FINANCIAL POSITION

Hokitika Guardian, 8 April 1932, Page 2

FINANCIAL POSITION

(Per favour of Government)

WELLINGTON, April 7.

The Minister of Finance (Hon. W. Downie Stewart), presented a comprehensive financial statement to Parliament this evening. Aiter a general outline of the position in respect to the figures available regarding the last financial year, Mr Stewart said that the net expenditure, as a whole, would exceed the revised estimates by approx, imately £SOO,CCO, due to decreased debt charges and costs of exchange arising out of the financial emergencies in London. On the revenue side, he stated that the shortage would be about £2,000,000, notwithstanding that shrinkages of over £6,000,000 had been provided for in the main and supplementary Budgets. Thus the total deficit would be about £2,500,000.

Regarding tbe current year, Mr Stewart laid on the table of tbe House, concurrently with the statement, those portions of the Economic Committee's report, dealing with the Budget, which were withheld when the main portionof the report was published. After reviewing the principal items on the Budget, Mr Stewart announced that, unless far-reaching adjustments me made to decrease expenditure and increase revenue, the prospective results for the current financial year would be as follows:—Expenditure £26,120,000, revenue £17,820,000, deficit £8,300,000.

The Minister stressed tiro seriousness of the position, especially when it is remembered that, last year, taxation was largely increased, reserves heavny drawn, and resources generally strained in the effort to balance the accounts. He pointed eat that, to meet the short age of much the same- magnitude during the current financial year was a more formidable problem, having regard to the limited taxable capacity that remains, and to the fact that the bridging of the gap must be largely 'accomplifeh('d w by' flieti'ivs ri of" reductions in expenditure. He showed that millions cannot be saved without very drastic economies, involving a serious curtailment, and, in some case, oven the abolition of various grants, subsidies and services, which have been undertaken under more prosperous conditions. His statement indicated that the Government’s . action must be governed mainly by what the country could afford, and he appealed to Members of the House, and the people of the Dominion, generally, not to add to the difficulties by opposing each and every economy that is proposed. j The remedial measures detailed in the financial statement are as follows;!

Remedial Measures. The problem then arises > How is this prospective deficit to be coped with? Before discussing the proposals contained in the economists’ report for reducing the amount to what they call a manageable deficit oi* between two and three millions, jt will facilitate a comprehension of the position if I state the suggested remedies m broad outline' as follows: Estimated

deficit £8,30 ,000; to be reduced by (1) Savings .04,100,000 ;(2) taxation to yield £2,200,000 — £6,300,000 ; remaining deficit £2,000,000. The details of the proposed taxation will he laid bo.ore the House at a later date. In the meantime I may say that the Government proposes to submit to Parliament certain increases in both direct and indirect taxation. Ihe savings proposed arise from the adoption in part of the economic recommended by the report of the National Expenditure Commission. Some economies recommended by that Commission were already in force, some were not agreed to liv tin*. Government and some will not operate during this financial .year, even if agreed to. I A statement will be made, later as to which recommendations have been adopted and the reason for the non- 1 adoption of others. The Commission of course has not completed its work and and further recommendations will be contained in its final report. I may' say, however, that the £4,000,000 referred to is broadly made up as follows: Reductions in salaries, w.ages and pensions £l,lC'.',ooo; abolition () f subsidy on unemployment funds £1.450,000; assistant e from Highways funds £500,000; subsidies to local bodies to remain a charge or highways account £135.000; reductions in other items £325,000; “Hoover” morntonurn( if ex-j tended) £60 f :,0c0~£4,100,000.

Reduction in Fixed Charges. Both the economists committee and j the Royal Commission recommended a reduction in fixed charges for interest an d rent ,?s well as wages. Al- 1 though these proposals only partially, affect the Budget, I propose to deal with them at this point, both as they affect the general position and the Budget. In paragraph 97 of the

REVIEWED BY HON. D. STEWART DEFICIT OF EIGHT MILLIONS ADDITIONAL TAXATION PROPOSED fThe long-awaited statement by the Minister of Finance, Hon. pownie Stewart, was placed before the House last evening. Of a comprehensive nature, it deals with every aspect of the Dominion’s finance, outlining the position, and proffering recommendations. The chief proposals are: To reduce wages and salaries of public servants; to make reduction in interest and rent; to effect economies in public expenditure; to increase direct taxation; and to enlarge the life of Parliament to four years.

The economists report, part 10, also appears to hold that the reduction should he by legislation. The same view has been urged by many outside representative bodies. Although ] am still of opinion that a fixed reduction by legislation is not the best course, 1 have subordinated my personal view to that of my colleagues, and what appears to be the general view accordingly the Government legislation will provide for a general reduction of interest and rent, but it will he qualified by provisions enabling the mortgagee or lessor to apply to the Court if he can show hardship and for the mortgagor or lessee to apply to the Court i? he can show that the relief is adequate. Th e legislation will also allow for concessions already made and for various other special consideration. It must be remembered also that in last year’s legislation I imposed special extra income taxation on receivers of investment income from interest and rent. The objection raised to that was that while it made this class contribute to the general financial needs of the Dominion, it made no concession to the mortgagor or tenant. As, however, it is now proposed to make a henvy reduction in interest and rent this special taxation will require to lie reviewed INTEREST ON THE PUBLIC DEBT.

I now turn to the interest on the public debt. Tile Royal Commission on national expenditure recommended that assistance might be obtained towards the buo getaiy position by (1) revenue from stamp duty on coupons and interest warrants and (2) a voluntary conversion loan. They pointed out that tfie advantages of revenue stamp duty were (1) that the duty could be put into operation immediately (2) that there would he no costs involved and (3) that the. duty would be purely of an emergency character and could ue lilted wholly or in part as prosperity returns. As against that if .the charges are made on a permanent basis it would tend to prevent a general fall in the interest level which is vital to the revival of trade aim industry in the Dominion. They therefore recommended a special emergency stamp duty mi the interest on al| internal loans hearing interest at 4i per cent or over. This did not suggest the rate of stamp duty which should he imposed, as they considered the question of taxation was outside the order of reference.

With regard to a conversion loan they pointed l out the disadvantages to he (1) considerable cost would Ik* involved in the process of conversion (2) immediate relief to the Consolidated Fund would not he possible and (3) it would penalise investors for the whole duration of the loans. In effect they recommended a combination of stamp duty and conversion. They admitted, however, that ifobbing would he more fatal to our credit than an unsuccessful conversion scheme and that the prospects of its success should

economists report it is stated "a reduction of 20 per cent, in fixed money claims would make a substantial contribution towards bridging the gap between costs and prices.” They further indicate that both rent and interest should be reduced on this basis. They also indicate a further reduction in wages of 1 ten per cent, as being necessary.

The Royal Commission on national expenditure in paragraph 134 of their report, recommended a general reduction of ten per cent, in salaries and wages of public servants. They also recommended n reduction of either 15 per cent or 20 per cent, in the rate of all classes of interest both provite and public. I will deal first with the question of interest, which is by far the meet difficult and intricate. The problems divides itself into two branches, namely,

interest on private mortgages, deposits, etc., and interest payable on tbe public debt, held in Now Zealand. In my view different considerations apply to these two classes of obligation. As to private interest I have on a previous occasion expressed the view that a flat cut all round would hi ommoe.,sary in some citses and ins'tffi in others. It would nske no discT'inination between those who had mvestoj w.oely and those who had inve'-o un wjicly. My view was, and is that vol-

'i,n s ry private adjustments antd where : <'(,< esary by the provisi > is of the M"' tgafois Relief Act, would provide more equitable of cases that exist ill-in any. flat race reduction could do, however, the Royal Commission on national expenditure states in paragraph 153 that in their opinion this process is i too slow in operation and may not result in an equal all round adjustment, and some or all of the commissioners advocate a reduction by legislation of 15 per ceiit or 20 per cent (paragraph 316).

be carefully guaged before it was undertaken. They suggest that the general reduction in interest under a conversion scheme should be 15 per cent, or 3s in the pound. Another section of the Commission recommended a conversion of 20 per cent., but so that, on loans the interest on which is taxable, they should not fall below 4 per cent, and on the tax free loans a- reduction to> £3 12s.

ECONOMISTS’ RECOMMENDATION

The Economists’ Co mini t tee recommended :

(1) A special stampi duty on interest on the internal debt, or (2) A special income tax. such as was imposed last year, or , 4 .

(3) A voluntary conversion. j loan, whereby the internal debt would be converted into new seeurtiies bearing a lower rate of interest.

They suggest a reduction by 20 per cent, to a minimum of 3ff per cent.

Reviewing these proposals, the Government is oi the opinion that, at this juncture, a voluntary conversion loan is not advisable for various reasons. In the first place, the average rate of interest on the public debt is too low to- make it probable that any voluntary con version scheme would be sucessful. The tables show that the average rate of interest on the debt held by the public is only 4f per cent., and on that, held by Government departments per cent. In the next place, the proportion of tiie debt held internally in New Zealand as against the external debt is much lower than was the 5 ' ease in Australia.

I It would appear that, in order to procure a successful conversion, it would be necessary to bring down the rates interest so- far below the market rate, that it- seems inevitable that the conversion would not be, in effect, voluntary, but compulsory. In other words it would amount to a competition with our creditors. Moreover, although some calculations in the reports of the economists, and the Royal Commission, suggest that a net saving, to the budget of £360,000 or more would be made, later figures, worked out by the Treasury, satisfy me that, after making all the necessary concessions to our own mortgagors, and taxpayers, the saving would be so small as not to warrant all tbe risk and turmoil of an attempted voluntary conversion.

TAXATION TO BE MAINTAINED. It may be that, at some later date, the question of a voluntary conversion will require to be reconsidered, but I do not- think ft is expedient at present; Finally, as in the case of ! private interest, it must be remembered that the interest from Government bonds was subjected to a special income tax last year. It is my experience, and observation, that many investors, both large and small, readily agree that they ' ,p$$ n . TO whatej&or taxation the State finds it necessary to impose, but they strongly : resent any suggestion of a forced reduction of interest by the Government on its own bonds. In reality, they received a ten per cent, cut last year by. virtue of the taxation, I am, therefore, still of tire opinion that the fairest way to call on the holders of Government bonds to pay their share towards the general need is by taxation, I therefore propose to maintain the taxation imposed laist year. This will not put them on a level footing with the private mortgaee if he is to suffer a 20 per cent, flat reduction. I propeso, therefore, to supplement the taxation on interest from Government bonds by a stamp duty on interest coupons, of 10 per cent.

TAX-FREE DEBENTURES. This brings me to the position of the tax-free debentures. Apparently, both the economists' and the Royal Commission contemplate that any stamp duty imposed on interest reduction should apply to the tax free debentures, as well as those not tax free. The argument used is, that this stamp duty is a special revenue duty, framed for an emergency, and not forming part of the ordinary system of income tax. This view is held not only by the Royal Commission and the econmists, hut it appears to be considered justifiable by some of the stock exchanges, and other organisations dealing in investments. I am unable to asqmiesce in this view, and it must therefore ho understood that, while the recommendation is submitted to the House by the Government on the advice and acquiescence of the authorities I have quoted, it does not express my own personal view.

Interest on local body debt—This will be dealt- with in the same way as interest on the public debt. That is to say, interest on local body debt will be included in the proposal for a stamp duty of 10 per cent., and the special income tax imposed last year will remain. Provision will he made in the legislation for payments to local bodies of the proceeds from the duty derived from the interest on their securities, less a reduction of 5 per cent, to cover costs and administration.

OTHER INTEREST. In order to preserve to tho existing relative position and ensure that the reduction in fixed charges i« an all round one. it is necessary to consider the position of hank rates and deposit rates. Generally, in so far as hank rates for advance are concerned, tho question of a reduction haw been discussed with the Associated Banks and an nnnoueoinent in regard to the matter will be made by the Chairman of the Associated Banks shortly. A. fairly extensive deposit business is done by trustee and investment companies and building societies and in

addition deposits are accepted by mercantile firms. All these institutions andi firms are asked to assist in bringing about a general reduction in interest charges. In order to ensure that individual firms do not obtain an advantage over their competitors by refusing to participate in the proposal, it is proposed to ask Parliament for authority to presense the maximum rates of interest that may be offered for deposits by tho different dassess of business.

The power to fix rates in this way will be made wide enough to cover interest on existing, deposits. In this connection I may say that it is recognised that a reduction in mortgage rates will .seriously affect the financial position of some institutions,' unless provision for a reduction is' made in the rates of interest for existing deposits. Power will also be taken to fix the maximum rates of interest that may be paid by Savings Banks.

REDUCTION IN WAGES. In order to give effect to that part of the Government’s programme which contemplates a general reduction ol rent, interest, salaries and wages, a comprehensive Bill will be presented to the House at an early date with regard to a wage reduction. Both the IRoyal Commission and the Economic Report contemplate a reduction of 10 per cent. The Royal Commission holds the view that a graduated reduction is not advisable, but the Government proposes, however, bo graduate the cut as regards the civil service, and particulars of this will appear in the legislation. In paragraph 140 the Royal Commission recommended that insofar as. 'the cut affects the Public Trust, the Government life insurance office and the State fire office, that these departments s'hould not be deprived of the benefit of the reduction in wage as was done last year, and the Government acquiesces in this view, LOAN FINANCE.

A London loan has already been announced. The £5,000,000 loan has been underwritten in London. The loan bears interest at 5 per cent, and was issued at £9B 10s per cent. The stock will mature on :he Ist November 1971, but tbe Government will have the option of repaying the loan wholly or in part or after the Ist November 1956 on giving three months’ notice. The return to investors with redemption at par a:; the maturity date is £5 Is 9d per cent, and t'he cost about £5 5s 5d per cent. Having regard to the present economic conditions the underwrifcing of a loan on these terms is satisfactory. £4,000,000 of the amount is to be used for funding the treasury bills outstanding in London which mature -in June next and the remaining £1,000,000 to a»sist in financing a much reduced programme

of capital works. CAPITAL WORKS. The loan will greatly assist in easing the strain on local resources. On this point the Economists Committee stated in paragraph 133 of their report that '“lf it is practicable to fund these bills on maturity, .such should be done so as .to ©as© the position in New ’Zealand.” Further, the Committee, while recognising til© necessity for a reduction in loan expenditure, recognised that a complete sudden cessation would only deepen the depression and lead to waste through leaving works in hand uncompleted.

These remarks are in line with my own views and the Government is endeavouring (to arrange finance for carrying on capital works on a reduced scale. It is hoped that including the £1,000,000 .from the London loan that arrangements can be made to finance an expenditure of £3,000,000 for Public Works, land development and forestry, and this would mean a reduction of over 50 per cent, compared with the programme for last financial year.

GENERAL FINANCE. Arrangements have also |T .o be made to deal with loans maturing in New Zealand and Australia. About £5,000,POO 'held by the public matures during this financial year. ‘ln addition, an extensive use will have to be made of | treasury bills to finance remittances to London and general requirements during the financial year. ■STATE ADVANCES. In view of the heavy demands in other directions I do not see any immediate prospect of providing additional capital for state advances during this financial year. The matter will not be lost sight of and will be considered it the internal money market, after providing for other requirements, is favourable. As to the existing resources of the office it is estimated that after providing for redemption of loans maturing during the year not more than £750,000 will bo available for reinvestment. From this amount, however, will have to be deducted the amount of interest and principal postponed by order of the courts under the 'Mortgagors’ and Tenants’ Relief Amendment Act 1932. Payments in arrears also have a definite bearing on the available resources. To enable flic State Advances Board to give further concession in deserving cases it is proposed to introduce legislation to permit the Board to rearrange loans to mortgagors ami capitalise arrears of interest. The Board will also be empowered in certain cases to allow the J per cent, rebate on prompt payment of current instalments even though arrears are still outstanding in respect of previous instalments. These further concessions will also tend to reduce the surplus funds avail ible for re-investment and as it is necessary in many cases to provide additional loans to protect existing securities the Board is conserving its limit'd resources for this purpose. 1 think it desirable that the country should know this in order that misapprehension may not arise in respect, t<* fresh applications for loans.

GENERAL. I have, made no reference to one question which occupies a large part

of the economists’ report, viz, the exchange problem and the price level. 'So far my immediate practical problem Bias been to make sure, of getting funds to meet our London obligations, and all general considerations of advantages and disadvantages of a free exchange or a high exchange- had to be subordinated to the more urgent one. Whatever New Zealand may decide to do when it is clear that- the need for tile exchange pool no longer exists. It is fortunate that the Ottawa Conierence will enable the whole problem of the price level to be approached from an Empire stand point. All attempts fo raise the price level by international action have so far been successful, but. concerted action on an Empire scale to raise the sterling level of prices, of primary products may be possible and is the only thing that can relieve the burden of the external debt.. At the present level of prices New Zealand call either pay her London obligations or buy British manufactures, but she cannot do both, or rather the latter must be severely restricted. Tt is satisfactory to note the Canadian Government proposes to make the question a prominent feature on the agenda paper at the Ottawa Conference.

THE PROPOSALS. In the meantime to deal with our internal problems, the Government proposes to submit legislation (a) to reduce wages and salaries in the public service and to make equivalent reductions in interest and rent. (b) To effect certain economies in expenditure. '(c) To raise additional revenue by direct and indirect taxation, (d) To enable the State Advances Department to grant further concession and adjustments.

(e) To provide for the life, of this and future parliaments to run for four years instead of three. So far as balancing the Budget is concerned, the proposals covered by this statement will, if the preliminary estimates of revenue prove to be correct, leave a deficit of £2,000,000. This position will be reviewed in the ordinary session when it is 'hoped that the situation will be cleared and the prospects can be- more accurately gauged further By that time the Government will have had time to consider the final report of the National Expenditure Commission. Apart from these considerations it is recognised that ultimate Budget stability must rest on general economic recovery, and cave 11111st be taken not to hinder that by imposing too heavy taxation in an effort to balance the Budget. At the same time the Budgetary position must not be allowed to get out of hand as that would constitute a menace to the whole economic fabric, if it cannot be' avoided without too drastic measures. We can, I think, legitimately offset any reasonable shortage against the reserves which still remain. The book value of these reserves invested in discharged soldiers’ settlement mortgages is £10,850,000. While this amount will inevitably have to be reduced on account of investment fosses, •th-e effective value will .* be more than ample to cover the deficit for the last financial year and the £1,000,000 shortage for this financial year. Should it remain at that figure estimate ed finally, the aim of the Government ie to reach Budget equilibrium by 1934.