PROBABLE EFFECTS

Evening Post, Volume CXIV, Issue 121, 18 November 1932, Page 8

PROBABLE EFFECTS

BUDGETARY POSITION

DISQUIETING CONTENTIONS

•Serious effects on the budgetary position, if the exchange .rate is raised are forecasted by financial authorities who have been studying New Zealand's economic position and the consequences which'have-resulted/ from exchange manipulation in other countries.

■It is evident.that the banks, -while agreeing to carry out the Government's policy of increasing the exchange level, will not take responsibility for surplus funds whi^h will accumulate in London as the result of a contraction of imports. 'As the export season is just commencing, the funds which will be available, to importers in London will soon; be piling up, and the' effects of any hindrance of the import trade will be quickly felt. It thus follows that it will not be long before the" banks will be embarrassed by an accumulation of bills •of exchange, and their legitimate course of action, in the interests of their own stability will be to refuse to purchase further ■ bills unless the Government guarantees to take .over unrequired surpluses, of exchange are one of the principal stocks iii trade of the banks, aiid naturally they must safeguard themselves absolutely from. anything approaching a perilous situation. FLOATING DEBT LIKELY. With a 25 per cent, premium on exchange, the Government will be asked to' find £250,000 for every million of accumulated bills-.which - the :; bank's deem they cannot dispose of. The' effect of this on the budgetary position would be' far-reaching. Already, the Government is budgeting for a de-:. fieit of nearly £1,000,000, and the Minis-: ter of Finance had intimated that the taxable capacity has reached the point when the law of diminishing returns has set in. It appears obvious that the Government could not raise additional taxation to meet the premiums on surplus bills of exchange, but it is possible that it will adopt the Australian policy of. borrowing the money from the banks 'and. creating a floating .debt. The floating debt of the Commonwealth now amounts to* something like £100,000,000, and a large part of it is due to exchange. It is anticipated that the New Zealand Government -would be;required to meet at least £5,000,000 yearly in accumulated surpluses. This money could be used for the repayment of overseas debt service, but for every £5,000,000 so purchased, a premium of £1,250,000 would have .to be paid. Should the Government not be able to meet the premium put of\ taxation, it would have to make arrangements to liquidate the amount of borrowing, as Australia has done. In the ease of the Commonwealth, the money borrowed has been turned into a floating debt on which "interest has naturally to be paid. . Financial authorities also refute the supposition that a high exchange would have an expansive effect on the volume of internal credit. In fact, it was argued to-day, that the result would be in the opposite direction. As the result of a high exchange, the exporting farmer, would naturally receive a bonus on his exports and it is assumed by the high exchange advocates that he.would pass this money into circulation. This procedure, would no doubt apply if the farmer were free from debt, but as the great majority of farmers have to face commitments with banks, stock and station agents, and other financial institutions, the additional money would go to those people who had the first call on the- farmer's income,- namely, his mortgagees and creditors. The effect would be that the farmers' "bonus" would not reach him at all, but would go to liquidate his debts. This would mean a contraction, i>tner. than an expansion, of credit. SECONDARY INDUSTRIES. Naturally, a high exchange will act in-the same way as an increase in the tariff and tend to stimulate secondary industries. It is contended by the exchange inflationists that the result will be an increase in the avenues of employment and a general expansion "of internal commercial and industrial activities. It has to be remembered, however, that tho country will have to face a severe shrinkage in the Customs revenue, which accounts for the major portion of the revenue of the State, and, in addition, there will be the extra burden of the overseas debt service. These factors, it' is argued by those who have examined the position, will more than cancel the inflationary effect of the artificially high exchange. Although.the promoters of the high exchange movement contend that the 25 per cent, premium will not contravene the Ottawa agreement, it is submitted in rebuttal that the Dominions are pledged to stabilise exchanges as far as their trading position warrants. The trading balance in New Zealand on a free exchange basis would be very little, if anything, above parity, and a high level would be a reaction against the Ottawa Pact. Furthermore, it is pointed out, Kew Zealand has pledged herself to place the English ..manufacturer on the basis of a domestic competitor, and if that pledge is to be carried out tariffs must accordingly be reduced in proportion to the exchange increase. While it is admitted that New Zealand's tariff is not . wholly scientific, it is argued t,hat the high exchange would

make it more indiscriminate than ever, and. might lead to irrational conditions in secondary industry development. The high exchange may also have a detrimental effect on the trade relationships between the Dominion and her principal market, Great Britain. It has to be remembered that Great Britain has a, farming community which is seeking increased protection, and should New Zealand's action in exchange manipulation be considered to be detrimental to the welfare of British trade, the advantages the Dominion enjoys on the Home market may conceivably be subject to review by the Imperial authorities.