NATIONAL FINANCE

Hokitika Guardian, 1 October 1931, Page 2

NATIONAL FINANCE

OUR PRESENT PLIGHT. (By. Scrutator in N.Z. Financial Times). During the past few weeks events in the field of national finance, both here and in Britain have moved to a position not far short of catastrophe. In Britain it has taken a political upheaval and, significantly, the dismissal of . Labour Government, even to clear the decks for a programme of rehabilitation ; while in the Dominion, where Labour elements are in opposition, a Parliamentary Committee representative of all parties in the Louse has been set up to make an investigation into the economic position of the country, with a view to the formulat on. of the inevitable “plan” to extricate us from our present difficulties. Too much significance need not be attached to the setting up of this Committee as a sign of grave national emergency, since it is clear that it is in part at least a manoeuvre in the party strategy that has arisen out of the .fusion issue. Nevertheless, the setting up of the Committee has been a wise move in the national interests, even if it only makes plain the fact that otir economic situation is much wOrSe than Parliament of the general public have hitherto realised.

OUR SERIOUS POSITION. While many .of the wild rumours now current can be <liscounted or dismissed ' it is nevertheless certain that the position is more serious than a study of the recent budget would indicate and ' that was surely ■ bad enough. There are reasons to fear that some of our local bodies are finding difficulties in meeting their loan commitments, not a surprising fact when one considers the rate at which these loans hav been piled upon the last decade. U seems also to be the case that budget estimates of revenue are not likely to y be realised and that here, as in Australia, we may not be able to turn the fiancia lcorner without some “adjust- . ment” of public debt contractors. We are at the moment, in other words, nationally insolvent, or so near to it that emergency measures to meet such a continency must be disesussed and prepared. In particular, some of our public expenditiires, in the way of social services and interest charges, that have hitherto been regarded as exempt from revision, will have, for the time being at least, to be reconsidered; while further avenues of retrenchment in variable expenditure will have tr be explored. When financial difficulties come, we must either reduce expenditure, or increase revenue, or default or'adopt some mixture of these expedients- because they are the only courses available; and ali so-called •plans or rehabilitation merely ring the changes on these alternatives in vnry» jug combinations and degrees, Tim solution of increasing public revenue '"sSSms ruled out by the stringency of . the time ,the restriction of taxable capacity, and the difficulty of borrowing on an adverse home and British market. “BORROW, BOOM OR BURST.” That some situation was ultimately inevitable has long been known, and indeed is crystallised in the famous “Borrow, boom of burst” maxim that has so often been cited as a warning to a heedless Parliament and people. The public policier, followed in this country in the last generation' have not been such as to commend themselves to financiers of a cautious disposit-

ion. The system, however, could have gone on much longer, perhaps a de(ade or a generation, had the world price level remained favourable; but the emtastrophie drop in the prices of primary products has so cut down our national income and taxable capacity, and so increased the weight of debt that some unorthodox financial expedient seems inevitable. The following figures are an indication of the main trouble to-day. They are given in millions sterling, and may be taken as approximately accurate, and as far as debt figures are concerned, are duplicated to the extent of something over seven million sterling, the amount lent to local authorities by the central government:—

1910. 1920. 19?' £m. £tn. £m. C ross Public Debt 74.9 201,2 276.4 Local Bodv Debt 14.9 24.6 64 Re- enue Central Government 9.2 26.1 26.3 Revenue Local Authorities 5.S 10.9 22.2 • A consideration of this summarised taii e shows clearly how rapidly public commitments have expanded, particull arlv in the field of local finance. It is the opinion of most who ha\e given, reasonable consideration to the subject ( that debt and expenditure, national and local, have expanded out of proportion to national income or taxable capacity as disclosed by any reasonable index. Taxab'e capacity, it must be remembered, is not the whole national .income, but only the surplus available a?qr providing for the living needs of the community, and of this surplus experience shows that it is administratively and psychologically feasible to take only a part. When taxation cuts into the national capital it accentuates existing difficulties by drying up the sources of future taxation, "discouraging industry, and increasing unemployment.

FALLING PRICES INCREASED BURDEN. Much •of our debt was contracted when the pound wa s worth much, less than it is to-day, so that with every appreciation of money, or fall in general prices, the burden automatically increases, and a progressively larger proportion of our national production lias to be earmarked for debt service. The fall in prices has been of so serious a nature that it is now- open to question whether the Government or the local authorities can imp-ement their bond in lull. I*or this situation they are not directly to blame, since the world price level is beyond our control, and it is idle now looking round for scapegoat for the extravagances of the past. We have sown the financial wind, and are now reaping the whirlwind. »

Ono general lesson that emerges from our. experience, and that of otner countries to-day, is the failure of democratic politic s on the When all adults have the right to vote and politics gets into the hands of men who live on it as professionals, it is inevitable that a system will arise under which votes are solicited and obtained, not by the crude, old-fashioned method of personal corruption, but bv mass bribery in the form of the expenditure of public money for the benefit of powerful Voting interests. In particulilfj the eniplOymeht of tile publicworks fulld as & hieaiis Of electoial policy has meant the coiicilating of voters, and"tile creation of jobs, by the expenditure oil works of dubious utility of loan moneys raised on the security of the public credit. Such a system cannot endure for ever, and its imminent breakdown is one of the readjustment problems that this country has to face, and, at bottom, is perhaps the most important of them all-

THE TASK OF THE

PARLAIMENTARY COMMITTEES

Faced with a task .of exceptional difficulty, the Committee is first of all collecting facts relative to the national economic life. It is the careful collation of the facts that is the important issue, since the general principles applicable are relatively simple, and, as far as State finance is concerned the possible alternatives are few. It is in prescribing sound remedies for the condition of private economic activity particularly primary production, that the greatest difficulty and diversity of opinion will be found. So far only general indications have been given as to what the Committee is doing, and in all probability it will not be disfi £- ed to publish a verbatim eqcrt cl its preceedings, as seme 'of the matter placed before it will doubtless be confidential. It is, however, desirable that as much publicity as possible should be given to the position of the country now that people generally are in a mood to listen. It may even be possibly to get the public to realise that the Government has no bottomless purse, but can spend only what it takes from us by taxation or .loan. RECASTING THE BUDGET. The immediate problem doubtless will be a reconsideration of budget estimates of receipts and expenditure, which, there i s reason to believe, are somewhat optimistic, in view of rapidly' developing conditions. As a rule such is the constancy of esablished habit, revenue receipts can be estimated within a very narrow margin, but in abnormal conditions past experience is 'not a reliable guide, and departmental estimates may be quite wide of the mark. " This may easily prove, in existing conditions, to be the case with the taxation estimates, notably customs duties, for the present year. It will be recollected that the Minister of Finance expected a deficit of £6,850/000, due to anticipated revenue shrinkages of £4,810,000, of which customs duties covered over two millions, land and income tax £600,000 and railway interest £930,000, while expenditure increases of £2,040,00 were expected, including unemployment subsidies at £1.1'X),000, debt service at

£350,C00 and pensions at £200,000. The items particularised are certainly ominous for the future. To meet this

deficiency, salary reductions contribute £1,390,000 other economies in expenditure £595,000, suspension of funded debt payment to Britain £870,000, and use of reserves £1,140,000. With other items this amounted to a little over five millions, leaving £l,800,000 to be raised by additional taxation. “BALANCED”? Several facts are here noticeable. The first is that the budget is not “balanced” at all in the ordinary sense of the term. When we talk of balancing the budget-, we usually mean balancing recurring revenue against recurring expenditure.' In this instance the balance has been effected bv postponement of a large item for funded debt service, and by employing reserves, capital items in other words to an extent of over a million sterling This is a form of deficit finance, and while it is not a desirable practice and cannot be repeated in this form, it is duffioult to see what else coulcT have been done in existing conditions. It was expected that these measures woidd yield a total revenue of £24,964,000, but the estimated figures for customs duties is £7,410.000, land tax £1,100,00, and income tax £4,230,000. If these estimates are too high, and there is a general impression that they are, then the budget will got balance even with its capital reinforcements. It is also clear that economies in expenditure have been on a small scale, and that with increasing debt and un-

employment, services, this item is likely to increase. Of the estimated expenditure no less than 17.6 millions sterling is invariable under permanent appropriation, and the balance of seven millions is on annual vote.

THE MAIN TASK. The main task of the committee, we think, will be to test, as far as possible the extent to which realised revenue will come up to expectations, and to consider to what further extent exn- " diture, either permanent or annual, can be curtailed. It does seem probable that some revision of budget) figures will be called for. The__-dimi-nution in imports will reduce customs revenue, and with the prevailing business depression taxable income will be smaller than, has been anticipated, while many farmers cannot pay land tax, because .they have nothing to pay it with. On these points the Committee will have to get the most accurate data available, and recommend accordingly. On the expenditure aspect, they will probably fail to agree, since the Labour members will probably refuse to assent to any curtailment of pensions, education, or other social services ; and, following the course adopted by the Labour Party in England to-day, stick obstinately to the short run interests of their class rather than to the general advantage, If expenditure cannot be reduced, then, if default is. to be avoided revenue must be increased. It is difficult to See where substantial additional revenue can be got from. The probabilities point to the fact that the limit of .taxable capacity has been reached, and that further imposts would re--1 tard recovery, and possibly actually result in dimin’shed revenue now or in the future. Whether taxable capacity is stretched to the limit is a question that experience alone can finally determine.

If a satisfactory adjustment of revenue to expenditure proves impossible, then the next item on the plan will be a compulsory "conversion" of the internal debt to a lower rate of interest which we do not like, and at the moment, on which we do not propose to dwell, but it is useless to conceal the fact that this form of disguised and partial repudiation is a contingency which we shall have at least to consider, and possibly put into effect. THE GENERAL POSITION. Other difficuTE questions for the Committee to face will be the general condition of business, and especially the position of the farming community. The situation of the sheep farmers is viable. Wool is down, and . likely to stay down, and that means that heavil> mortgaged properties contain, for the time being, little or no equity, and may not even bring 'in enough to meet rates, taxes and interest. Whether an attempt should be made to interfere with existing mortgage contracts will be a thorny problem, .since expedience shows, that this Supei-flcially easy i-eilledy irlay be worse in its effects thart the disease. It Is a question whether tins problem should be left to the natural P'ay of economic forces, or whether remedial action should be taken. This depends to a considerable extent on the actual facts, which so far have not been made public. UNEMPLOYMENT. In addition, this harassed Committee will probably be called on to consider the unemployment situation, and the provision of some more permanent cure than relief palliatives. It will also have to face the problem of exchange and possible inflation. If the budget does not balance, then short-term borrowing on Treasury bills seems indicated,and this is bound to inflate bank credit, raise the price level, and keep up costs, while a further fall in exchange would complicate the problem of remitting money to London. There is also the thorny question of the wheat duties, which at their present level are quite unjustifiable. Altogether the Committee has its hands pretty full. PRINCIPLES OF FUTURE POLICY Whether the work of the Parliamentary Committee is effective or not in finding a rehabilitation plan, and we are not, on present showing, over-optimistic on that point, it is plain that the future remains for consideration. Unless there is a change, in world conditions or our own policy, like causes, in the future, will produce like effects. As regards external factors affecting our prosperity, the most important is the world price level, over which we can exercise no appreciable control, and which determines the money value of our export surplus, and indirectly the annual weight of the external debt. This factor we hp.ve to accept, but it does lie with us to determine the extent to which our own internal price level shall correspond with world conditions. The proper policy, it is suggested, is to keep our internal currency at par with sterling, or at all events, in the next few months or years, make every effort to prevent the New Zealand pound from falling to a lower discount, expressed in English pounds, than rules to-day. There will be powerful' forces ranged on the other side to depreciate the currency. DEFICIT FINANCE. In the first place, deficit finance may be forced on the Government, and it may resort by direct or indirect means, as most countries with chronically unbalanced budgets do, to filling up the gap by creating paper or bank credit. There are =ome who would go to the extentt of deliberately bringing this about, under the name of “controlled inflation," in order to ease the internal strain. Such a policy would, in the first instance, benefit primary producers, : who would secure the exchange premium 1

in addition to the normal ruling international price; but the effect, we think, would be only temporary, and too dearly bought at the price of raising the cost of imports, increasing costs in respect of all imported materials, and creating a serious transfer problem owing to the added cost of foreign remittance, especially on debt interest account. Experience, further, shows that “controlled inflation," in a financially weak country, soon gets out of hand, while if the country is not inherently weak there is no justification for the policy. We shall return, perhaps on many occasions, to this important point. If we are to get'into a sound positAn the l ; ,nes of internal policy must be entirely recast. The first problem Is created by our heavy industrial costs, largely the result of a generation of compulsory arbitration and the mentality thereby generated. Until we can reduce costs of production, and make business profitable to the eniployei, i\e cannot absorb our growing army of unemployed. On the contrary, unless some drastic policy is undertaken, the present drift will soon 'bankrupt us. There is no short cut to improvement here, but what is wanted is a process of economic surgery by removing present obstacles to production in the shape of undesirable interference, and then letting the recuperative powers of economic laws work a cure, or at all events an improvement. We have surely tried out the liiterfererice policy to the limit, and found it wanting.

PUBLIC WORKS POLICY. Another important matter of policy is to remove the public works policy of the Dominion from the sphere of party politics, thus depriving our professional politicians of their principal weapon of electoral corruption. This could be done quite easily, though it presents problems of its own, if there were a sincere desire , to do it. At present we have, in ad- | dition to the unemployed army ot over 50,000 people, some ten thousand living on the expenditure of public works loans raised on a diminishing public credit, for purposes of diminishing utility, if any utility at all. If this work were withdrawn from-the parliamentary spheie it could be placed on a rational economic basis, and future operations confined to WOI* ks of probable utility, and there are not many of these. Much of the work carried out by the State in this connection should have been left to private enterprise, subject to ultimate social control; and if private enterprise was not willing to enter the field, that in itself would be at least a presumption ithat the work is of dubious public utility. Only thus, moreover, could we explore the possibility of a long range planning of large constructional works as a stabiliser of employment conditions. 'STATE ADVANCES. Another public policy in need ol drastic reconsideration is State' Advances, sit- -should -not -be the' job-of the state to act as universal pawnbroker and mortgagee, or, for that blatter, as Universal landlord, This introduces a further element of electoral corruption, leads to considerable losses of capital owing to the laxity resulting from political pressure, brings citizen and Governme,nt into undesirable antagonism of interests, and artifically inflates land values by making capital cheaper than it would otherwise be. The pawn broking business should be lett in private hands.

OVERCAPITALISATION INCAPACITY

In many other ways our country could very well change its comic opera outlook, both in public and private business. Ht is a notorious fact that our mostimportant basic industries arc in a bad •way, largely as -the result of overcapitalisation and managerial incapacity. Butter-making, refrigeration and transport are among -our basic activities. The deplorable mess in which our transport is involved, and its heavy cost to the people, are well known. What is less known is that the financial position of most of our butter companies and refrigerating businesses is equally unsound.

There is far too much overhead, and plant” and productive capacity in excess of demand, so that both industries are wording on a no-profit margin, and paying for huge unnecessary competitive activities. Rationalisation is imperatively demanded on grounds of national economy. The happy-go-lucky-inefficiency of our workers has often been pointed out ; what is not s 0 frequently adverted to is the incapacity of o,ur business and industrial management, as disclosed by the figures, of public companies. This is a matter in which improvement must come from the side of industry itself. If it does not come, so much the worse for us, now that we cannot continue to make ends meet by the annual borrowing of five to ten millions a year. Finally, at the moment, there is need for a continuous efficiency audit of public finance and public business, and that might be difficult to secure, because few Governments would care to have their activities continuously so criticised by a committee either of their own servants or of outsiders.

GomethTng of the kind, however, seems indicated if economy is to be anything more than either a hypocritical cry or a resort in only grave emergency. We need the study and enforcement of economy and efficiency all the time, and not only in periods of crisis. .Democracy is- financially wasteful, and should set a watch dog up against itself in its own host interests.

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