STATE FINANCE

Evening Post, Volume CXXVII, Issue 2, 4 January 1939, Page 12

STATE FINANCE

OVERSEAS FUNDS

BORROWING IN THE LOCAL MARKET

['Evening Post," January 4. A lengthy review of New Zealand State finance is one of the outstanding features of the "Economic Record" for December, the journal of the Economic Society of Australia and New Zealand. The writer is L. W. Halt, Auckland University. Dealing in detail with current revenue and expenditure and reserves, the writer enlarges on the public works policy and refers to the present Government's opposition to raising loans outside New Zealand. Attention is directed to "the weakness of financing capital works by means of savings bank deposits," as they are short-term funds and liable to be drawn on heavily in the event of a depression.

The Reserve Bank is dealt with in a special section and reference made to fhe drain on its London funds.

/ In conclusion the writer remarks that the post-depression period was one of marked prosperity for New Zealand, due mainly to increased returns from exports and from local production. "Many local industries have been j stimulated by increased purchasing power due to the increased wages paid, but on the other hand in some industries rising costs have encouraged keener competition from overseas, and a measure of tariff protection has been found necessary. "In order to absorb the unemployed it has been' deemed advisable to carry out a substantial programme of public works. Loan funds have so far been available internally for this purpose through the large excess of savings bank deposits over withdrawals, while increased returns from taxes have made available considerable sums from revenue for capital development. In the current year it will apparently become necessary to borrow fairly heavily on the local market, and to repeat the process annually if the present rate of capital development is to be maintained. "Present policy would appear, to cause current investment to outrun current savings, with a consequent drain on the London funds. There is apparently also some movement of capital seeking investment overseas. xhe_ present overseas funds are sufficient to allow for an adverse trade movement at the present rate for some time [the article was obviously written before the recent measures were taken to control exports and imports and exchange], and meanwhile there has been a slight falling off in imports. Two factors operating which will tend to maintain an adverse trade balance are the financing of public works by internal borrowing, and the issue of credit by the Reserve Bank for financing the housing programme and any deficits which *_iay arise on the marketing of dairy produce.

"TQC the present adverse movement continues, the Government will be compelled to raise loans in London for capital development, or to restrict consumption by raising the rate of exchange or rationing imports." Imports are now under control. The writer realises that "a serious fall in the overseas prices of primary products would accentuate the. present trend of State finance, especially if it took place in products covered by State guarantee.

As the writer sees New Zealand, even with its present high national income, the Dominion is "living beyond ite means," particularly as it is considered to be expedient to carry out extensive capital works without the aid of overseas capital. The final sentence of the article is: "A serious fall in that portion of the national income which is derived from overseas would cause a most embarrassing situation."