ECONOMIC REVIEW

Hokitika Guardian, 27 January 1933, Page 6

ECONOMIC REVIEW

BY A.IR, FORBES,

A COMPREHENSIVE STATEMENT.

(Per Favour* of Government). WELLIN GTJN, January 27.

In the- House of • ' Representatives this morniiwr 'Ministerial 1 statements 4 &. ”, • .7S \ relating .to‘the ' Government s policy were, presented by Hons.. Forbes and Coates, l ' ' ' The following Ministerial statemepit by the Rt’. Hon. G. W. Forbefc, Prime. Minister, was made to-day: “Hon. Members-will recollect that, on December 1 last, in intimating that it was proposed : to move the adjournment of Parliament- until .January. 20, 1 stated that the intention was to allow Cabinet to give a fuller and more thorough examination of proposals affecting the general economic position of the Dominion, and particularly the difficult condition of the farming industry, owing to the further . drop iii prices of export produce in our*external markets than was possible while Ministers were closely engaged in Parliamentary work. “After the House .adjourned on December 9, the Government lost-no time in making the necessary qrr-nngpments to have , the fnfleeti.-.'infb.rnßVtion. isup-’ plied as to the effect of the low prices on the budgets' of the farming community, hind, in ; this connection, . Dr. J. Hight, mnj Professors ,J. Pclsbaw and A. H. Tocker were, asked, to,coine to Wellington to make a- report upon the changes that had occurred since the, compilation of the repprt of the Economic 1 Committee,, of which they, were members ill Fehruary, 1032. 1 lie report which’ they have furnished in compliance with this request. has, beenmost helpful to the •Government, especially in arriving at the -decision of Cabinet- to .bring about an increase in the rate of exchange. The in-, formation supplied by farmers’ agencies and hv the various State lending departments showed that the farmer borrowers, had slipped back very seriously in their .payments of principal and interest during the last twelve months. I'

OUTSTANDING ARREARS, i “To give Honourable ARmbers some idea- of tlie magnitude of the arrears outstanding.' oh loans to settlers, in respect of tlie Sta'te Advances: Department, and the Lands .Department, T quote the cfeflowing figuresAt March 31,-1931, -the amount owing by settler#’Vb-> the'"State. Advances - Office was £411,740; at Atai'bh; 31; 1,932, it’ was £835,760 and at September 30, 1932, the total had . increased to £1,056,830. On the Lands Department £1,522,137- was due for rent and interest in arrears at September 30 last, and in addition, the postponements of rent and .. interest amounted . to £2B3,fEo> -•- ■ . • . ’ A

“I think that members of the .House will agreo figures supplied by 11 1 ese?- hyO' - State Departments furnish a fair mdex as to, the position .of mortgaged ‘farmers generally in. the .Dominion. T'ho growth of the arrears on the part of the fanning. community lias ..been particularly rapid during''Hie kft-t few owing to their credit'and reserves becoming exhausted,.and .the. mope,recent, decrease in the prices pf. rtlieip products, ; especially dairyj'prdducb, ’will no doubt accelerate this slide.- It will be. readily teen that-a -serious position has arisen, which will soon become a further lem for the already overweighted consol id a te.d : “f funds- .The . rqview .pf the economic position submitted by the Economic Committee showed that, it had become progressively .worse since their report in February, last. ECONOMIC POSITION DECLINES.

“The following figures will illustrate this:—Taking an. index figure of all New iZealand export prices for the period 1909-1913 as 100, while in 1927 it had increased .to 168,., in Npyeuiber, 1932, it had fallen as low as 86 or a decrease of .49, pep in four years. '

‘‘ 1 ri'lft-x 4itM*n'tion : , in ...passing-, <tliat the furth'eVrificent -decline ‘ iu..".-dairy produce.'.prices is,.not taken into account inpdi&jgu-Feii Iha.ve just quoted. Now, ak'”ts> trade, the most obvious 16$ e-e.t'Pof • this • decline -in export prices may\.b.e. i seen' .jn the overseas trade rltnrns; 'ln 192& the value of our exports was £56,20'0,p00., . while in ]<J32 it :wa& £33,600-,oo^J>.The value of onr imports.for the same years Was £44,(XX),0.60 sfjijd; £22,803,P0P. These figures trdfH-eijeiit 1 a. decline of 50 per cent, dn tlie- vaiue. of onr exports, and 53 per cent? in exports. The heavy fall in imports is, of course, the direct effect of the contracting in exports. ■; . ... . ,

national income. ’ • ‘ |I Avil»> now -tike production in . relation to national income. The' estimate of national income is approximately made'by adding about 20 per cent to the, official of total [Mdduo'ion. The following/tuhle sets out .the , pplfitjon :—Estilnated value of total production, farm products, 19.28-^9," £82,J00,P0P J ; 19324*3,; £49,000,003; . other. p'oclucts, .£61,200/V)0, £32,500,090. Total production £123,300)000. £81,500,000. '.National income* 1928-29. £150,1)00,000, 193233. £98,p00,000. .There is'thus a fall in the national income of 35 per cent., Tt may 'therefore be concluded that the national money income, which constitutes. the purchasing power of the community,. has.- decljned 1 by. at least one third of the 1928-29 income. Again, in regal'd to internal trade and fitiahoe, it is inevitable that a decline of this magnitude should . be. effected in the volume of internal trade, the.; best available indication..of. internal business is tlie return of’.total debits .per week to all bank accounts in, the Doin-

inion, joublislied by the .Government statistician. Tii-tse show in 1929 the average debits were, £520,5)00.000, and in 1932- £13,500,'0Cu, or a decline of 35 per cent, in the total volume of financial hiisiueis.’iu- tlie .country. “The figures I have given to the House present a-* striking record of

the dec;l,inp. that Ipt-s occurred in New Zoahvid’S income and trade. Ibo effects of tlie de pre-id on have been cumulative- being felt fir-t by tlie

■I vj inf sv These- -effects liiive prissed on .to the producers of local goods services of all kinds. The full extem£(>f these effects, however, is only now 'beginning to lie in:du df nud’Dadc. Thd-ftMoiirb' theMefMH(»4o iWafntaiu production have drawn goon resouioes and eAjiital and“eWtKfiß they .-liipyp to ,dcu^n4ps| > leJy jffi* llp oine from tlie sale of the'ip products, as the resources "on which they can draw become prcgro ; svoly exhausted. .Ilieii purchasing power must dyc-ine further, and the effect on the cities and ,tpwn,s must lie felt more severely.” “It becomes apparent, therefore, that the essence of the present difficulty i s i» the progressive disappearance, of profits, and in the increase of Ijasses. The restoration of sound business conditions, the expansion of production, the absorption of the unemployed, the increase in purchasing power and in demand, and tlie revival of general business activity, all these must depend, on the creation of such conditions as will permit profits to 'reappear. l’rofits depend on the relation of costs to prices. Since 1929, export prices have declined by 49 per cent. Retail prices liaye failenyhso °.nly. 19 per cent., wholesale prices by 14 per gent and wages (nominal)fSy l-<> P er gent. A reduction of internal prices and costs ol about 35 pea* cent, is iequired to feeing about the same relationship to export prices as existed m 1929.

“Tlie main problem is to -reduce the disparity between cost and selling prices. To let matters drift, and allow undirected deflation to have f.uil sway would be obviously unthinkable, and could not be countenanced by the government. Such a policy would dangerously aggravate our already serious difficulties. Cabinet, in its consideration of the position,* have examined various suggested remedies, having for their objective the increasing of prices,, such as a rise in the rate of exchange, various forms of internal ci-edit expansion, including a grant or bonus to primary producers, and also, a, grant or subsidy t° farmers, financed by taxation.

INCREASED EXCHANGES. \ After- mature deliberation the Gov-ernment-came to the' conclusion that ah increase in the rate of exchange from 110 s to 125 s would be more advantageous to the country as a whole than any other .method in easing our present difficulties-. The Government approached the banks and requested them to give effect to this decision. In 'thefr arrangement with the banks the Government have undertaken to indemnify them .against any loss that may be incurred on. the sale of exchange purchased at the new figure, and a Bill will be introduced accordingly to obtain tlie necessary parliamentary authority to give effect to this undertaking. j “I do not in this statement propose to deal in detail with the various arguments for and against this decision. Ample opportunity will be afforded to Honourable Members for discussing tbe subject. I will brie.ly mention some of tlie advantages which may be expected to accrue from the course that has been decided upon. AD V ANT AG ES EXPECTED.

“The national income and the national spending power will be proportionately, increased. It is estimated that the proportion of costs, likely to increase with a rise in exchange, is .small at the present time. Industry and t)r.ade are being contracted and unemployment has not decreased because much business cannot be conducted on a profitable basis. With production contracting as it is at present, because of maladjustment of costs and .prices, a rise in exchange, which increases prices more than costs, will certainly tend to arrest the decline, and may stimulate an increase. ft ma v be urged that-the primary effect of' a rise in exchange is to increase budget! expenditure through the increase in the cost of overseas interest payments, ami ,to reduce customs revenue temporarily, hut the secondary and more important, effect is to prevent an'.appreciably greater fall in taxation capacity, and non-tax receipts. It- is confidently anticipated that the net benefit to the budget from the increase in exchange rate will not be long delayed. The full effects of the present depression have not vet been fully felt hut it is quite certain that, | unless further adjustments are made, I the national income’and taxable cap* acity will fall further.' ... ." , “It will be i t'metniioi:e ( 1 ‘ 1*1 1 :ib, a short time ago. I expressed the opinion that the question of exybancro was'-qne that should be properly ■■determined by'-'the banks.. Since that date, and cyn,sequent upon a close examination : ofdtlie position, the .Government came to the conclusion that the matter had become . one of serious national importance, and could not .be left to outside agencies. Tf the country had been able to continue without an alteration .in the rate of exchange, no one would have been better pleased than myself, hut, in the history of all countries, grave emergencies arise when it her-mo* necessary for a Government to internose, and place unnn their own shoulders the •responsibility lor the course of action they deem best in the interests of the country. What T stated on the .occasion to which T have referred., was toy opinion, in the liarht of conditions then existing, that, these' conditions have unfortunately become more un-

favourable, aiid rendered action, on tlie part of the Government imperative. I recognise that the action of the Government in bringing about an increase in the rate of exchange does not find favour with those engaged i" the import trade, and in other business circles, but I would earnestly ask those;, who are loudly criticising the Government to view the -position from a national standpoint arid consider what would happen if a policy of extreme deflation with all its attendant evils were allowed to hold sway.

TAVO OUTSTANDING FACTORS. “Two 'of the outstanding factors which appealed to" Hie" Government were the existence of a distressed farming community and' the unfortunate position of the unemployed. It is indeed a sad state of affairs when 68,000 of our citizens are out of employment at a time usually regarded as the busiest season of tlie year. A\ lien we remember this fact, I feel certain that the pressing nature of the problem must be brought home to every one of us. I would ask our critics to regard the position in the same spirit as actuated the Government in coming to its decision. If orthodox methods fail to find a solution in times of grave emergency then. I claim that the Government is justified in resorting to; other means in order to lighten the burdens of the people. I feel confident that with tlie stimulation which' will -iiow be given to both primary and secondary- industries, we may look forward to gradual, but certain 'absorption of a large number of those who are at present unemployed. The importance of this aspect of present conditions can in the view of t.-:b Government, no longer be ignored. There are those who hold different opinions from the Government in regard to the policy of raising tlie rate ol exchange, to relieve what all must agree is a very serious position, but it is the responsibility of the Government to decide the course to be adopted. This wo have done, and we are confident that the. wisdom ol ibis stop will ere long be apparent.”

HON. J. G. COATES

IMPORTA N T -ST A TEA! EN T

WELLINGTON, January 27. Statement to the House by l’t. Hon J. G. Coates, Alinister of Finance.

INTRODUCTORY. Since the adjournment of the House, the Goyernmerit have again taken thorough stock of the economic position of the country," and have -considered ways and. means of niVcting. the situation. In particular, the Government have, been concerned about the plight of the prim ary. industry, which i« the basis, of the whole economic structure of this Dominion. COSTS AND PRICES.

During 1932,, there was a further heavy fall in" export prices" and the general level of. these price,; .as shown by the. index numbers is now .little more than one half of what-it war; in 1929. Comparing the position as shown by lh e Government statisticians index of .price,; in 1914 and in November 1932 we have the export price .21 per cent,, below) 1914 and farm expenditure (year 19311 49 per cent, above 1914. Retail prices ■are 29 per cent, above 1914 and wholesale prices 21 per cent, above 1914.

FALL IN EXPORT PRICES. Tli e notable feature, and tih e one calling for urgent action, i? the 4all in export prices. Ibis fall in prices U 5 disastrous and it renders th e financial positron and outlook of n large proportion of farmers increasingly difficult. They have been able ,to carry on and to maintain production only bv failing to meet their fixed charges, and by living on capital, but tarni maintenance is suffering and in many cases stock is being sacrificed. If some effective action i<s not taken a greatly reduced volume of production must assuredly follow.

RELIEVING THE SITUATION. During the past year, much was clone in one way and anothe,. in the direction of relieving tihe situation, but it all fell far short of what was required to bridge th e .widening gap between costs and price.?. New Zealand in common with other countries, has-been looking to a recovery of world prices. Unfortunately these hope* hay ( . not been realised. On the contrary, as is well known, price? have' fallen still iurt-hor. The fall haq been particularly severe in those products.- which are the exports of New Zealand. We have not yet received ,th e 'full benefit from the agree, jnentg made at Ottawa, 'and I am confident that following the world economic conference,, steps will be taken by the Great Powers to remove some of the principal underlying causes of the do.ri preijsipn. and to bring about a wise in world prices. Thc.« t . measures will ,sist the Dominion, but the Government ar 0 satisfied after a searching examination of the situation, that we afford to wait any* longer lor assistance from these .sources. WHAT IS NEEDED.

We must immediately take' steps of ai, far to aft-let our primary industries'. ■

At th e outset, the general line . of ipproach favoured by the Government in bringing costs and prices i L DC * may be indicated. It is frequently said that an initial and fundamental choice must be made. The clioicy, is between ’•other reducing costs or increasing monetary receipts. The choice is said to lip between "deflation*’ and “inflation.” iOur view is that with the choice of reducing costs or jnerealiig monetary receipts, the country should deliberately proceed by both methods. The gap to he bridged is a wide one. By ‘approaching the problem from both ends, by deliberately planning to increase receipts and where -possible to reduce costs; we shall Wing adjiastment wvitli Jess dislocation, than if we seek to obtain adjustment by one method alone.

NO CIVIL SERVICE CUT. Presently T shall • ref or to certain directions in which the reduction of costs) as well a s the increasing of receipts is to be yought, but at once I may [say that a. further reduction in the nates of wage,; and salarie,; in tlie Government employment is not contemplated, and this is it-elf a reason to, our faking in hand .adjustment* of an alternative kind. 1 R (EXCHANGE RATE.

’All'suggested method.;, such as bounty on exports, remission of rates and land tax exemption of farm loans from income tax, and the direct issue of cß’d't by tbe Government, were carefully considered, but the raising of th? e xehang o iato s was deemed preferable to all other methods, and ai; hon. members ai p -jaware. notion has already bon taken in this direction. Arrangements have ! b'o ( n made with the Associated Banks whereby the exchange rate for telegraphic transfer New Zealand on London has be e n -raised from £llO to £125 for £IOO in London, and other rates have been raided correspondingly. This,' action har, been taken by the banks at the request of the Government and ® s a method of economic a (liniment. This Reins so it i s reasonable that the banks- should be -safeguarded against loi? R in giving effect to the Government’s policy. Aeeordmg'v the Government have agreed to .safeguard the .banks against loss arising out of exchange dealings at the new i ate... This in effect' means that the .Government will purchase any surplus 'London credits bought bv the banks at the new rates, of which they are unable to dispose at the current rates in this -way, ‘the Government may be eal’.ed upon to pu-rcihn.se more exchanges than is actually needed for current requirements but fi"v -such ,surplus amount can be used to pay ,off debts -abroad with funds borrowed in New Zealand. The net effect, apart, from exchange, is the,; a transfer of debt from, abroad to New Zealand. While som P surplus exchange may have to be purchased during tlie first year, it iV considered that tins i---but a temporary phase, a.; conditions will soon adjust them-'elves to the new position. The Government recognise that whatever the rate of exchange may be. stability is a most important factor in the interests of all sections of the community. „This being so .it j,; proposed to maintain'the present rate of exchange for a. reasonable period, anti 1 may say that it will not bo departed from lightly. It is of course ini possible to fix tally definite period, as we cannot -far-sec the., co,upqy'of event s , either in New Zealand or abroad. A Bill to give effect to, the arrangement, with the banks will shortly !be introduced.

INTEREST-CHARGES. “With the .faitAn prior* and the decrease in the volume of business, fixed charge Karo becom e n serious problem in practically all. business, u’ld as the price's ■ cif-.r-pri-mafyirprodnct,; have fallen most .severely, . .bur-deii.'. .-P1 . fixed charge,.; is -particularly acute in , the business of fanning. Thus, tlie question of lowering .ifits^t3)'afges~nTuSTTbe''a" major item in any scheme for adjustment of. costs; Thp-.Cp.vernment are anxious-. .to. bring':;, ah,out.-,lower, .market ratp s o’f'.Yintei'estAom A-sound basis. If this can be achieved, it will be of much greater, and,of.mor e lasting, benefit to all sections of the community, than a simple cut .ip existing- charges in London. Interest rates in the chort term loan market have fallen to a very low level- iinVU following the recent British, > ( ’vb.. * . conversion (YLlong term rate* are also coming dou’p fairly rapidly in Australia. Comprehensive steps wC'e taken tq -reduce, the rates of interest on all existing Securities of the Government and local bodies, and this, together with other measures, has led to lower market rates of interest in Now Zealand.

••()u.r market rate.? of interest continue to . be : relatively high, atnd it would appear that the situation is influenced by the rates on the large volume of .‘ existing securities. The Government;.?consider .it i-easant'al. that ■interest- rates; on existing securities should be brought down to. a "lower level, j at prc,s(at.;wo: are discussing ways and i means of achieving this object. 1 am i not in a position at this stage to make any definite' statement, but I hope jn due course to be able to bring forward comprehensive' proposals for dealing 1 with.the whole problem, and as far' as possible, on a voluntary Ixe-is. This i« a difficult 'matt?i', particularly insofar as local bodies debts ar e concerned,.be--1 cause there ate so many local authorjtffes with securities on the market. Any reductions brought about ill the inferrest- rates on local body debts, -insofar | a s they exceed the benefit at present 1 derived from ; the ten p e r cent, stamp duty, would enable local authorities to .give further relief to ratepayers. i»»»v -siifln relief would of course he of direct assistance in lowering the fixed charges of exporters, and other producers, if the more comprehensive proposals can he successfully' arranged. The present ten fie,, cent, stamp duty, which is somewhat irksom e to bondholders, will be abolished concurrently with the reduction of intere,-?t on Government ana local body -securities. “We have also to consider deposit rates and overdraft rases. Discussion* in regard to t-he-so matters, are well in hand, acid T am hopeful that arrangements can he completed to lighten the cost of these items. Finally there is the problem of mortgage rates. A s Hon. Members' are aware, legislation is already- 'upon’ the -Statute Book providing for i a 20 per cent, reduction and for the review of individual case* by the mortgagors’ adjustment commissions, and the courts iivsofa r a? statutory reduction is concerned, and..l do not think it- would be jn the interests of borrowers to go any further in thi* difett'|ini, ior.it .must be 'recognised that, if. .industry is to b 0 carried on, the pf investors must be re- . tained. Tfe''.existing power? for the review of individual cases are' already very extensive, arid no further major

amendments of l’ie Jjuv appear to he (necessary. Moreover, it should not be overlooked that, if the rates of interest on Government and local body securities and on deposits cil n be brought down, tJiis in itself must make mortgage investments relatively more attractive than they are "it present,' ri d consequently nvill induce in or,, investments in this diretioii in fact a lowering of interest rates on gilt edged securities must benefit all borrowers a.s it will permeate through th 0 whole field of investment. KAIL tv AY FREIGHT CHARGES.

“As a further stop towards bringing down cost-* arrangements are being made with the! 1 ’ raflwiay board for a reduction of about 15 per cent, in freight charges, covering a fairly wide range of commodities. Tnis will and to our budgeting difficulties, perhaps to the extent of £lbj,OCO in the first year alt-nough increased traffic at- the lower rates may later reduce the amount of tlio loss involved. In any race it is considered that the reduction is warranted from the more important viewj.cilit of assistir.g to reduce working costs. TH E TARIFF.

“It has bicn the practice of New Zealand, during the last few years, to hold periodical inquiries into the custom / ta;vff. Such ".lquiries -were hold in 1921 and 192? and the time wouij 1, in t'iie ordinalb’ can,roe, lie ripe for a further investigation. The need for such an investigation is all the more urgent owing- to the existing economic and financial crisis which has had,such a catastrophic effect on world prices. In New Zealand, more particularly the tariff should be overhauled. owing to the fact tiiat our export ’ trade, depend almost wholly upon our primary products, and the lower prices obtainable have made it necessary to reduce costs.of production to the lowest possible -level, consistent with an orderly economic and industrial development. No one will question the fact that the incidence of customs taxation is a very, important factor in connection with such cost, and with the general east of living of the whole 1 community. Apart from these considerations, New Zealand is committed, under the Ottawa. Agreement, to conduct such an inquiry, the question having been there approached. From the viewpoint ,of facilitating trade with the United Kingdom in return for valuable concessions given to. this Dominion, the Government have no intention of exposing to unreasonable .competition any industry which' can function on an economical and effeient bai,ii«. On the other hand, as I have indicated, tile country cannot afford to maintain tariffs which increase costs of production, and the cost of living, unless a real benefit accrues to. the community, Therefore it in intended to set up a small body, which will review the whole ( position and makeC recommendations with respect to tariff rates. It is. proopsed -that the inquiry should commence as soon pi.j possible'. It will be remembered that under article 8 of the Ottawa Agreement, ■. it wag arranged that United Kingdom producers should have an opportunity of putting forward their views at the tariff investigation. The Government are in communication with his Majesty’s Government in the United Kingdom with a. view to ascertaining' when the producers there will he in a position to furnish the necessary information. When a reply is received fin indication will he given as to the date on which the inquiry will commence. The personnel of the investigating body will be made known at a-i early a date as possible after the rising- of Parliament.

PROSPECTIVE BTJDGETARY POSITION.

The various proposals outlined will for tli? modt part .accentuate -rather than relieve the' budgetary position, but taking a broader view it cannot be gainsaid that if we fail to take steps to enable our primary industries to carry on, and to maintain the high state of efficiency, our budgetary position will, before long, be still more seriously affected. Already the shrinkage in the national income has been such as seriously to diminish the taxable capacity of the country and justification of the increase of the exchange rate from the viewpoint of the Government's budget is that the increase which this action should produce in our national income, as measured in New Zealand money, must later strengthen also our taxable capacity. lihe budgetary situation for the current financial year may be regarded as satisfactory in that in general the estimated results for the year will lie fairly closely realised. The position will be reviewed in more detail later when the figures for the first nine months of the year have been audited and are available for publication. In the meantime, I may say that our expectations are that with the utilisation of reserves amounting to £2,5011,090 the year will close with a deficit in the- vicinity of £700,050.

For next financial year if the revenue and the expenditure were the same as is now anticipated for this year,'we would of course come out with a deficit of a similar amount. Unfortunately our problem is not as simple as that, and to obtain the prospective shortage we have to add to this £700.000, the further anticipated shrinkage in the revenue and any unavoidable increases in expenditure. While the raising of the exchange rates will he of immediate benefit to the primary producers it will he some time before the beneficial reaction can be f e lt by the rest of the community, or be reflected ju the budget-. ]n fact it, is anticipated that the immediate effect on the budget will he an adverse one, pending the time when businere geiicfallv o'aii be adjusted"to the changed - conditions. Accordingly, so far as

| next financial , year is concerned, it jf considered advisable to allow lor a

further falling off in revenue and particularly in custom. $ revenue. In addition to the effects of lb- increase in the exchaiur,. rates and the other proposals which 1 have already out’-nod the* revenue would inevitably have b ! -Vn further affected bv the , e n-tinuaiKy.of th ( > slump conditions, tin- effects tending to be cumulative. In addition to the customs revenue we have also to allow lor til?, fact that the torch sicns giver following the Ottawa Co’.'ferenep will be operative for tire full yen' - . Apart from all these special e-oiisideratic. ,s flie difficulty of forecasting the biidg,l ary 'position for 1933-34, is Increased by ffiany uncertain factors over which we have no control, for instance, the tjrend of overseas prices for primary products, and that may he taken, following the world economic conference to materially affect our estimates