FEDERAL FINANCE

Hokitika Guardian, 26 August 1930, Page 7

FEDERAL FINANCE

NIEMEYER’S ANALYSIS:

j* AN INTERESTING REVIEW. (Australian Press Association)

- SYDNEY, Aug. 24. Sir Otto Niemeyer, representative of the Bank of England, in Ins state-

ment to the State Premiers’ and I Treasurers’ Conference, remarked

T that a. practical solution ,of the serious liiiancial problem,- was not rendered any easier by tlie natural optimism,/ of/the Australians, among whom', he said, the general belief prevailed that there was an unlimited market . abroad for Australian goods, a/ud» that’something would turn up. .He then proceeded to sketch the elements of the situation. He said he regretted •, none of the States lias yet passed its Budget for the current year because Australia must. be treated as a whole, • and the reactions of inter State finance and of State and Federal finance are essential to a complete view. The fortunes of all, he says, are inter-dependent. He continued: Characteristics of the Budget position are that the Commonwealth and nearly all of the States have/had deficits for at least three years, these resulting in accumulated deficits which largely have been, unprovided for, except by tern porary methods of finance. The Commonwealth alone, he says, has an accumulated deficit of 'six and, a half millions to which must be added the accumulations of the States. The Commonwealth Budget, on the Estimates presented, is narrowly balanced, but it-is clear that several of the States must face a substantial Budget problem. Even if their Budgets this yeaivprove balanced, owing to the seasonal nature of the tax rethere. will be .ways and means deficits in . several'. States 'during the

early" months.- : . • •i Apart'", from - the.. Budget position, there is/ani/unfunded floating debt, of about tliyee/.millions.There also are maturing , securities between , now and.>peeember totalling eighteen millions//for. the Commonwealth, and some 24'< millions for the States — ehieflv /New - South Wales and Victoria. These'-,.wi1l be followed by some >' forty-fotir;,' millions .for the Common- •' wealth' and the States in the next calendar .year; ; severity-two arid a half ,] millions- in , 1933 j and., fifth-one mil- ]

lions in ' The external debt is large, and is 1 made more severe by the depreciated 1 exchange; an it includes no less than « thirty-six . millions, practically at call, t in London, of which eighteen mil- f lions are : due to the Commonwealth 1 Bank; nearly eight, millions in Sep- 1 tember to one London bank; and ten ] millions of Short Treasury Bills, half t cithern- due in September, and the t

balance in December. Moreover, in a few years, Australia will have a heavy funded external debt maturing, starting with thirteen millions in 1932, near the time of the seventy-two and a half millions internal liability. The deposits in the savings banks are beginning to drop, and drop heavily, in some cases, which increases the difficulty of dealing with the internal maturities. The yield from taxation—already at a heavy level in relation to the national income—is dropping substantially, and it may be i expected to fall more.

After referring to the weakness of Australian credit (already cabled), Sir Otto Niemeyer points out that the balance of trade is strongly unfavourable, it having fallen from about one hundred and forty millions yearly to something perhaps a little over one hundred millions, which, after providing for Government requirements, . would not leave more than about sixty millions for all other Australian payments overseas. The staple exports in wool and wheat have declined in price, the former by 45 per cent; and the latter ; by 39 per cent, since 1920. This has resulted in a depreciation of the exchange, which has only been maintained at a six .and a half per cent basis by exceptional and drastic tariff increases, by prohibitions and the most rigid rationing of exchange by its banks. There are temporary expedients, which have been tried elsewhere, and are not able to be regarded as permanent solutions.

H>e continued: “Australia is off the Budget equilibrium, and off the exchange equilibrium, and she is faced by considerable unfunded and maturing; debts, both internal and external. In addition, she has on her hands a very large programme of loan works, for which no financial provision has been made. The only alleviation of the gloomy picture is that, apart from the thirty-six millions of unfunded debt, Australia, by u great piece of luck, lias no external maturities in 1930 or 1931. That means, in effect, that:,she has a maximum period of two years in which to put her house in order.

HIGH COSTS

“These serious manifestations of financial malaise are the inevitable reflection of deeper economic causes. By a series of accidents, chiefly the • liberality of lenders and the accidental high prices of Australian exports, Australia, so far, lias been able to remain aside from the general trend of i world conditions, and to maintain a standard of costs which the rest of the world has long since found impossible. While wholesale prices, compared with 1925 have fallen slightly in Australia—about five points—they fell nine to ten points in Canada, New Zealand and South Africa; eleven in the United States; seventeen in the United Kingdom down to the end of 1920, and twenty-three in 1930. From the Australian angle, the English figures aro perhaps most important, they more nearly reflecting the world market. Tfcus, even with the same drop in Australian prices,

the gap between this country and the rest of tlio world is increasing rapidly, and is not diminishing. It does not need much reflection to appreciate the probable effect on the value of Australian exports. It may be hoped though without certainty, that wool may maintain something like its present level, but with heavy harvests anticipated in Canada, Argentina, and India, and a large tarry over in Canada and the United States, it is difficult to see how wheat prices can fail to drop. Further, ■

though the Australian wheat crop, may be larger than last year’s, its effect on the aggregate value of the exports is likely to be small.

Sir Otto Nliemeyer proceed/: ■ “T think it is generally admitted that Australia’s national income lias substantially diminished. Yet, further, and from that lessened total, you are j driven to take an increased share in j taxation, while at the same time, I making heavy call; for loans lor con-j versions on the diminishing current i savings in a time of depression. One ! may put the same facts in another form. .While the values in the world

export market to which you have to sell have fallen, and arc falling steadily, the values in Australia have fallen very little, and this fact itself intensifies the difficulties of achieving even a trade balance, to say nothing of trade surpluses which you need to meet your foreign payments. So long as the sheltered trades of Australia insist in taking so large a share of the national dividend, and even an increasingly large proportion, as the national dividend drops the difficulties of unslielterod exports and trades can only increase. Australia has to adjust herself to a world economic situation more disadvantageous to her than any in the last decade.

“As a debtor nation, Australia is interested in the world price level, and this is everywhere falling rapidly. It is likely to continue falling. To this situation, Australia has by no means adjusted herself, either as regards the situation of the primary producers or secondary production. The fall in price levels means, apart from an increased 'burden of all debts, that, firstly, the primary producers, who are competing in the world markets with Australia have a competitive advantage so long as the latter’s costs of production are not reduced. “Secondly, if Australian secondary industries must face fierce international competition, growing in intensity as price levd’s fall, unless it, in turn, is able to reduce the costs. Trie secondary producer can attempt to meet thin price situation by increased tariff protection, but this simply means that this protection is achieved at the cost of primary production. The primary producer can not attempt to meet the situation by a further depreciation in the exchange. Increasing tariffs prejudice the primary producer, but rising exchange rates prejudice the whole fabric of national finance. Morover, the argument bo stated has assumed that the prices of Australian export products ( in the world markets are accurately

reflected by movements in the general world price level. This is not the case,

and there is considerable reason to fear that the pricer-; of those particular products in which Australia, as exporter, is primarily interested will decline more rapidly than the general price level.

“The prices for finished goods in all countries are kept up by the inelastic character of the'wage system, while primary production, not employing much labour, is more responsive to the direct pressure of supply to demand. “Australia’s disadvantages arc ac-

i. centuated. by climate vagariep. The combined effect of these factors has already been to alter the position of Australia, in bargaining to sell her own production against that of the rest of the world. A .larger quantity of Australian goods must- now be given for the name volume of Australian purchases.”

j Turning to the factors affecting Australia’s economic situation from the inside, Sir Otto Niemeyer says: I “Australian production increased by o”i v one per cent, per capital between 1911 and 1928. This, obviously, is less than the rate of increase of other countries’ products competing with . Australia’s. In Australia, between 1924-25 and 1927-28, the number of workerfi employed rose by five, per cent, but the output was only three per cent higher. In the same period the United States factory employment fell five per cent, 'hut the output rose fifteen per cent. In the United Kingdom, the industrial population was five per cent greater and the production seven per cent more.” There was also evidence, lie said, that the standard of living in Australia bad ranched a noint which it was economically’ bevond te capacity of the country to bear without a considerable reduction of costs resulting in an increased per capital output. At present, while the money wage of those employed is almost double that of 1911, the number of those who can attain that wage is. so steadily decreasing.—unemployment, having doubled since 1924 —that the Australian workers, as a body, effectively receive litti'o more than in 1911. The. margin of those who have to be the carried neutralises in the total the advantages of those employed. This process must ibocome more acute, unless an adjustment is made, - enabling a larger number to share the total national dividend. Australia must reassure the world as to the direction in which she is going financially, and no one else can do that for her.”