DOMINION FINANCES

Southland Times, Issue 21096, 30 May 1930, Page 8

DOMINION FINANCES

MINISTER’S FORECAST

A DEFICIT OF £3,000,000

RAILWAYS CHIEF CAUSE

MORE TAXATION LIKELY

A serious state of affairs in connection with the Dominion’s finances is revealed in a statement issued yesterday by the Prime Minister, the Hon. G. W. Forbes. It is estimated that there will be a Budget shortage of £3,000,000, and losses on railways are given as the chief cause.

“Drastic measures will be necessary,” says Mr Forbes, the statement concluding with a hint that additional taxation will be unavoidable.

(Per United Press Association.)

Wellington, May 29

The Prime Minister and Minister of Finance, the Hon. G. W. Forbes, in a further statement to-day, briefly reviews the financial position of the Dominion. The relative contributing factors are traversed and the approximate Budget difficulties to be surmounted are set out.

Mr Forbes, in describing the methods to be pursued in the solution of' a difficult financial position, adds that with the loyal co-operation and support of the people, there is no reason why we should not ere long look back with satisfaction on an embarrassing milepost safely passed.

Present Outlook. “The Right Hon. Sir Joseph Ward has handed over the portfolio of finance after doing a great deal to enhance the public credit of this Dominion. His record of service in this important-sphere is one that he may well be proud of and I think that everyone in the country will be pleased that though his last year as Minister of Finance was a difficult one, he was able to uphold his reputation and close the accounts with a surplus of approximately £150,000. I am sorry to say that the present financial year, which is my responsibility, is going to be a very difficult one indeed, and I desire at the outset to take the country into the confidence of the Government in regard to the Budget difficulties which have to be faced.

“The heavy fall in the prices obtained for our primary products in the overseas markets, particularly wool and dairy produce, has meant a lessened yield from exports. The financial year does not cover the full export season, but the figures are nevertheless significant. The exports for 1929-30 amounted to £49,045,817, a drop of approximately £8,100,000 compared with the previous financial year. The imports for 1929-30 amounted to £49,167,914 so that there was a small excess of imports amounting to £122,097 as against an excess of exports amounting to over £12,000,000 for the previous year. This falling off in the trade position is reflected in the banking position where the figures at the end of the year, in comparison with the position 12 months earlier, show a decline in liquid resources amounting to about £9,600,000. This contraction of the national income means that we must curtail our demands, both privately and nationally, but we have had to meet similar fluctuations in export prices previously and there is no occasion for alarm. Partly on account of the trade position, but mostly due to the reaction from Australian conditions, the exchange rates are very much against the importers. There is one consolation however and that is that the exporters are benefiting by the position.”

“The contraction in the national income, coupled with the exchange position, must result in a considerable falling off in imports .and this, of course, means a corresponding decline in customs revenue which, it is estimated, will probably be over £1,000,000 less than it was last year. The hard times will also have an adverse effect on the yield from income tax, and also land tax, though, of course, not to anything like the same extent as on customs duty.”

Railways. “a heavy falling off in the expected yield from taxation is, I regret to say, not the sum total of our financial troubles, for in addition we have got to face the fact that the railways have now reached a position when, on the present basis of operations, they can no longer meet their interest bill, the estimated shortage being about £1,250,000. There is nothing to be gained by hiding the position, or attempting to minimize the difficulties, for little can be done to remedy matters unless the full significance of the position is fully realized !by the people generally. The bald fact is that an additional burden of £1,250,000, less the sum total of any savings that may result from economies in expenditure, must this year be carried by the taxpayers. Many of the latter will doubtless wonder why so heavy a burden has fallen' upon them like a thunderbolt from the skies. A brief review of the railway figures during the ■last few years will perhaps make the position clear.”

“In 1925, with the object of placing the railways upon a commercial basis, the Government of that time passed legislation separating the railways finances from those of the Consolidated Fund. Reserves were to be built up for renewals and depreciation and interest at the average cost of the capital was to be paid each year to the Consolidated Fund, which, however, was to pay back to the railways the amount of the losses on branch lines and isolated sections, an amount of £1,327,649, representing the surplus earnings for former years. After deducting a policy, the rate of interest was handed back to the railways as working capital. Such were the arrangements made for the four years ended on March 31, 1929. After receiving annual subsidies on branch lines etc., rising from £360,000 for 1925-26 to just on £500,000 for 1928-29, the railways showed results as follows: Profit " Loss 1925- .. .. £79,000 1926- .. .. £loojooo 1927- .. .. £291,000 1928- .. .. — £433,000 "Consequent on legislation passed last session, no subsidy on branch lines and isolated sections was paid last financial year, but this loss to the railway accounts was for the most part offset by writing off £8,100,000 of capital which lessened the interest charge on the railways. The finrancial result for 1929-30 was a loss of about £1,210,000, making a net accumulated loss to date of £1,955,000. Up till now however, these losses have been met in the railway accounts out of the working capital and reserves .created apart from a cash of £150,000 to enable the railways to complete the payment for last financial year.” “The interest due to the Consolidated Fund has been paid out of the cash resources of the railways, and the losses that

I have referred to, apart from those on branch lines, did not fall upon the taxpayer for the current financial year. However, from sheer lack of cash resources, the railways must fail to show in their interest, payments by the amount of the net loss for the year, estimates on the present losses of operations, at about £1,250,000. The interest on the relative portion of the public debt will, of course, be paid in the usual way so that the extent of the railway shortage will this year mean just so much more to be found out of taxation or savings in other directions.” , “It may be added that the serious position of the railway finances has already been clearly pointed out by Sir Joseph Ward in his last Budget. He stated inter alia that he was satisfied that if the present drift was allowed to go on for only a few years longer, the taxpayers of this Dominion will have to find not less than £2,000,000 a year to meet railway deficits.”

Road Competition. “As pointed out by Sir Joseph Ward, the chief cause of the trouble is direct competition instead of co-ordination between road and rail transport services. Further, to again quote the last budget. ‘The irony of the situation is that the heavy losses on the publicly owned railways are being largely brought about by good motor roads being built, also with public money, to facilitate direct competition with the railways. In other words, State capital is being provided to assist in the direct undermining of the earning power of £57,500,000 of State capital already invested in the railways.’ Now that the railway losses have to be met directly out of taxation, it will, I think, be generally realized that the present state of affairs cannot be allowed to go on any longer, and the measures that the Government will bring down to coordinate the road and rail construction policies, and the steps to be taken to obtain co-ordination between the road and rail transport services will, I feel sure, have the hearty support of the people.’’ “To .return to the budgetary position, it will be seen from what I have already stated that the Government has to cope with a falling off in the revenue of the Consolidated Fund amounting to something like £2,500,000. In addition, in the ordinary course there, will be automatic increases in debt charges, pensions and other statutory payments of a rigid nature, so that if the various services at present supplied by the State are all to be carried on as heretofore, an increased expenditure of about £500,000 would be necessary.”

A Shortage of £3,000,000. “That is the position as I find it, without doubt a formidable problem for any Minister of Finance to solve. Still, the Government is ready to tackle the problem resolutely, and given the co-operation and support of the members of Parliament and the people generally, I am confident that the position can be met and the Budget balanced as of course it must be without any serious hardship, for the general financial position of the Dominion as a whole is quite sound and courage, determination and a capacity for hard work are typical characteristics of the New Zealander. Then of course the scope for development in this naturally' well endowed country is very large arid ‘hard times’ like the present can best be met by redoubling our efforts to tap the potential wealth of the Dominion. In the immediate present however, it must be recognized that we have got to cut our coat according to our cloth, both privately and nationally, and review our expenditure with the object of temporarily eliminating or curtailing such items as can be most easily dispensed with. This is the line of action the Government propose to take in balancing the Budget for the current financial year. Needless to say, every effort will be made to obtain the greatest possible economy in administration, but -as this is a matter that has already received considerable attention, there is no possibility of saving anything like the £3,000,000 required in this way. Accordingly, before considering the question of increasing taxation, the Government is reviewing the services at present supplied by the State and by services I mean monetary assistance granted, as well as work done by State Departments.”

Curtailing Services. “It is proposed to curtail or even suspend services where this can be done without upsetting the basic organization of the departments or causing undue hardship to the institutions or sections of the community who are indirectly benefiting by particular items of expenditure. In other words, we have got to determine what is essential and what is not, and for this year at any rate, eliminate, or at least severely curtail, the non-essential. Under the circumstances, most people will agree, I think, that this is the right course to adopt, but in dealing for instance with grants and subsidies, the institutions or sections of the people directly benefiting naturally have a somewhat biased opinion as to what is essential and the Government is left with a rather invidious task. However, reductions in expenditure are'the only alternative to heavy Increases in taxation, and in the interests of the country must be made accordingly. I appeal to the people to view the matter from a national standpoint and support the Government in carrying out an unpleasant duty.”

Departmental Expenditure. “The net expenditure out of the consolidated fund last year amounted to approximately £25,200,000 of which £17,227,000 was incurred under permanent appropriations, that is to say, continuous authorities, and £7,973,000 under annum votes which comprise the departmental expenditure, numerous small grants and subsidies, and various miscellaneous items. Nearly half the latter amount, or £3,219,000, was for education, in connection with which there is practically continuous pressure for more and

more expenditure in various directions. While on the subject of education, I would like to say that the expenditure out of the vote is by no means the total cost to the State. In .addition, there is expenditure under various Acts of Parliament included under permanent appropriations and also out of the revenue from national endowments and reserves. Then there is the annual charge, amounting to about £350,000, for interest and debt repayment charges on the loan expenditure. Thus the total annual cost of education is at present over £4,000,000 and it is steadily increasing year -by-yearJ In.reviewing the expenditure/this huge annual cost of education requires seri-. ous consideration, and the question arises whether the limit of the ,burden on the taxpayer has not been reached.” “Another large item of expenditure that calls for serious overhaul is naval and military defence, which in total is costing the taxpayer over £1,000,000 per annum. This is a heavy drain on the Consolidated Fund under present conditions, and as was announced by Sir Joseph Ward some weeks ago, steps are being taken to bring the whole defence policy under review. In the meantime, the suspension of military .camps will enable considerable savings to be made. The votes generally are being very carefully examined, and for this year departments will be allocated only such amounts as will enable them to carry out their proper normal functions with efficiency. While exercising continuous rigid economy in detail, the less essential or extraneous items will have to be eliminated as far as possible, having regard to the degree ■of hardship likely to result to outside organizations concerned. In this way it is hoped to save over £500,090.”

Debt Charges. “Of the £17,229,000 of expenditure under' permanent appropriations, £10,697,000 is interest and debt repayment charges, where no reductions are possible. Debt charges, of course, are governed by the amount of the public debt, and the purposes to which the borrowed capital is applied. Capital used for State advances and other purposes that are earning full interest obviously imposes no burden on the taxpayers as such. On other items of capital expenditure there is a partial recovery of interest, and in some cases no direct recovery whatever. Even so, such expenditure may be really productive in that the wealth and earning capacity of the community may be increased as a result of such capital expenditure by more than sufficient to offset the relative burden on taxation for loan charges. Still, such indirect returns are very difficult to measure, and I think we have now reached a .stage when great care must be exercised in investing further loan moneys in purposes from which the return is so indirect. I repeat that great care is necessary, but nevertheless the Government will not hesitate to provide the capital that is considered essential for the economic development of the country. Another aspect of the matter that needs careful consideration is the involved question of what should be provided out of the revenue and what out of loan capital. Even in the commercial world, this question is on occasions the subject of diverse opinions, but in State finance where the ‘public interest’ is the broad aim as opposed to ‘profit’ in private enterprise, the problem is much more difficult of solution. However, in short what the Government will aim at will be to arrange its programme of development in such a way that the interest and sinking fund charges on the loans raised for the various purposes will be absorbed without causing the country financial embarrassment. At the same time, every endeavour will be made to ensure that 20/- of value materializes for every £1 expended.”

Expenditure under Acts of Parliament. “Deducting interest and debt repayment charges, there remains on the basis of last year’s figures £6,530,000 of expenditure under various special acts of Parliament. This amount included approximately £2,750,000 for pensions and family allowances, a rigid item where no curtailment of expenditure is possible without altering the basis of the various pensions schemes, in fact an automatic increase in pensions is to be expected annually. A further £l,500,000 consisted of automatic transfer of petrol tax and other earmarked revenues to the highways account and the local bodies, while £910,000 was absorbed in subsidies to hospital boards and local authorities on rates, and £380,000 for subsidies to the superannuation funds and the national provident fund. Apart from these items, the expenditure under special acts of Parliament amounted in the aggregate to £920,000 so that it will be seen that the scope for reductions is not nearly so great as the total figures would lead one to expect. Part of the subsidies to hospital boards is on account of capital expenditure. In view of the financial position, hospital boards will be requested to reduce capital expenditure to an absolute minimum in the interests of both the taxpayers and the ratepayers. At present bequests and voluntary contributions for public purposes are generally subsidised by the Government. I am afraid that this expenditure will have to be curtailed and subsidies withheld in cases where no undue hardship will result from such action. For instance, many bequests are in the nature of ‘windfalls’ and quite additional to the normal finance of the institution benefiting. Obviously no serious hardship or disorganization can result from the withholding of the subsidy in such cases. It is probable that further savings can be effected in connection with other statutory payments and each one will be examined closely in the light of the principles that I have already enunciated. Further, all special funds will be reviewed in connection with making good the Budget shortage.” “In regard to highways, as I have already indicated, the whole policy will have to be dealt with from the point of view of promoting co-ordination with the railways.”

Economy In Railways. “The fact that the railways have reached the end of their financial resources and are unable to meet a large part of their interest charges is the principal cause of the present financial predictment. Before. calling upon the taxpayers to make good the shortage, it is the intention of the Government to have the expenditure of the Department minutely overhauled with a view to obtaining the greatest possible economy in operation, consistent with the maintenance of a proper standard of safety for the travelling public and efficient train services. In other words, the railway shortage to be met out of taxation must be reduced to an absolute minimum. In order to do this, the Government proposes to set up a special Commission from outside the Public Service to fully investigate all branches of the Department’s activities and advise the Government where economies can be effected.”

“To sum up, it is estimated that there is this year a Budget shortage of about £3,000,000. This shortage must be made good out of savings, or increased revenue, or both. In view of the contraction in the national income due to falling prices, the Government is especially anxious that els much as possible of the amount is obtained through savings.”

Additional Taxation. “Drastic measures are essential if any worth while progress is to be made in this direction, and it must be recognised that not only is the Government unable to enter into fresh commitments at present, but that savings cannot be made without a curtailment of some of the existing services. It is probable, after all feasible economies are made, that some additional taxation will be unavoidable. However, it is with confidence that I appeal to all sections of the community to quietly and resolutely face the unpleasant hard facts, and accord to the Government solid support, and co-operation in order that the difficulties of the position may be surmounted without strain and with as little disturbance as possible in the economic life of the people.” ' - ■