FINANCE AND COMMERCE

Nelson Evening Mail, Volume LXIV, 14 January 1931, Page 9

FINANCE AND COMMERCE

(Prepared by the Department of Economies of Canterbury College.) The seventy-second bulletin prepared by the Department of Economies of Canterbury College and issued by the Canterbury Chamber of Commerce, deals with reduction of costs. The bulletin is considerably longer than usual and the first section only is published to-day. The second section will be published later. (Part I.)

New Zealand’s total exports for 1928 and 1929 were valued at about £SO millions in each year, and for the year ended June, 1930, at £471 millions. For October, 1930, the official index number of all export prices was 1143, a figure 3 per cent, above the 1914 level, and 301 per cent, below the average level of 1928 and 1929. Price levels 30 per cent, below those of 1928 and 1929 mean that the quantities of produce which brought £SO millions then would bring less than £4O millions now. About 94 per cent, of the exports are pastoral products, hence most of this loss of income falls directly on pastoral farmers. But this is not the whole effect. Some part of farmers’ produce is sold locally, and its local prices move generally in accord with export prices. For the five years 1923-24 to 1927-28 the official estimates of total national production averaged £lls millions; the share contributed by pastoral farming averaged £O4 millions, or 554 per cent, of the total. A reduction of 30 per cent, in the price of these products, whether sold locally or overseas, means that the same quantities would sell for only £44.8 millions, or £19.2 millions less than formerly. In view of the increases in pastoral production that have occurred recently, it is probable that the decline in pastoral income will be greater, but it may be put tentatively in the neighbourhood of £2OO millions. Further increases in production might lessen this decline, but increased production'usually involves increased expenditure, and in the face of the present low prices and high costs a decrease in production appears more likely than an increase. At the same time the proportion exported may be greater owing to decreases in local consumption. The reduction of income, however, cannot end with the farmers. There are possibly a few farmers who have reserves to draw upon and who can maintain business as usual for a while despite the present high costs and low prices. But a large number have probably been drawing on reserves for some years past, and the low prices of last season further depleted their resources. The still lower prices prospect for the present season mean that many farmers will be unable to meet their financial obligations, and will, in addition, have to economise their expenditure, both on living and on production, most drastically. A reduction of 30 per cent, in their income means a reduction of 30 per cent, in the money they have to spend for all purposes. Hence other industries producing goods and services to meet farmers’ needs, or to meet the needs of otligrs more or less dependent on the farmers’ demand, must also suffer reductions in income. This is likely to mean a contraction in production and a reduction of employment offering throughout industry as a whole. The volume of production and employment can be maintained only if the reduced income can be made to buy the same volume of goods and services as formerly; that is, only if domestic prices, which constitute costs of production, fall proportionately with the reduction of income. No completely satisfactory base can be found for present comparison of costs and prices. The comparisons above, which show for October last a 30 per cent, reduction in farmers’ incomes, are based on average export prices in 1928 and 1929. In those years some unemployment existed, owing mainly to the disparity of costs and prices, even though the demand for labour was increased by heavy public expenditure on works that cannot be regarded as economic. In the table which follows official index numbers of export prices and farm costs are compared and the relative percentages of farm costs that could be paid with a fixed quantity of average exports arc, shown for different periods. All indexes are equated to the common 1914 base, and the table assumes that farm costs are still at their 1929 level, no later figure being available.

PURCHASING POWER OF EXPORT PRODUCTS

The import of this table is unmistakable. Export prices are now round about the 1914 level. Farm production cannot be maintained at its pi esent volume when the income from farm production fails to meet the costs of that production. If farm production contracts, then the farmers’ demand for all goods and services required for production must contract correspondingly. These goods and services are thus freed for use in other industries. But other industries cannot export, except in negligible quantities, and the domestic demand for their products must contract as the farmers’ demand is reduced. Hence the productive capacity of labour or plant set free both by the reduction of farmers’ production and the consequent contraction of other industries, must remain unused unless local prices fall to an extent sufficient to enable farm production to be maintained. This is the reason why costs must be reduced. It is not a matter of what ought to happen; it is a matter of what must inevitably happen; and the conclusion is inescapable that unless internal prices fall heavily or external prices rise remarkably, an exteremely severe contraction of local production and employment cannot be avoided.

It might he added that present prospects hold out little indication of rising external prices in the immediate future. According to the latest information available in mid-December, the trend of world prices is still downward, and though many people hope the bottom has been reached, and even look for some recovery from present levels, it must be recognised that recovery may

REDUCTION OF COSTS

THE PRESENT POSITION

CHAMBER OF COMMERCE BULLETIN

be only temporary, ami that the general downward trend in evidence since 1925 might be continued. THE CONSTITUTION OF COSTS Most producers commonly regard their costs in terms of the payments that must be made in the course of production. They consider costs of materials, of labour, and overhead costs, including interest on capital, expenses of administration and management, rates and taxes, depreciation and insurance, etc. These costs arc determined mainly by ruling market rates. Costs of transport and marketing, which determine the margin between what the consumer pays and what tin* producer gets, should be added. But such an analysis is neither fundamental nor final, for the cost each producer must pay for some necessity of production is the price another producer is charging for his product. It has been estimated, for instance, that wages are 25 per cent, of the direct costs of farm production in New Zealand. Estimates of the proportion of direct.costs, however, obscure the fact that labour costs, capital costs, taxation, etc., borne directly by other industries enter indirectly into every cost the farmer has to meet except interest on the unimproved value of his farm. Throughout the whole of industry the prices of some groups of producers constitute the costs of other groups and costs and prices are inextricably interwoven. Excluding imported materials, the costs of production for all industry in New Zealand are determined by prices ruling in New Zealand, and costs can be reduced only by the reduction of domestic prices.

Ultimately all costs o/ prices may be analysed into broad groups such as labour costs, interest, rents, profits, and taxation. No precise information is available to ascertain exactly what these costs amount to in New Zealand, but estimates of the relative importance of some can be made, and analysis of costs is essential if the matter of cost reduction is to be approached systematically. The figures that follow are necessarily rough estimates, subject to some margin of error, and they refer mainly to 192(1, the Census year, for much of the information can be found only in the .Census returns. They are, however, roughly comparable, and provide the basis for significant conclusions.

In Volume XI of the 1926 Census .Reports, returns of income made in the Census are combined .with income tax returns, and it is estimated that the private money income of the population of New Zealand in 1925-20 was roughly £100,000,000. Averages were computed for different classes, and from these official figures the following table has been compiled:

This table gives 72 per cent, of the private income of New Zealand as accruing to wage and salary earners, and leaves 28 per cent, to others. The figures are probably understated throughout, but if the understatement be relatively the same for each class, the percentage would be unaltered by the correction of the figures. Other official sources may, however, be used for an alternative estimate.

The 19110 Year Book gives the estimated value of production as £ll3 millions at wholesale prices. The difference between wholesale and retail prices for about 00 per cent, of this produce sold in the Dominion, plus goods and services omitted, might add perhaps 20 per cent* to the estimate, making the total national income round about £135,000,000. For the next table the total employees, including both salaried and wage workers, in each industrial class have been taken from Census Report IX., and the average incomes estimated from a variety of official sources. Wages in primary production are a rough average of official figures with an allowance for lodging; domestic employees are from the same source, without allowance for lodging; industrial employees are the actual averages in factory production; the “other groups” are averaged at the same rate; transport and communication employees are assessed at the actual average paid in the railways; the commerce and finance, public administration and .professional groups are averaged at slightly less. These are for male employees only. Female employees in all groups are added at £lO5 a year. Workers unemployed and relatives assisting are omitted altogether. ESTIMATED YEARLY WAGES AND SALARIES

A wage and salary bill of £80.3 millinos is 71 per cent, of the official estimate of total production, £ll3 millions, or about 00 per cent. of the rough estimate of national income,

£135 millions. If salaries above £3OO (£l6l, millions according to income lax returns which may overstate the amount owing to inclusion of income from other sources) are taken from total wages and salaries, about £O4 millions is left as the wage bill for employees receiving under £3OO a year. :C(il millions is 474 per cent, ot (Inestimated total national income and 5(5A per cent, of estimated total production.

Since the prices of some industries are the costs of others, the total national income is the total cost of production ‘including profits). The foregoing analysis, though admittedly rough, justifies the conclusion that all. salaries and wages constitute round about tlirce-iiftbs, and wages and salaries below £3OO a year round about one half, of all costs of production in New Zealand. The importance of labour costs is therefore so great that they must take a leading place in any discussion of cost reduction.

it is not practicable to estimate the total interest bill of the Dominion, but certain items may be indicated. The Year Book estimates for 1928-29 the mortgages on land having an unimproved value of over £SOO, which must include nearly all farm land, but only a part of town land. The average rate of interest paid is nearly OJ per cent., and this lias been applied to the totals to ascertain the annual interest bill. The figures may be set out as follows: MORTGAGES ON UNIMPROVED VALUE OVER £SOO Yearly Amount. Interest. £ millions. £ millions. Country .... 115 7.4 Town 35 2.3

The town figures omit a good deal, but the country figures must cover most of the farm mortgages. Farmers also borrow on short term, but such loans probably average less than a third of their mortgages. If one-third of £lls millions, £3B millions, is taken at 7£ per cent., the added interest for short loans would be less than £3 millions. It appears safe to suggest, therefore, that the farmers’ interest bill for the Dominion, for mortgages and short loans, may be in the vicinity of £lO millions. Other approaches to the interest question overlap with mortgages and short loans and with one another. Seven per cent, on £53 millions of bank advances amounts to £3.8 millions. Interest on the public debt for 1928-29 amounted to £ll3- millions, and loan charges on local body debt for 1928 totalled £4£ millions. Such charges, however, cannot be added, as they overlap, and none of them covers the whole of the field.

Interest, rent, and profits are also mixed. Taxation is known, but is drawn from incomes from every source. In pre-war years total State taxation, though increasing, never reached £6 millions; in 1927-28 it amounted to £17.1 millions, in 1929-30 to £19.5 millions, and the estimate for 1930-31 is £2O millions. Local body taxation amounted to £2.2 millions in 1913-14, and to £6.1 millions in 1927-28.

In summary, then, it may be said that wages and salaries constitute round about 60 per cent, of all costs of production in New Zealand. The remaining 40 per cent, has to cover all interest, rents and profits, which include most returns for management, depreciation, insurance, extension of capital equipment, and probably lhc greater share, of both Slate and local taxation. J’art 2, dealing with Methods of Cost Reduction, will be published later.

1914 Export prices. 100 Purchasing Farm power of costs, exports. 100 100 1925 170 158 107.5 1920 138 155 89 1927 130 157 80.5 1928 152 104 93 1929 145 104 88 1930 (Oct.) 103 104 03

INCOMES IN ] 92/5-1020 Total Average income income ,0 milNumber £ lions. Employers: Males 48,200 300 14.47 Females 3,358 205 .09 Total 51,584 15.10 Workers on own account, males 02,220 195 12.13 Females 7,705 150 .12 09,931 12.25 Wage or salary earners, males Wage or salary 305,120 200 01.02 earners, females 90,425 105 10.12 401,545 71.14 Grand total 523,000 98.55

Yearly Average total Number of rate. £ Males. Employees. £ millions. Primary 04,5)3 175 11.3 Industrial .... 92,330 230 21.2 Transport and conim u n ication .... 50,153 203 13.2 Com m e r e e and finance 40,308 200 12.0 Public and professional 28,078 200 7.3 Domestic service a ,121 200 1.1 Other groups 18,317 230 4.2 Total .... 305,120 70.2 Females 90,425 105 10.1 (fraud total 401,545 80.3