SUPPLEMENTARY BUDGET

Hokitika Guardian, 7 October 1931, Page 2

SUPPLEMENTARY BUDGET

|N COMMITTEE OF WAY AND MEANS. (Per Favour of the Governmentj WELLINGTON, October 6. (By the Hon. W. Downie Stewart, Minister of Fnance.)) ~ Mr Chairman: — The necessity for a Supp’ementar.v : F'inuncial Statement arises from the fact that conditions have been, and are changing so rapidly that it is impos* aible to peg down as reliable any esti- . mates of revenue, lienee if the drift in our public finance is to bo checked, £ remedial measures must be applied " whenever it is clear that further delay means further danger. No one can say what will he the economic position six months hence, particularly in view of recent happen-■»-K- ings in Great Britain, many people think that the conditions in the Okl IWorld have now reached a stage when (vfc far-reaching measures of an international character will be taken, that wi 1 te. lead to a substantial recovery in pricMv es. If so, our difficulties will be automatically eased in the meantime. THE BUDGET. i • §§&'■ On the facts as I find them, it will pfl be remembered by. Hon. Members that yv§f‘, my predecessor, in the Budget presented the House on the 30th July, was f$ faced with the problem of meeting an (d- estimated prospective deficit of no less %, than £6,850,000.

,? This sum is was hoped, would be prp?L vided for by stringent economies, re- % ductions in salaries and wages, the ? u,e of reserves and other, items amounting to £5,506,000, leaving £l,- ?, 800,000 to be provided for by addition*ai taxation. This additional taxation was to be ? ir come tax, and the balance was to be met by customs and excle duties and S'amp duties. Although it is only about two months , Since the Budget was ■ presented, it has since become fairly obvious that the shortages in revenue will he @ven greater than were allowed for by my , predecessor, and it is now clear that the Budget will require to be further n strengthened by a substantial amount. Tlie Customs revenue for the first six monhs of the fiancial year is already about £750,000 behind the esti mate. On a proportionate basis, there is very little prospect of this deficiency icing made good by heavier importations during the coming months. In fact, the shortage is more likely to increase. The increased duties imposed by the Budget and calculated to yield about £'■loo,ooo are not likely to meet the position in addition to this drop in customs revenue, it is probable that falling land values will affect death - duties to a greater extent thrn was anticipated. , Further, it is now estimated that >, the revenue from lands—interest on n ortagages, rent etc, —will show a falling off greater than was allowed for in the "Budget. Final!v 1 may say the Budget esti' mates included. £930,000 on account of interest on railway capital, but the interim figures so far available shew that this item can only be realised bv the most rigid .economies, and by at' temps to fortify railway revenue. It is therefore practically impossible to form any proper estimate of what 1 lie Budget revenue will be when the financial year is finished. It is clear however, that a substantial sum will require to he found from somewhere if there' is to be any hope of checking tiie present drift'/and balancing the Nat.anal Account. 'J'-e oniy methods available for the purpose are further economics, lurther taxation and further recourse to any reserve funds which are available, but over and above the Budget problem there is the imperative need for rendering some assistance to the farmers, if they are to stay on the land, and if production is not to decline rapidly, :in 1 indeed if we are to avoid a national disaster in a general breakdown of the farming industry. While prices of primary products remain at their present level, it is of course impossible to restore the farming industry to a condition of prosperity. but in so far as it is possible to assist the farmer it is in the interest of the whole community that funds he found from some source for this purpose. ‘l’he three great problems with which the country is faced are therefore the precarious position of the farmer, the ‘ position of the pftblic finances, and the “ great and chronic problem of unemployment. '

ABOLITION OF GRADUATED LAND TAX

INCREASED INCOME TAX —o —‘— FURTHER SHORTAGE OF <£1,850,000 CHEAPER FERTILISERS FOR FARMERS REDUCTION OF BORROWING

These problems are inextricably interwoven and they constitute a menace to the whole stability of our social organisation. FIXED INTEREST CHANGES. Before dealing with the Government’s proposals for assisting the farm ers. balancing the Budget and the problem of unemployment, 1 would like to refer briefly to the question of fixed interest charges. In some quarters it has been urged that relief for th Budget could be obtained from the writing down of interest on all public securities held in Ne'V Zealand, Tt is suggested that this could be arrived at either h.v n voluntary conversion of our internal debt, on the lines adopted in Australia, or by a statutory reduction of interest rates.

The posiion of New Zealand, however, in this respect is not antilogous to that of Australia. There are no large loans falling due., in the near future, which would lend themselves to conversion, and the average rate of interest at present paid on Government securities in New Zealand—approximately -LV per cent. —is too low to make it reasonable to expect that any lower rate will be obtained by conversion operations. In the next place, any compulsory reduction of interest payable to bond ho dors would, in reality, default by the State, and would seriously damage our credit. Whatever the position of private ■ borrowers may lie, the State is still able to pay its debts. In rny opinion it could not, and should not, ple d inability to pay when the bondholder demands his interest.

European experience seems to slmv that destruction of confidence in the security of savings is the most serious ca’amity that can befall any nation, and the Government’s chief aim must proper mainteh'an ce'of'p uhl ie eofi fidence. Moreover, the State is not onlv a borrower, but a lender of many millions through the State Advances ar.d other Departments. If therefore a concession were extracted from tlie bondholders, the State wo Id he expect* ed to pass this concession cn to its borrowers, but many of these borrowers have been financed out of loans raised overseas, and under no circumstances could the State claim relief in respect of overseas interest payment. If, therefore, the concessions extracted from the New Zealand bondholders were passed on to all borrowers, the State would lose more than it would gain by some hundreds of thousands of pounds. The result would be to further burden the Budget instead of bringing it relief. It is well known of course that mortagage charges are perhaps the ch ef source of embarrassment to farmers and others under present economic condition, but an arbitrary reduction would dri\e capital awnv froin this class of investment. This would not be in the inteiests of the borrowers themselves. Further such a reduction would work out very inequitably in those cases where mortgagees are in a worse position than mortgagors. In the case of many fanners the relief ;fielded would be entirely inadequate, Moreover if a fixed reduction were made the mortgagee would tend to regard that as the limit of his duty, whereas much greater concessions are being made by voluntary negotiations. Again many mortgages are for a long term and it is quite possible that prices will show some recovery within a vear or two.

Finally as the State holds about one third of the mortgages in the Dominion and a reduction in mortgage charges alone would very seriously prejudice the budgetary position so far as tlie State tenants and State mortgagors are concerned, the Government is doing its best to meet their necessities in a generous way. Each case is “dealt with on its merits.

It may still be argued however that although the State is in no position to claim a reduction of its interest payments to its bondholders, nevertheless these bondholders enjoy a .secure income and should be called upon to share in the sacrifices which tiiw whole community is being forced to bear, d agree with this view, but tlie most, effective way to see that the holders of Government bonds bear their share of ihe general burden is through taxation and the same considerations that apply to the bondholders apply to all receivers of investment income. If taxation is fairly and justly applied by the State there is no breach of contract between the Government and its creditors. THE FARMERS’ PROBLEMS. "While it is not considered advisable to make an arbitary reduction in in-

derest charges, it is considered that the position can best be met by some extension of emergency powers. The Government is of opinion that the provision of the Mortgages Relief Act should be enlarged. Justice could he more fully done by this means than by a fixed reduction in interest, which would work out .inequitably. sometimes granting insufficient relief and sometimes too much. It is therefore proposed to enlarge the powers of the Court so that it may not merely postpone payment of interest for 12 nionths, hut may make such remission reduction or postponement of interest on existing mortgages as seems just, and equitable. Moreover, where the mortgagee is the vendor for unpaid purchase money, the Court may make reduction or postponement of principle of interest to a mortgagor. The Court will also no empowered to authorise a fair distribution between the mortgagor, mortgagee and the holder of the chattel securities, of the proceeds of the farm to enable the best to be done for all parties and to ensure that production will be carried on. It also appears expedient, in view of tlie rapidly changing circumstances, that the legislation should .enable the powers of the Court to be extended by Ofder-in-Council as circumstances may render necessary. REDUCTION IN RATES.

Apart from interest the principal items in the farmers fixed charges are rates and taxes. Hates in particular are a heavy burden, Under present conditions these rates have been heavily increased by the cost of road ituproyemeuts, and maintenance througu the use of the roadij by motor Traffic* Quite recently the Main Highways Board increased the subsidy to local bodies for the maintenance of highways, from a basis C2 for £1 to £3 tor £! as from Ist April last, thereby assuming a greater proportion of the burden of highways.

An of tim finances ot the Highway revenue funds shows that after preparing for all tlie normal requirements tor maintenance, interest, sinking fund and the subsidies on races -to local authorities, the probable revenue receipts for tlie year from the existing taxes and license lees together with the balance carried forward on the Ist April last, will provide a balance at the end of the year of not loss than £250,000.

This balance, or the quarter part oi it the Highways Board would normally have transferred to highways construction, but under present circumstances it- is considered that it would be better to somewhat curtail construction work for this year and apply the £250,000 by way of a special subsidy to rural and local authorities in relief of tlio existing burden of rates. The basis on which the amount will be distributed has not yet been finalised but will be announced later when the necessary impowering legislation is brought down. These ipga,spues will give some relief from the burden of rates.

A» a means of providing more permanent and far-reaching relief, the Government proposes to proceed with tho inquiry by Royal Commission into the possibilities of national economy through the amalgamation of local authorities and n general overhaul and reorganisation of the whole system oi local government,

GRADUATED LAND TAX. This tax is operating with extreme harshness at present, both on rural and suburban lands. It is not based on any principle of ability to pay and it has been condemned for many years. I quote from among many and i peated condemnation!; the report of the 1924 Royal Commission on land and income tax which stated :-—“The graduated land tax was originally designed to break up large estates. There is no evidence to show that it is required any longer for this purpose, and there was much evidence showing that it il now preventing the development ot large areas of land, requiring a considerable amount of capital expenditure to break in. The gratuated land tax applied to business premises is a serious handicap to trade and industrial enterprise and serves no good purpose.” I propose, therefore, to assist farmers and also the recovery of trade and industry generally by abolishing the graduated land tax, while retaining the flat rate of Id in the pound of unimproved value. Tlie abolition of tlie graduated land tax will of course involve the elimination of the 5 per cent allowance on unimproved value at present allowed in the assessment of income tax. This allowance was made to avoid the double taxation involved on taxing the

land tax. also the income derived from it. With the flat rate land tax standing at Id a shortage will require to he made up which will in part be done by the abolition of tlie 5 per cent, allowance and partly by the further tax proposals which I will refer to presently when dealing with th e budgetary position.

I may say, however, that to a considerable extent the burdens will fall collectively on the same shoulders as formerly paid tlie graduated land tax, although the individual incidence will be different, so far as rural lands are concerned.

The taxpayers in the higher scale above £7500 unimproved value already pay income tax, but it is proposed to make provision by legislation wlucn will operate from next year, to bring farmers with an unimproved value of £3OOO or over under the operation of the income tax. subject to the usual exemptions. This will mean that ail income will then be treated alike. FERTILISERS. The measures that I have already

referred to will assist- tlie fai mers to remain on the land by lightening their fixed obligations. In addition, howevei the Dominion as a wine is vitally concerned to see that the volume of production is maintained and even i-.i m sed. Before tlie special I’arliam lifary Economic Committe ma n Witnesses urged that if farm production is to be maintained, it is imperative to provide further assistance to fanners. The following extract from evidence, is emphatic on the point:.— “A tailing off in the volume of our farm production will be a serious matter for the. whole country, and will si fleet'not only public revenue but the earning power and standard of 'living of every one. A serious falling off, such as seems to us to be in evidence, will be nothing: short of a calamity, which will upset and disorganise our whole economic relationships. What is needed is an increase in (h,. volume of farm production to balance the reduction in values that now obtains, and that seems likely to continue. The whole economic future of this country defiends upon increased farm production. This is the question of supreme importance at the moment. The maintenance of production can be greatly stimulated by fertilisers. It is found that there has been an alarming falling off in tlie. use of manures brought about no doubt, by the efforts of the farmers to cut, down expenses. . Under these circumstances it is essential that the prices of fertilisers must he reduced and if production is to be maintained it will be necessary for the whole community to assist. For this purpose the Government has ori. nged j.o shave H substantial portion of t.q. ■ w phosphate rook which v• : " " no the

farmer a material reduction in ; 1". pu}*_ chase price of fertilisers. 'The cost to the Government for this year is estimated a(. approximately £1UO,0()0. ARBITRATION COURT. The bearing of the operations of the Arbitration Court on the fanners costs,, unemployment and the industrial situation in general, has received the careful consideration of the Government. It is considered that money conditions and restrictions now in operation in many of the Arbitration Court awards seriously militate against the employment of our people. The economic conditions now existing demand more flexibility. For the purpose of making it possible for employ ers and employees to arrive at agreements that will enable cost to be reduced and at the same time allow for the maximum employment and tlie fullest development of our industries, it is proposed to amend the Act mainly on tile lines suggested by the 1928 Industrial Conference, the chief feature of which is known as compulsory conciliation and voluntary arbitration. UNEMPLOYMENT. In spite of the most strenuous efforts by the Government, the Unemployment Board, the Local Bodies and numerous social organisations and the provision by the taxpayers of a huge sum of money t.o assist the unemploy, ed, no substantial or satisfactory solution of the problem has yet been achieved, Every one is agreed that no real progress will be made until the unemployed are engaged on reasonably productive work, which will reflect itself in increased export or increased local manufacture. The Government is engaged in an attempt to change over from the present policy to a new policy, on the lines indicated above. It it proves successful it should result in the gradual absorption of the unemployed in productive industry. SUP PLEA 1 ENI’AR Y' B UDG ET. And in lessening the need for taxation, but- in the meantime a point has. been reached in which all the funds available are strained to the utmost, and are insufficient to cope with the immedate need of a great need for relief. There is no margin of funds to enable the Government to change over from the old policy to the new. If the new scheme is to be tried out it appears as if the Minister in charge of Unemployment will require temporarily some additional funds, which can only be got from additional taxation, as no further money can be obtained from the Consolidated Fund. One of tlie main nbf.-.'-t- hi view is the use of the um .’-pio. --d preparing land for settlement. .her particulars will bo placed befoic iL.o mouse as soon as possible. BUDG ETAR.Y POSITION.

I now propose to sum up the Budgetary position. So far as it can be seen

at the present, as indicated in my opening remarks, it is practically impossible under the present conditions to estimate with any degree of accuracy the yield from the various items of revenue. In my opinion, however, we will have to cope with a further shrinkage in revenue, amounting to at least £1,250,000, which amount is arrived at ora the present deficiencies in sight, but goes no further. The amount is made up as follows: £ Customs 900,000 Stamp death duties 105,000 Interest and public debt redemption fund ... 100.000 Other items 100,000 Total 1,250.000 Tn addition to these revenue shrinkaces the expenditure will he still further increased by the absolute necessity for giving some further assistance to Hospital Boards. Tt is proposed to provide up to £i ”,000 for this purpose, wkHi will b° mndo available by way of additional subsidy.

Tlie change over from the Graduated and Tax will involve a net additional burden of £320,000. There is also the amount, required for fertilizers already mentioned of £IOO,OOO. Certain exchange profits on remittances to Australia and savings consequent upon the voluntary reduction in deposit rates, arranged by the Prime Minister last- July, will provide a .saving of £150,000 towards these in-

creases. The. total net additional'amount involved in the revenue shortages and these add'Gonal items is thus £1.595,000. made up as follows:—Shortages 'referred to above £] ,250.000, le'-s exchange profits and reductions in deposit rates £150.000, £1,100,0001; ; fertilizers £100.IKK), land tax gross 1 £/75000 less elimination of 5 per cent allowance on unimproved £155.000. Hospital subsidies £75,000. Total £1,595,000. | The reduction in land tax is only a substitution of one form of taxation for another and not an. addition to tlie general burden of taxation economies, j Having thus arrived at the total net increase that must he added to the Budget, the question to be answered is how is this to he made up. The first duty of the Government has been to undertake further economies in Government expenditure. Tlie Economy Committee set. up- by the late Government has already made substantial reduction in expenditure, which together with the reductions in salaries and wages amounted to approximately £2,090,090, but in my opinion the public will not willingly submit to further taxation unless it is satisfied that j the most drastic economies have been | effected in departmental expenditure, j Cabinet, therefore, resolved that an effort should be made to reduce expenditure to the extent of £1,000,000 per annum, and immediate steps have j been taken to curtail expenditure on this basis for the remaining months of the year. It is expected that the result should be a saving of about- £400,000. In view of the extem-t to which the departnient’s have previously been combed, these further economics must mainly be effected by curtailment of services some of the- proposals will no doubt bo strongly resisted, but it is useless to disguise the fact that unless the public is prepared, to support these steps it will have to submit to higher taxation or allow a heavier drift to take place in our finances, and this would seriously affect our credit. The details of the c e economies will be furnished to the House in due course. RESERVES. Towards tho balance T hope to obtain £350,000 by drawing still further upon reserves. As no doubt Honourable Members are aware, a large part of the accumulated surpluses of the Consolidated Fund from the pre-war and post-war years was invested in discharged soldiers settlement mortgages, repayable by instalments over a long period. These investments were constituted part, of the public debt redemption fund, the interest on which goes to the Consolidated Fund, as a set off against the expenditure provided for under the repayment of the Public Debt Aef.

Ihe £350,000 which it. is proposed to take represents the repayments of principal by the mortgagors. That, it is estimated, will be available during this financal year. I may add that in view of the uncertainty of the whole revenue yield, I propose to ask the House for legislation empowering me to obtain further assistance from the Discharged Soldiers Settlement Account. This may necessitate making special arrangements by hypothecation or otherwise for liquidating o“f any amount that may he required over and above tlie £350,000 estimated to be available from the capital repayments. With this special provision in reserve I am hopeful that budgetary stability can be maintained. TAXATION. These proposals leave about £470,000 to be provided for by additional taxation, over and above the amount proposed in tlie main budget. The first question is as to where this can be imposed with the least hardship. A-s regard custom taxation, and tariff rates, these are already so high that tlie law of diminishing returns is operating over many of the items. I propose, however, to move a resolution to-night with regard to two classes of imports which I think will provide about £240,000 towards the amount required. For the rest I am driven to review the position and tlie possibilities of further direct taxation through the income tax.

Income tax is always less palatable to the tax-payer than indirect taxation, but in the present emergency we have no option. The payers of income tax will view with strong disfavour further burdens being imposed upon them. I take it, however, that these taxpayers would prefer to shoulder further burdens rather than see reductions made in the old age pensions, soldiers pensions and pensions for tlie blind. They would equally resent any suggestion that the State should default in its interst payments. A reduction in pensions may at any time become’ a-n' imperative necessity, if the worlds price levels remain low, but for purposes of my present computations T have laid this on- one side.

Dealing jiow with the income tax. it is well known that the company tax in New Zealand is the heaviest in me British Empire, if not in the world, while individual income tax is the lowest in the British Empire.- T do not, therefore, consider it expedient, or just, to add anything more to the company tax than was imposed by the main budget. More particularly is this the case in view of the fact that a large proportion of the Companies

engaged in business im- New Zealand are engaged in financing or assisting tne primary producer, and any further tax burdens imposed upon companies is liable to- reflect itself in a. restriction of advances to the farmers or a withdrawal of other form of assistance. I therefore exclude the companies from consideration.

In reviewing tire prospect of further revenue from direct taxation, the ifidividual income tax payer having already stated that the imposition of further taxation on companes is not justifiable, I now come to the position of the individual taxpayer. At present his contribution by way of income tax is the- lowest in the Empire, by reason of the low minimum rate at which our Act starts and the liberal exemptions he enjoys. I am not forgetting the fact that the main budget increased his surtax from 10 per cent, to 30 per cent., but I have pointed out that the receiver of gilt edged income is called upon in these troubled times to carry his share of the burden. He is more concerned than any one else to see that the State remains solvent. European experience shows that in a gen-eral-breakdown he suffers irretrievably more than any one else. In imposing any fresh burden it is pointed out that he should bear a share commensurate with the risks he has at stake.

■With these aims in view, I propose Tii;.‘Order to secure the measure of assistance which is considered indispensiable that the income tax should yield.— (1) To impose a special emergency tax on unearned income of individuals equal •to one third of the income tax payable on such unearned income, and to -eliminate the ten per cent, reduction at present allowed on earned incomes up to £2,000. (2) To impose a special flat rate tax of 4d in the £1 on incomes of individuals after allowing a general exemption of £SOO.

■lt is estimated that the effect of these alterations with the abolition of the graduated land -tax will be to increase the net yield on these items of taxation by about £230,000. > The foregoing provisions for economies support from reserves and taxation (all additional to the main Budget) should if realised strengthen the Budget to the extent of about £1,250,000, but it should be clearly realised that the scene is changing daily and estimates cannot be relied on in any degree. It is our duty to do our utmost to check the drift in our public finances but the ground is shifting from under us every day and the position may be required to be reviewed again before the end of the financial year.

The proposals to meet the additional burden of £1,595,000 are therefore as follows :

Economies, £400,000; reserves, £350,000 ; customs taxation £240,000 ; income tax to cover land tax adjustment £320,000; additional, £230,000; £550,000 reduction in amount provided in main Budget for supplementary estimates, and contingencies, £55,000 ; total £1,595,000. BUDGET ESTIMATES. With the adjustments 1 have outlined the revenue estimates for the year shown in the main Budget at £24,946,000 must now be recast as follows: £ Customs 6,750,000 Beer duty ' 650,000 Film hire tax 50,000 Motor vehicles duties and licenses _ 1,760,000 Stamp and death duties 2,990,000 Land tax 625,000 Income tax 4,935,000 Interest xeceipts, railway capital .' 930,000 Post Office 535,000 Public moneys 755,000 Public debt redemption fund 720,000 •V—Total 2,930,000 MISCELLANEOUS. Post Office surplus 1,090,000 From reserves 1,490,000 Others 1,396,000 Others 3,976,000 Total 24,666,000 The estimated expenditure of £24,763,981 as shown in main Budget will be increased by £IOO,OOO for fertilizers and £650,000 for subsidies to Hospital Boards and on the other hand reduced by £400,000 on account of economies, so that the Budget position for the year is now estimated to be as follows: Revenue £24,666,000 ■Expenditure ... ••• £24,540,000 Leaving £126,000 to provide for supplementary estimates and contingencies. loan expenditure.

Nearly half the net expenditure of tlie Consolidated Fund consists of debt charges and any further loan expendituve is a direct factor in the Budgetary position. The fall in the national income and the in the taxable capacity of the people has automatically increased the relative burdens of the existing u>ebt charges. The sooner we can cease borrowing abroad the better and this remark applies equally to the loan expenditure of local authorities as well as to Government expenditure. For this financial year no additional capital is being provided for State advances, but repayments from existing advances are available for fresh advances. For Public -Works, the additional loan capital to he provided has been limited to approximately £1,750,000, which

means that a curtailment of over 40 per cent, has been made in the raising of fresh capital. If State advances is included the curtailment is over 50 per cent, compared with the amount borrowed last financial year. CONCLUSION. In conclusion the main difficulty in forming a policy consists in knowing whether the present price level is to be regarded as temporary or permanent. 11 prices are likely to rise, then temporary measures to bridge a short, but difficult period, will meet the case, bilt if the present price level is to remain, then more drastic measures will certainly be necessary. Most ol the economists who gave evidence before the Special Parliamentary Economic Committee considered it reasonable to suppose that there will be some recovery in prices, but rhat we are not likely again to reach the high prices of our more prosperous times. Various schemes have been put forward for stabilizing the local price level on the basis of export prices, but there are serious objections to all these schemes. Moreover, experience in other countries seems to show that an increase in the volume of money often fails tp affect the price level in the way desired. In America, the reserve Banks made vigorous efforts to sustain prices, but the only effect was a violent financial speculation in securities, and the prices of goods remained the same, or continued to fall. In France when the note issue was nearly doubled, prices fell about 20 per cent., but although the attempts so tar made by Central Banks to stabilize prices arc very disappointing, it is reasonable to hope that the difficulty will be more successfully overcome when definite International action is agreed on by the Central Banks. In the meantime, so far as our public finances are concerned, it appears to me that the best way to cope with our problems, while conditions are changing so rapidly, would be by a financial dictatorship. As that is not politically possible it he next best course is to make provision to meet the position as we find it now, and review it again before the end of the financial year, so that if necessary and if practicable, further steps may be taken to check any furthei drift and maintain stability in our public finances. We must never corse to remember that we are trustees tor the future as .well as for the present.