Government Loan Practices

Press, Volume XCV, Issue 28269, 6 May 1957, Page 8

Government Loan Practices

The Minister of Finance (Mr Watts) is expected to announce soon the amount to be sought by the Government from the public for its first loan this year. A welcome addition to the usual statement of the amount and terms of the loan would be an undertaking to close the loan as soon as it is fully subscribed. To some extent the Government competes in the money market with local Jodies and public companies. Both these classes of borrowers are controlled (by the Local Government Loans Board and the Capital Issues Committee respectively) as to the amounts they may seek from the market; and both are required to return any oversubscription. It is sometimes argued that at a time when the trend of the economy is inflationary, the Government acts in the national interest by accepting over-subscriptions to its loans. But this is true only if the money is not pumped back into circulation. Last year, in two approaches to the loan market, the Government sought £15,000,000 and raised £ 18,427,285. In spite of this “ windfall ” of more than £ 3,400,000, the Government finances showed a deficit in 195657, brought about primarily by higher Government spending. The deficit could have been avoided by reducing expenditure or—a less attractive expedient politically—by increasing taxation. The bold step of accepting no over-subscriptions to Government loans would have the advantage, among others, of imposing an extra measure of self-discipline on Government financing.

“ Government loans should “ be for specified amounts, and “they should be closed as soon “ as these figures are reached ”, said the chairman of the Christchurch Stock Exchange (Mr J. H. Griffiths) in his address at the annual meeting of the exchange last year. He said that when the present Government was in Opposition its members were critical of the Labour Government’s “ on tap " loan practices. Stock exchange members are better placed than most to assess the views of all institutions dealing in the money market; and Mr Griffiths’s views on this subject are no

doubt shared by many of the Government’s M competitors ” for loan money. Some of the extra £3,400,000 gratefully accepted by the Government last year would have been invested in local body loans or company shares had this sum been returned to subscribers. Local bodies, in particular, have been hard-pressed to find sufficient loan moneys for capital projects no less important to the economy than those of the central government. The fact that last year’s Government loans were over-subscribed is no evidence that the lenders wanted to invest more than £ 18,000,000, instead of the £15,000,000 asked for, in Government stock. Many individual investors and managers and directors of lending institutions probably subscribed more than they had originally intended to out of a sense of duty. The rush of applications in the last week in which the subscription lists are open—-and even after they have officially closed—has been a notable feature of Government loans in recent years. This gives the impression that many investors defer their applications until they “ see how the loan is going ”. Those who have subscribed, or subscribed more than they wished to, out of a desire to see the loan filled, may justifiably feel some annoyance when the Minister announces that the loan has been oversubscribed. So much is conjecture. It is no conjecture, but a mathematical certainty, that the more money a lending institution invests in Government stock the less is available to other borrowers.

By limiting the loan subscriptions to the “target”, and by declining late subscriptions, the Government would encourage investors to subscribe soon after the lists were opened. The lists could be closed earlier than in the past, and other borrowers would have a better chance to obtain their requirements. Had this practice been followed last year the Government would have earned the gratitude of the stock exchange, local bodies, public companies, and the lending institutions a £ 3.400,000 investment, as it were, in public relations. The investment is just as sound now as it was a year ago.