give effect to this decision. In their arrangement with the banks the Government have undertaken to indemnify them against any loss that may be incurred on the sale of exchange purchased at the new figure, and a bill will be introduced accordingly to obtain the necessary Parliamentary authority to give effect to this undertaking. I do not in this statement propose to deal in detail with the various arguments for and against this decision. Ample opportunity will be afforded to Hon. Members for discussing the subject. Advantages of Increased Exchange 1 will briefly mention some of the advantages which may be expected to accrue from the course that lias been decided upon. The national income and the national spending power will be proportionately increased. It is estimated that the proportion of costs likely to increase with a rise in exchange is small. At the present time industry and trade are being contracted, and unemployment has not decreased because much business cannot be conducted on a profitable basis with production contracting as it is at present because, of maladjustment of costs and prices. A rise in exchange, which increases prices more than costs, will certainly tend to arrest the decline and may stimulate an increase. , Arguments Replied To It may be urged that the primary effect of a rise in exchange is to increase budget expenditure, through the increase in the cost of overseas interest payments, and to reduce customs revenue temporarily, but the secondary and more important effect is to prevent an appreciably greater fall in taxable capacity and non-tax recepits. Benefit To Budget It is confidently anticipated that the net benefit to the Budget from the increase in the exchange rate will not be long delayed. The effects of the present depression have not yet been fully felt, but it is quite certain that unless further adjustments are made, the national income and taxable capacity will fall further. It will be remembered that a short time ago 1 expressed the opinion that the question of exchange was one that should be properly determined by the banks. Since that date and consequent upon a close examination of the position, the Government came to the conclusion that the matter had become one of serious national importance and could not be left to outside agencies. If the country had been able to continue without an alteration in the rate of exchange, no one would have been better pleased than myself, but, in the history of all countries, grave emergencies arise when it becomes necessary for. t ,a Government to interpose and place upon their own shoulders the responsibility for the

course of action they deem best in the interests of the country. Conditions Become Worse What I stated on the occasion to wnich L have referred, was my opinion in the light of conditions then existing. These conditions have unfortunately become more unfavourable and rendered action on the part of the Government imperative. I recognise that' the action of the Government in bringing about an increase in the rate of exchange does not find favour with those engaged in the import trade and in other business circles, but I would earnestly ask those who are already criticising the Government to view the position from a national standpoint and consider what would happen if a policy of extreme deflation with all its attendant evils were allowed to hold sway. Two Outstanding Factors Two of the outstanding factors which appealed to the Government were the existence of a distressed farming community and the unfortunate position of the unemployed. It is indeed a sad state of affairs when 6 8,000 of our citizens are out of employment at a time usually regarded as the busiest season of the year. When we remember this fact, I feel certain that the pressing nature of the problem must be brought home to everyone of us. If Orthodox Methods Fail — I would ask our critics to regard the position in the same spirit as actuated the Government in coming to its decision; if orthodox methods fail to find a solution, in times of grave emergency, then I claim that the Government is justified in resorting i.o other means in order to lighten the burdens of the people. Absorption Of Unemployed I feel confident that with the stimulation which will now be given to both primary and secondary industries, we may look forward to a gradual but certain absorption of a large number of those who are at present unemployed. The importance of this aspect of present conditions can, in the view of the Government, bo longer be ignored. There are those who hold different opinions from the Government in regard to the policy of raising the rate of exchange to relieve what all must agree is a very serious position, but it is the responsibility of the Government to decide the course to be adopted. This we have done, and we are confident that the wisdom of this step will ere long he apparent. MR. COATES’S STATEMENT PLIGHT OF PRIMARY INDUSTRY The following is the statement made to the House of Representatives by the Rt. Hon. J. G. Coates, Minister of Finance:— Since the adjournment of the House the Government have again taken thorough stock of the economic position of the country and have considered ways and means of meeting the situation. In particular the Government have been concerned about the plight of the primary industry, which is the basis of the whole economic structure of this Dominion. Costs and Prices 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 192 9. Comparing the position as shown by the Government Statisticians’ index of prices in 1914 and in November 1932, we have export prices 21 per cent, below 1914: farm expenditure (year 1931) 4 9 per cent, above 1914; retail prices 29 per cent, above 1914, and 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 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. In the past year much was done in one way and another in the direction of relieving the situation, but it all fell far short of what was required

to bridge the widening gap between costs and prices. New Zealand, in common with other countries, has looking to a recovery of world prices Help for Farmers We must immediately take steps of a far-reaching nature to assist our primary industries at the outset. The general 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 be between “deflation” and “inflation.” Our view is that, with the choice of reducing costs or increasing monetary receipts, 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 loss dislocation than if we seek to obtain adjustment by one method alone. Civil Service Salaries I may say that a further reduction in the rates of wages and salaries in the Government employment is not contemplated and this is itself u. 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, exemptions of farm loans from income tax, and the direct Issue of credit by the Government were carefully considered, but the raising of the exchange rates was deemed preferable to all other methods, and. as TTon. Members are aware, action has already been taken in this direction. The Government have agreed to safeguard the banks against loss arising out of exchange dealing at the new rates. This in effect means that the Government will purchase any surplus London credits bought by the banks at the new rates of which they are Unable to dispose at the current rates. Tn this way the Government may he called upon to purchase more exchange than is actually needed for current requirements, but any such surplus amount can bo used to pay off debts abroad with funds borrowed in New Zealand. The not effect, apart from exchange, is thus a transfer of debt from abroad to New Zealand. While some surplus exchange may have to bo purchased during the first year, it is considered that this is hut a temporary phase, as conditions will soon adjust themselves to the new position. The Government recognise that, whatever' the rate of exchange may be, stability is a most important factor in the interests of all sec-, tions 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 he departed from lightly. Tt is of course impossible to fix any definite period, as wo cannot foresee the course of events either in New Zealand or abroad. Reduction of Interest Charges The Government are anxious bring about lower market rates or interest on a sound basis. Tf this can be achieved it will be of much greater and of more lasting benefit to all sections o r xi,p community than a simple cut in •existing charges. Tr. New Zealand our market rates of interest continue to be. relatively high. Tim Government consider it essential that interest rates on existing securitio.- should ho brought down to a lower lewd. T 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 in so far as local bodies’ debts are concerned, because there are so many local authorities with securities on the market. Tf the more comprehensive proposals can ho 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 tn regard to those matters are well in hand and I am hopeful that arrangements can bo completed to lighten the cost of those items. Mortgage Interest Rates Finally there is the problem of mort- ! gage rates. As Honourable Members 1 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. In so far 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 l>e carried on-, the confidence of investors must be retained. The existing power for the review of individual cases arc already very extensive, and no further major amendments of the law appear to bo necessary. Railway Freight Charges As a further step towards bringing down costs arrangements arc 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 £IGO,OOO in the first year, although increased traffic at the lower rates may later reduce the amount of the loss involved. No one will question the fact that the incidence of customs taxation is a very important factor in connect on with costs of production and Trit* -he general cost of living of the whole com munity. Apart from these considerations New Zealand is committed under the Ottawa agreement to conduct such an inquiry into customs tariff the question having been there approached from the -viewpoint of facilitating trade with the United Kingdom in return for valuable concessions given to this Dominion. The Government have no intention of 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 t herefrom. It is intended to set up a small body which will review the whole position and make recommendations with respect to tariff rates. Tt is proposed that the inquiry should commence as soon as possible. Prospective Budgetary Position The various proposals out lined will for the most part accentuate rather than relievo the Budgetary position, but taking a broader view it cannot be gainsaid that .if we fail to take ''tops 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. A justificatio 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 Now 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. I may say that our expectation is that, with the utilisation of reserves amounting to £2,500.000, the year will close with a deficit M in the vicinity of £700.000. For next financial year if the re-, venue ami the expenditure wore the same as is 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 snrinkages in the revenue, and any unavoidable increases in expenditure. While the raising of the exchange rate will bo 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. Tn addition <o flip effects of the increnrr 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 bo cumulative. Customs Having regard to all these considerations it is at present anticipated that the customs revenue for next financial year will show a falling-off compared with the probable receipts for this year of £1,400,000. Income-Tax Income tax which will be based on this year’s trading operations will undoubtedly be less. Tentatively a com-

parative decrease of £750,000 is beingallowed for. Stamp and Death Duties Revenue under this heading 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. The net decrease in the revenue is estimated at £250,000. Interest Receipts Interest receipts from the railways will be directly affected by the proposed reduction in freight charges and with a further probable* decline in the receipts from other investments. The not shrinkage is estimated at £220,000. Post and Telegraph Profit On 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 this heading. This will increase the revenue shrinkage by the amount anticipated to come to hand this year, viz., £470,000. Other Items The remaining items of revenue will all be more or less affected by the continuant present conditions and a net decrease of £260,000 has been put down for such items. This year’s revenue will include £2.500,000 to be derived from the liquidation of resources invested in Discharged Soldiers’ Settlement mortgages. Exchange Based on the anticipated results for this year the largest expenditure increase will undoubtedly be under the heading of exchange. The increase in the exchange rate adds a further £1,050,000 to the cost in New Zealand currency of remitting pay ments. * Further Economies A further net saving estimated at £lOO,OOO will be obtained next year arising out of the fact that economies will be operative for the full year of the total recommendations 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, viz. naval defence (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 adopting the last item. As for the reorganisation of the hospital system, this is a matter that has not been overlooked, built is obviously a proposition that would take some time to obtain any relief. The remaining recommendations of the Commission are not being gone into, but the most that can be hoped j to be obtained from them is £200,00 0. EXCHANGE SURPLUS IN LONDON The treasury estimates allow 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 to £1,000,000 (that is 25 per cent of the surplus).