DOMINION'S FINANCES

Rotorua Morning Post, Volume 1, Issue 38, 7 October 1931, Page 3

DOMINION'S FINANCES

'xpected deficit has increased since budget presented VITAL NEED FOR STRICT ECONOMY jpplement ary budget proposes savings and taxation , WELLINGTON, Tuesday. The anxiously awaited supplementary financial statement was jresented in tlie House of Representatives to-day by the Minister of finance, the Hon. W. Downie Stewart. The necessity for a supplementary financial statement arose from the fact that conditions had heen and were changing so rapidly jjat it was impossible to "peg" down as reliable any estimates of revenue, said Mr. Stewart. Hence, if the drift in the public finance ivas to be checked, remedial measures must be applied whenever it was :lear that further delay meant further danger.

'No one can say what will be the i moime position six months hence," ) Minister said, "particularly in i\v of recent happenings in Great itain. Many people think that conions in the Old World have now ,ched a stage when far-reaching asures of an international char;er will be taken that will lead to a bstantial recovery in prices. If our difficulties will be automatiey eased, but in the meantime I ist Budget on the facts as I find )) 2m. It would be remembered by memrs, be continued, that his predessor, in the Budget presented to the mse on July 30, was faced with the oblem of meeting an estimated ospective deficit of no less than ,850,000. This sum it was hoped iuld be provided for by stringent onomies, reductions in salaries and iges, the use of reserves and other >ms amounting to £5,056,000, leav1 £1,800,000 to be provided for by Iditional taxation. This additional xation was to be gained to the exnt of £73,000 by income tax and e balance was to be met by cusms and excise duties and stamp lties. [Although it was only about two pnths since the Budget was prejnted it had since become fairly vious that the shortages in re|nue would be even greater than jsre allowed for by his predecessor id it was now clear that the Budget ould require to be further strengened by a substantial amount. The customs revenue for the first ( months of the financial year was ready about £75,000 behind the esnate on a proportionate basis and ere was very little prospect of this ificiency being made good by heavr importations during the corning onths. In fact, the shortage was ore likely to increase. The increas- ! duties imposed by the Budget, id calculated to yield about £900,10, were not likely to meet the posiCustoms Revenue In addition to this drop m cuslis revenue, it was probable that lling land values would affect death ities to a greater extent than was iticipated. Further, it was now esmated that the revenue from lands, terest on mortgages, rents, etc.. ould show a falling off greater than as allowed for in the Budget. "Finally, I may say the Budget esmates include £930,000 on account t interest on railway capital, but ie interim figures so far available iow that this item can only be reased by the most rigid economies and attempts to fortify railway reviue. It is therefore practically imossible to form any proper estimate f what the Budget revenue will be hen the financial year ends. It is lear, however, that substantial assismce will require to be found from imewhere if there is to be any hope f checking the present drift and balicing the national accounts. The tily methods available for the purose are further economies, further ixation, and further recourse to any iserve funds which are available, at over and above the Budget probMj there is imperative need for mdering some assistance to the irmers if they are to stay on the lJid and if production is not to deine rapidly, and indeed, if we are •avoid a national disaster in a genral breakdown of the farming indusV Produce Prices While the prices of primary proucts reniained at their present level, k Stewart proceeded, it was of inrse, impossible to restore the farm!S industry to a condition of proserity, but in so far as it was posMe to assist the farmer it was in le interests of the whole community ?at funds be found from some source )r this purpose. The three great problems with Wch the country was faced were, lerefore, the precarious position of 16 farmer, the position of the public nances and the great and chronic roblem of unemployment. These toblems were inextricably inter0ven and they constituted a menCe to the whole stability of the soc- '' °rganisation. So far as could be seen at present, s he had already indicated, it was factically impossible under present )nditions to estimate with any deree of accuracy the yield from the a.ri0Us items of revenue. In his op1Ion) however, the Government will ave to cope with a further shrinkage j revenues amounting to at least |)250,000 which amount was arrived on the present deficieneies in sight it goes no further. The amount as made up ag follows: Customs 00,000, stamp and death duties 150,000, interest on Public Debt Re•toption Fund £100,000, other items lJ°,000 total £1,250,000. n addition to these revenue shrink?es the expenditure would be still a'ther increased by the absolute nee*% for giving some further as'lf>tance to hospital boards and it was h>Posed to provide up to £75,000 for . Purpose, which would be made ^ailable by way of additional subsidy. ® change-over from the graduated I tax would involve a net addi|°nal burden of £320,000, and there as also the amount required for fertkers of £100,000. Certain exchange Pfits on remittances to Australia ^ savings consequent upon the vol--V reduction in deposit rates ar^ged by the Prime Minister last y Would provide saving; of £150,-

000 towards these increases and the total net additional amount involved in the revenue shortages and those additional items, was thus £1,595,000, made up as follows. — Shortages referred to above £1,250,000, Less exchange profits and reductions in deposit rates £150,000; total £1,100,000. Fertilisers £100,000; land tax (grass) £475,000, less elimination of five per cent. allowance on unimproved value £155,000, net £320, 000; hospital subsidies £750,000; total £1,595,000. The reduction in land tax was only a substitution of one form of taxation for another, the Minister pointed out, and not an addition to the general burden of taxation.

Proposed Economies "Having thus arrived at the total net increase that must be added to •the Budget," Mr Stewart continued, "the question to be answered is, how is this to be made up. The first duty of the Government has been to undertake further economies in Government expenditure. The economy committee set up by the late Government has already made substantial reductions in expenditure which, together with the reductions in salaries and wages. amounted to approximately £2,000,090, but in my opinion the public will not willingly submit to further taxation unless it is satisfied that the most drastic economies have been affected in departmental expenditure. Cabinet therefore has resolved that effort should be made to reduce expenditure to the extent of £1,000,000 per annum and immediate steps have 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 extent to which the departments had previously been cornbed these further economies must mainly be effected by a curtailment of services, he said. Some of the proposals would no doubt be strongly resisted, but it was useless to disguise tbe fact that unless the public was prepared to support these. steps it would have to submit to higher taxation or allow a heavier drift to talce place in the national finances, and this would seriously affect tbe Dominion's credit. The details of the proposed economies would be furnished to the House in'due course.

Use or Keserves "Towards the balance, I hope to obtain £350,000 by drawing still further upon reserves. As no doubt hon. members are aware, a large part of the aecumulated surpluses of the Consolidated Fund from the 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 Act. The £350,000 which it was proposed to take represented tbe repayments of principal by the mortgagors that it was estimated would be available during the eurrent financial year. "I may add that in view of the uneertainty 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 hypothetieation or otherwise for liquidating any amount that may be required over and above the £350,000 estimated to be available from the capital repayments. With this special provision in reserve I am hopeful that Budgetary stability will be maintained." Taxation Proposals. These proposals left about £470,000 to be provided for by additional taxation over and above tbe amount proposed in the main Budget, said Mr Stewart. The first question was, where this could be imposed with the least hardship. As regards customs taxation, the tariff rates were already so high that the law* of diminishing returns was operating over many of the items. He propose 1, however, to move a resolution that night with regard to two classes of imports which he thought would provide about £240,000 o towards the i amount required. For the rest, he | was driven to review the position and ] the possibilities of further direct taxation through the income tax. "Income tax is always less palatable to the taxpayer than indirect taxation," he said, "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 the blind. They would equally resent any suggestion that the State should default in its interest payments. A reduction in pensions might at any ^ time become an imperative necessity if the world's price levels remained low, but for the purposes of his present computations he had laid this on one side. Dealing with the income tax, the Minister said it was well known that the company tax in New Zealand was the heaviest in the British Empire, if not in the world, while individual income tax was the lowest in the (Continued on Page 4.) .

dominion's finances

(Continued From Page 3.) British Empire. He did not, therefore, eonsider it expedierit or just to add anything more to tll© eompany tax than was imposed by the main Budget. More particularly was this the ease in view of the fact that a large proportion of the companies engaged in business in New Zealand were engaged in financing or assisting the primary producer ahd ahy further tax. burdefts impo'sed upon them was iiable to reflect itself in a restriction of advances to farmers or the withdrawal of other forms of assistance. He had therefore excluded the companies from eonsideration ih rfeviewing the prospect of further revenfie from direct taxation. Ittdividual Taxpkyers Having already stated that the im~ position of further taxation On companies was not justiflable he how came to the position of the individual taxpayei*. At present his contribution by way of income tax was the lowest in the Empire by reason of the low minimum rate at which the Act starts and the liberal exemptions he enjoyed. He was not forgetting the fact that the main Budget increased the surtax from 10 per cent. to 30 per cent., but he had pointed out that the receiver of "gilt-edged" ihcome was called upon in these troubled times to bear his share of the burdeii. He was more concerned than any one else to see that the State remained solvent. European experience showed that in a general brealcdown the bondholder suffered uncomparably more than anyone else. Special Taxes In imposing any fresh burden it had been pointed out that the holder of bonds should bear a share commensurate with the risks he had at stake and with these aims in view, he proposed, in order to secure the measure of assistance which was considered indispensable 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 10 per cent. deduction at present allowed on earned iiicomes up to £2000. (2) To include in the assessments (but only for the purpose of fixing the rate and the general exemption) all tax-free income and income taxed at the source and to remove the present discrimination on income derived from certain local body and eompany debentures. (3) To impose a special flat rate tax of 4d in the £1 on incomes of individuals after allowing a general exemption of £500. "It is estimated that the effect of these alterations, with the abolition of the graduated land tax, will be to increase the net yield on those items of taxation by about £230,000," said Mr. Stewart. "The foregoing pfovisions 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 cheek the drift in our public finances, but the ground is shifting from under us every day and the position may have 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 income tax £230,000. Total £550,000. Reduction in amount provided in main Budge.t for supplementary estimates and eontingencies £55,000. Total £1,505,000. Budget Estimates With the adjustments he had 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 receipts, railway capital £930,000. Post Office £535,000. Public moneys £745,000. Public Debt Redemption Fund £72.0,000. Total £2,930,000. Miscellaneous Post Office surplus £1,090,000. From reserves £1,490,000. Other £1,396,000. Total £3,976,000. Total • £24,666,000. The estimated expenditure of £24,763,781 as shown in the main Budget will be increased by £100,000 for fortilisers and £75,000 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, expendituie £24,540,000, leaving £126,000 to provide for supplementary estimates and eontingencies. Loan Expenditure Nearly half the net expenditure of the Consolidated Fund consists of debt charges and any further loan expenditure was a direct factor in the Budgetary position. The fall in the national income and in the taxable capacity of the people had automatically increased the relative burden of the existing debt charges and the sopner they could cease borrowing abroad the better. This applied equally to the loan expenditure of local atithorities, as well as to Government expenditure for this finan-' cial year, No additional capital was heing provided for State Advances but repayments from existing advances would be available for fresh advances. For public works, the additional loan capital to be provided had been limited to approxhnately £4,750,000 . which meant that a curtailment of over 40 per cent. had been made in the raising of fresh capital. If State Advances were included, the curtailment was over 50 per cent. compared with the amount borrowed last financial year. Difficult Task In conclusion, Mr. Stewart said the

maih difficulty in framing a poliey consisted in knowing whether the present price level was to he regarded as temporary or permanent. If prices were likeiy to rise, then temporary measures to bridge a short but difficult period would meet the case, but if the present price levels were to remain, then more drastic measures would certainly be necessary. Most of the eeonomists who gave evidence before the special Parliamentary econqmic committee considered it reasonable to suppose that there would be some recovery in prices, but that we were not likeiy again to reach the high prices of the recent more prosperous times. Various schemes had been put forward for stabilising the local price-level on the basfs of export prices, but there were serious objections to all these schemes. Moreover, experience in other countries seemed to show that an increase in the volume of money often failed to affeet the price-level in the way desired. In America, the reserve banks had made vigorous efforts to sustain prices,, but the only effect was 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 f ar made by central banks to stabilise prices had proved very disappointipg, it was reasonabie to hope that the diffieulties would he more successfully overcome when definite international action was agreed on by the central banks. "In the meantime, so far as the Dominion's public finances are concerned, said Mr Stewart, it appears to me that the best way to cope with the country's problems while conditions are changing so rapidly would be by a financial dictatorship. As that is not politically possible, the next best course is to make provision to meet the position as we find it now, and to review it again before the eiid of the financial year so that if necessary, and if practicable, further steps may be taken to check any further dpift and maintain stability in our public finance. "We must never cease to remember that we are trustees for the future as well as for the present."