ECONOMIC REPORT

Hokitika Guardian, 4 March 1932, Page 6

ECONOMIC REPORT

REPORT TO GOVERNMENT. The report of the Economic Committee to.'- Government was made available to-day and the following is a summary thereof, which runs into 52 foolscap pages :

SUMMARY OF CONTEXTS. SECTION L—The Basis of Past Prosperity. The national prosperity of New Zealand depends in exceptional degree on her high volume of external trade. Nearly 40 per cent, of her income comes from exports, and of these 94 per cent, are pastoral and dairy-pro-ducts. The course of prosperity of New Zealand has been determined largely by the movement of export prices and overseas borrowing. From 1895 to 1921 rising export prices and continuous overseas borrowing provided for almost unbroken prosperity. The post-war boom resulted in considerable over capitalization in many industries, particularly farming ,but by 1929 this bad been for the most part liquidated. though over-expenditure on public works financed by heavy overseas borrowing continued.

Section! ll.—Causes of Depression in New Zealand.

From 1921 to 1929 the average level of export prices was high, • there were marked improvements in farm efficiency, and the continuance of overseas borrowing helped to sustain the national income. Largely because ' of this borrowing, there was a luck of balance between capital expenditure •and expenditure on goods for immediate consumption. Even if external causes bad not brought about the depression of 1930-31 , the country would have been faced with a problem of readjustment. In 1930 export prices fell heavily, and the failure of other prices to fall in sympathy resulted in acute price disparity. The exportprice ii'iclex fell between 1928 and 1931 from 1520 to 874, whilst the - farmexpenditure index fell from 1642 to 1490. The value of farm * production fell front £82.1 m. for the year ended June, 192-9, to £54 m. for the year ended December, 1931. The net income of the farmer fell sharply, and in many cases disappeared. This had serious effects on business in general. Moreover,' the national income fell owing to the lower purchasing-power of exports over imports and to the increased volume of exports required to pay interest on the debt held overseas. The main problem in New Zealand is to remove the disparity between export prices and internal prices, and to adjust her economy to a lower level of overseas borrowing. SECTION lll.—The Loss of National 1nc0me..... N"V ..7, •. The uatjb'mtE'ihcomg 1928-29 jV estimated at £l5O m. .-At the present .time it is about £llO m. and is declining at a rapid rate. If adjustment is made at. the present exchange of 10 per cent, and production does not increase, it may settle at about £9O m. If adjustment is made at parity with sterling, -thh" ineijihe mffy a -fatbtn--aboiit £BO m.

SECTION IV.—Distribution of Loss of Income.

The fall in national income since 1923 has been unevenly distributed over tbe community. Out of a total loss of £4O m. about £2B in. lias fall cn upon export producers, and the unemployed have increased by about thirty thousand, bearing a loss of about £’3.o in. The profits of industry have fallen considerably, though not so severely as in farming'. In these cases the losses have not been offset by the fall in the .cpst of living, so that the loss in real income has been substantial. The money loss of wage-earners and salary-earners has been, in the main, offset by the fall in the cost of living, though they have suffered from increased taxation. It js difficult to estimate the effect on recipients of fixed money incomes, but the reduction in these incomes may he!said to be less than in the cost of living. These incomes ’ have, however, been subjected to special taxation. SECTION V.—General Effects, of Depression on Public Finance. " As the result of falling export prices, reduced overseas borrowing, and the consequent depression, the Dominion’s national income has been reduced between 1928-29 and 1931-32 by about 27 per cent. The decrease in taxable capacity lias been tar greater. With a total, expenditure, from the Consolidated Fund of under £2.) m. in 1930-31, a prospective (Illicit of £8.4 m. for 1031-32 had to he covered. Present indications are that) j despite these adjustments, the fiuan-, rial year will end with a substantial J deficit. The burden ol interest | charges on national an local-body | debt has been increased by the tall in prices. A limit 1,11(10 units of exports are now required to pay the same interest bill as was paid by till' sale ol | .0011 units in 1928-29. In 1928-29 about Hi per cent, of the national income was required to pay taxes and rales as against. 2(1 per cent, of a null'll smaller income in 1931-32.

SECTIOX A'll.—The General I’rojdeni of Readjii.Mineni. T;||cro are three aspects of I In; problem of nsiiljuslinent (1) To remove price di.-pai it ies by increasing the receipts ol tanners, or decreasing yilcrtinl costs, or by a combination of both ; (2) To spread the loss leMiPing from the depression more evenly over the community ; and (A; To balance the nations! and local body budgets. It would be unwise to expect adpi :- .it through a subßanGai nss in ex-

port prices or an early and substantial

increase in productivity,- more especially a s the latter requires as a prior condition the removal of existing impediments to production. Nor can adequate relief come from overseas loans. The fundamental issue is to restore the spending-power of farmers by causing profits to emerge; hence -the crucial problem is to remove the disparity between farm costs and farm .sellingprices. 'Without this adjustment, how can the community deal effectively with the problem of unemployment, balance the Budget, and restore and maintain sound financial conditions? A 'further reduction in costs of industry in general is necessary to enagage in other and profitable enterprises those

workers and employees formerly dependent- upon the expenditure of overseas loan-money.. As the result of the depression, the community has suffered a real loss of income, the equitable spreading of which over the people as a whole is part of the problem, of readjustment ; this is another aspect of the problem of reducing costs. Resistance, by any section of the community, to the sacrifice involved will only delay the process of recovery, dampen down enterprise, and ultimately injure the interests of that particular section in common with those of the whole community. Some adjustments have already been made, but the total loss is so great jthat it must be spread more evenly if the economic structure- is not to remain ill-balanced. A condition essential to permanent equilibrium is the balancing of national and localbody budgets. Eventually this may be effected by additional economies and some increase in taxation, but in the case of the national .Budget the gap cannot be completely bridged until the general process of economic adjustment is well under way. Meanwhile it will be necessary, as a part of the policy of reconstruction, to finance deficits bv means of loans or Treasury Bills, an well as those public work s whose completion promises a net gain.

SECTION Vlll.—Exchange and Economic Readjustment.

Up to 1929 the New Zealand monetary system was based upon a storing exchange standard. Fluctuations in the balance of payments had little effect upon the exchange rate, because funds accumulated in London could be held there pending a later increase in demand. Such funds • were always convertible into New Zealand currency, approximately at par. Special influence,operate on ' the exchange rate in a period of monetary disturbance. Thus funds held abroad may become less liquid or the exchange operations of other countries may affect the rate of exchange. The New Zealand balance of payments has been affected by a contraction' of the value of exports from £65 in. to )£32 im. in sterling values. Imports have fallen from £45 m. to £26 m. The present 10 per cent, exchange -rate discourages imports and’ helps to sustain export production byadding to the gross income of exporters.In general, an exchange rate ab-ve parity will benefit exporters, because the addition to gross income more than offsets any increase in local costs

through 1 the higher exchange rate, i,Such a rate also sustains the money value of national income above its level at parity with sterling or at parity with. gold. • Thus at 40 per cent, ex-

change national income is estimated

to settle at £ll2 m. compared with ffi.Bo m. at parity with sterling and £9O m. at the present 10 per cent, rate.. The additional national' income sustains revenue at a higher level and more than compensates for the increased exchange charge on the overseas debt •service, both State and local body. By (sustaining a higher price level than would be possible at parity ot exchange a rate above sterling sustains •security values and strengthens the position of financial institutions whose liabilities are in fixed money claims and whose asset s vary with the price level. By raising the- level.of export prices in local currency the rate above parity with sterling lessens the nd'ustment fixed charges, - wages, and salaries that have to be made to restore the equilibrium between costs and prices in export production. A. /very high rate

v ,-„i-lrl, however, dam nee the cmmtrv’s credit abroad and throw an undue strain upon the currency system as a factor in economic readjustment. At parity of exchange the reduction in costs which would restore profit in export production and leave exporters with the. same loss of real income as tlm rest of the community would be 35 per cent. It would he more than 25 per cent, at the present 10 per cent, exchange, 15 per cent. at. a 40 per cent.

<'vr-1 *;iji< r t* rate. and 50 per rent, at parity with gold. It is thus easier to make an adjustment at a fate above sterling than at parity with sterling or with gold. A transfer of income similar to that effected by a high exchange

rate might, he secured bv a primage d”fv on all imports, with additional taxation and export bounty. SECTION IX.—The [future of New Zealand Currency.

The (iovernmeut prescribes by law tlm basis of the unit of currency. This was lixed in New Zealand by the convertibility of New Zealand currency into stnrll'mt. which wn;i bus*, d oil one sovereign containing 12d. 2.7 gr. ol standard gold. In eo'inmon with sterling, •New Zealand currency is temporarily off Ibis basis, and it is legitimate fo consider whether it '.should return to it or adopt a new basis. This will d- - pend upon (lie future ol the exchange rate, which is likely to be determined mainly by the movements in export prices. If it were thought desirable In

maintain a high' rate, this could bo done in the first instance by using any temporary accumulation of funds ill .'London to meet redemptions or to transfer external .debt to internal debt. A permanent change in the legal basis of the currency could be made by devaluation. SECTION X. Adjustment In Regard to Fixed Charges-—lnterest And Rent. The rigidity of fixed charges during a, period of falling prices both hampers industry and prevents the smooth and equitable distribution of the loss over the population. Except in cases where concessions have already, been granted, recipients of; fix(hd incomes have actually benefited from the fall in prices. An adjustment of fixed incomes, whether by means ,of a special levy or reduction in. such incomes, would not. impose undue hardship upon the recipients. This adjustment might be facilitated by a special duty on fixed income elements, the extension of the Mortgagors’ Relief Act, or, in the case of public debt, by' further income tax or by conversion operations. Any reduction in private interest should be all-inclusive, covering interest on all debts against which chattels have been pledged, and interest in all mortgages, urban and rural. Similar conclusions apply in respect of rents. A reduction of 20 per cent, in fixed money claims would nfable a .substantial! a'nd equitable contribution towards bridging the gap between costs and selling-prices.

SECTION XI. Economic Adjustment In Respect Of Wages. From 1921) to September, 1931, the award rate of money wages fell by 11.5 per cent., as compared with a fall in the cost-of-living index of 11 per cent. On this basis real wages remained approximately the same for workers in full employment. During the same period the community has incurred a loss of real income of from 10 per cent, to 15 per cent., and a further reduction of 10 per cent, in wages and salaries would he necessary to bring wages down to conform with the real loss in national income. This should be read in conjunction with the discussion of Section X. In view of the changed economic situation,. undue restriction on working-conditions

which may have been appropriate in the past should be relaxed.