BRIDGING THE GAP.

Waikato Times, Volume 114, Issue 19100, 10 November 1933, Page 3

BRIDGING THE GAP.

REMEDIAL MEASURES.

REDUCTION IN INTEREST.

LOCAL BODY AMALGAMATION

ROYAL COMMISSION PROPOSED

(Special to Times). WELLINGTON, Thursday. In his budget speech in the House of Representatives last evening the Finance Minister referred to the steps taken to meet the financial position, and the effects thereof, as follows; — I am glad to be able to note that export prices generally are on the up grade. The further disastrous sag in prices which occurred during the last June quarter was followed by a rapid recovery, and, though a slight check has since been experienced, there is reasonable ground for the belief that this is only a temporary halt. The general movement covers practically all of the products in which the Dominion is interested, and is apparently of such a nature that the prospects for economic recovery are brighter now than at any time since the heavy fall in these prices brought depression to New Zealand. As the return from our exports increases, the gap between prices and costs in the primary industries, which constitutes our basic problem, will close, and farming will again become profitable. When some measure of equilibrium is thus restored at the foundation of our economic structure, recovery generally will follow rapidly, although it will naturally take time to clear away tho wreckage of the slump and get trade and Industry working smoothly again. The outlook, however, is heartening, and gives us renewed courage to press forward with the work of reconstruction.

Assisting the Farmer. The Government is at times accused of devoting its energies to assisting the farmers at the expense of < the towns, hut anything approaching a collapse of our primary industries means ruin for the whole Dominion. Thus, in helping the farmers to carry on, the Government is directly assisting the whole community. It Is not a case of town versus country, and the fostering of any such feeling is to be deplored. It is not denied that the secondary industries, and, in fact, all sections of the community, have been seriously affected, hut their troubles are a reflex of tho disastrous position in which the farmers found themselves as a result of a 50 per cent drop in the sterling value of their products within a period of about three years. On tho other hand, working-costs remained relatively rigid at about the same level as before.

Obviously, drastic action was called for. Steps were ‘taken to bring about a general reduction in salaries and wages, as these enter largely into Ihc cost of everything. The reductions made, however, were more than offset by a fall in the cost of living, so that I here was actually no fall in the purchasing power of full time wages rates. Substantial reductions in land-tax, not only relieved fanners, but benefited owners of city properties, and doubtless were a factor in lowering rents.

Subsidies on the carriage of lime and fertilisers and also on the manufacture of the latter, together with

cheap railage freights on farm-pro-duce generally, provide further aid to the farmer at a cost of over £400,000 per annum. Another matter that received attention was fixed charges wherein the disturbing effect of the heavy fall in prices was most glaringly apparent. It was found necessary to make provision for an all-round 20 per cent reduction in mortgage interest down to a minimum of 5 per cent.

Interest Rates and Conversions. ,

Experts do not altogether agree as to the causes of our troubles, but all are in agreement that cheap money Is an essential element in recovery. Accordingly, the Government set out upon a campaign to bring about lower market rates of interest.

In New Zealand, the rates of interest on Government securities largely set the standard for the Dominion, and affect all interest rates. This being ■so, attention was turned to the problem of converting the internal public debt to lower interest rates. The conversion was an outstanding success, and illustrated the willingness of the people to make financial sacrifices. The whole of the £115,000,000 concerned was converted, with the exception of £475,000, equal to less than i per cent. The effect on market rates of interest is fully up to expectations, for tho new 4 per cent stocks are being sold on the market at higher prices than ruled previously for 5 per cent securities. The securities issued by local authorities could not be overlooked. Accordingly, a statutory reduction of 20 per cent in the interest payable on all such securities, but with a minimum rate of 4i per cent., was imposed. Local bodies are now engaged in drawing up schemes and making preparations for convers’on operations. Numerous schemes have already been passed and authorised by Order In Council, and during the next few months a large number should be placed before the bondholders.

Overdraft and Deposit Rates. It was recognised that a reduction of bank overdraft rates would prove of immediate and far-reaching benefit. The overdraft rates of the banks and the advances rates of other institutions are ,of course, definitely linked with deposit rates. The Government made every effort to bring about all-round reductions, and a comparison between the ovei draft rates obtaining in May, 1930, when 7 per cent was being charged, and tho rate ruling for best accounts as from May 1, last—namely, 5 per cent—speaks for itself. The interest now being charged on stock and station accounts was also reduced to a minimum of G per cent. With bank advances standing at about £50,000,000, a reduction of 2 per cent in tills direction alone means a direct saving of £1,000,000 a year, and this relief has been afforded where it is most urgently needed. ■ This brings us to deposit rates, embracing banks, savings-banks, building societies, and trading companies. Deposit rates generally arc based upon rates offered by the banks, and the extent of the reduction effected in the bank rates is indicated by tho following:—Three to six months, April 1930, 3J per cent; July 1933, 2 per cent: Twenty-four months, April 1930, 5 per cent.; July 1933, 3 per cent.

These reductions in the bank rates rendered it possible to reduce the maximum rates that might be paid by building societies, investment companies, and trading companies. it is significant that the prescribed returns from building and investment societies and trading companies since the recent legislation came into operation disclose that interest rates as high as 10 per cent were being paid by certain of these institutions, while rates as high as 6i per cent were quite common,

The rate for the Post Office savings bank and the trustee savings banks Is now as low as 3 per cent. Moreover, in so far as the Post Office savings bank is concerned, this rate applies only to amounts up to £IOOO, but above that amount 2J per cent is air lowed up to the maximum of £2OOO. The ultimate success of the Government’s Interest reduction policy depends upon achieving stability at the lower level of rates. This Is now assured in so far as interest on Government and local body securities Is concerned.

I may add that the Reserve Bank when established will play a leading part In bringing about and stabilising Interest rates at lower levels. From this aspect alone the Bank will be of very definite value, both from the viewpoint of publlo finance and of the country generally.

So far as mortgages are concerned, the 20 per cent reduction is only a temporary expedient, being operative to 1935 only. Unless the mortgagor knows where he stands In regard to his finances for a reasonable period ahead, he has not the same incentive to develop the property, which is the security for the loan. Thus, in their own interests. I strongly urge mortgagees to arrange renewals for a definite period at the reduced interest rates. Furthermore, if rates for other forms of investments are stabilised at lower levels, there should be a corresponding permanent reduotlon in mortgage rates. The State lending departments are giving a strong lead by granting renewals for a further terms at 5 per cent interest in cases where security and personal element are satisfactory. Any new loans are also being made at this rate

Local Body Matters. The fall in prices has greatly increased the relative burden of rates, and demands for derating of rural lands, are made from time to time in different quarters. The subject was prominent at the Counties’ Conference. Total derating is not a practicable proposition, and I do not think It would be equitable. The first effort should be in the direction of seeing what can be done to reduce the burden by lowering the cost of local government through an overhaul of the whole system. What I have to mind is a scheme of amalgamation of local bodies to obtain increased efficiency and economy.

The Government has under consideration the personnel and order of reference for a Royal Commission to be set up to Inquire and report on the whole question.

There is of course no Intention of pressing for amalgamation except where the advantage to the locality is clear, and the change is agreed upon. Tho particular matter that calls for attention is the granting of relief in respect of fixed charges on rural land.

All the measures referred to are important factors in giving relief and laying the foundation for economic recovery, hut so wide is the gap that alone they were not sufficient to meet the situation. The desperate financial position of thousands of farmers made this very evident. Despite a remarkable increase in quantities exported, the sterling value of exports fell from £5G,520.000 for 1928-29 to £32,677,000 for Inst year, a decline of over 50 per cent. With a drop in income of this magnitude ihe imperative necessity of giving assistance to the primary industries is obvious.

Exchange Adjustment. In these circumstances the Government, reached the conclusion that raising the exchange rate was the best course to pursue.

The Government fully realises that exchange adjustment increased the serious difficulties of local bodies, traders, and other sections of the community generally, tout the step was deliberately taken in the best interests of the Dominion, for anything approaching a collapse of the primary industries would lead to disaster for all other industries.

It was to be expected that such a far-reaching act would give rise to sharp differences of opinion, but the recurrent agitation for its repeal and baseless rumours that the rate is about to fall have led to a measure of uncertainty that ti unwarranted, and those responsible for stirring up the agitation are acting against the best interests of the Dominion.

As a Result of all the efforts made, the gap between costs and prices has been narrowed considerably, but the Government Statistician’s indices show export prices about 16 per cent below the 1914 level, whilst farm costs, which are more difficult to measure, are still about 20 per cent abovp that level. This is the position after taking the exchange adjustment into account, so it will be evident that the measure of assistance given by the raising of the rate must continue in the meantime.

In taking action in the various directions that I have indicated the Government has been concerned more with cconomio rehabilitation of the country generally than with balancing the •Budget. The revenues of the State depend upon trade and industry and the general welfare of the people, and in times like the present it is advisable to look first to the foundation of the Budget. The restoration of sound economic conditions is a first step towards sound public finance.