MOTHERLAND'S DEBT

Sun (Auckland), Volume 1, Issue 29, 27 April 1927, Page 11

MOTHERLAND'S DEBT

redemption efforts saving by conversion looking to THE FUTURE (From Our Resident Reporter.) WELLINGTON, Saturday, tty diligent provision year by year • substantial sum for debt reduc--01 the Home Government has greatly inroved the financial position of Engind m relation to the deadweight ational debt, although the improveE “_ t lies, so far as the capital debt is more in a rearrangement of maturity dates than in absolute reduces affected. just what can be accomplished by successful arrangement in this direction is outlined in the report of a special committee which recently investigated the British national debt and the question of taxation in Great Britain. and copies of which have just been received in New Zealand. The report is of more than passing interest to \ew Zealanders, for Dominion conditions in the main reflect —though perhaps somewhat slowly—the trend of events in the Motherland. It is shown by comprehensive tables and detailed review that Britain’s post war efforts toward debt reduction have been persistent and sound, and in spite of the huge drop in the financial state of the Homeland generally, this department at least must have caused gratification to those handling the nation's affairs. Almost immediately after the end of the war steps were taken to ease the position by the issue of two long-term loans —the Funding Loan and Victory Bonds. In 1920-21 the next step forward was the balancing of the Budget and the provision out of revenue of over £250 millions for debt reduction. From that point it became possible to effect a much needed reduction in the volume of the Floating Debt —wh'ch, although opening the door to many financial dangers, is not considered sufficient at present to become an agent of economic mischief. FLOATING DEBT The desirability of reducing the Floating Debt is, however, not overlooked by the committee, which is careful to point out that the real dangers of a large Floating Debt would appear in the event of a future national emergency requiring Government borrowing on a big scale. In such a case an increase in the Floating Debt would be almost certain to occur, and the fact of this debt already being heavy would intensify the difficulty of securing further short borrowings without recourse to measures which would involve serious inflation with all its harmful consequences. At March 31. 1914, when the figures Were practically the same as at the outbreak of war, the deadweight debt totalled £649,770,000. On April 1, 1920, the deadweight debt had reached £7,831,744,000, and on March 31, 1926, £7,615,916.000. showing a net reduction •ince 1920 of £215,828,000. Account is taken, however, of the Victory Bonds •nd Funding Loan tendered for death duties in the period and purchased out of the sinking fund. These, though not yet cancelled, are an asset heid against the debt which may properly be de-

ducted in a comparison over the period. > o amount held on April 1, 1920, was £ L,960,000, as against £57,271,000 on March 31, 1926. With this adjustment the net reduction becomes £270.134,000, The report deals extensively with conversion offers made by the Government to holders of maturing securities, and refers to debts due from Allies, which show that the aggregate payments due by Italy and Roumania under funding agreements total £306 millions. The principal sums remaining outstanding in respect of other funded loans, mainly granted for reconstruction purposes amount to nearly £24 millions. The unfunded debts stand in the accounts at a total of £1,534 millions, of which advances to Russia account for £794 millions, and advances to France for £647 millions. A provisional agreement has been drawn up for the settlement of the latter debt. MILLION A YEAR In dealing with the possibility of saving money through conversion of loans falling due in the future the report says that the greatest gain to the State from the conversion of the 4A per cent stock will be secured if the yield of gilt-edged securities has fallen by 1961 to such a point that a conversion of 3 \ per cent or less at par is possible. “Conversion to 3i per cent," it states, means a savnig of one million a year in interest. which, on a 31 per cent, basis, is worth about £2Bl millions in capital. The present value of this capital at 4 per cent., the mean of the rates assumed at the beginning and end of the period, is about £7,000,000, or the equivalent of about 7 per cent, on the amount of the issue. * If in 1961 the yield of gilt-edged securities still remains at per cent., the question of conversion does not arise, but, if yields have fallen at all, there remains the possibility of converting to some rate intermediate between 31 per cent, and 4J per cent., with a corresponding saving of interest. “We are of opinion that it would be in the best interests of the State to issue all future loans at a figure not very appreciably below par. We have not overlooked the possibility that a change in the policy of issuing 3i per cent. Conversion Loan for funding operations might conceivably be regarded as damaging to the national credit. It is to be recalled, however, that while the 3£ per cent. Conversion Loan remains the sole form of funded debt issued since the war, a return to a redeemable stock bearing a higher nominal rate of interest—the 41 per cent. Conversion Loan, 1940-44—was made in connection with conversion operations in 1924-25 and the following year. We do not think any important' reaction would be felt. “ Although the figures in this report can only be offered as a rough estimate, they are sufficiently close to show that the reduction is due in the main to two factors—the very large sums which have been provided for debt redemption out of revenue, and the considerable scope for saving afforded over the period by the fall in short money rates, and no doubt largely due to the sound financial policy followed by the Government. Up to the present time the saving effected by conversion operation, has, as was to be anticipated, been small, and obviously the future gain which may be secured from these operations depends entirely upon the continuance of a decline in the general rate of interest. INTEREST MAY DROP “We are not prepared to make any prophecy regarding future interest rates. While over a period there is

ground for hoping that a downward movement will be shown and the policy in regard to debt repayment may itself exercise some influence in this direction—it cannot be ignored that in certain circumstances such as a trade revival, an upward movement would be the initial result. Nor can it be overlooked that whatever the general trend, temporary movements coinciding with the maturity of debt may affect the terms of the new bargain to be made with holders of Government securities. But in view of the frequently expressed belief that a considerable saving is likely to be achieved by further conversions, we think it desirable to define clearly the utmost that could be gained in that direction upon certain arbitrary assumptions regarding the rate of interest which may be required to be paid upon conversion.’’ A table is given showing in round figures the internal debt maturing year by year, together with the interest charge and the annual saving which would accrue if, at maturity, the debt were converted to a 4 per cent, basis or a 3£ per cent, basis, Floating Debt and Saving Certificates are omitted. This shows t&at on the Treasury Bonds and National War Bonds maturing at various dates up to 1934 conversion to 4 per cent, would save £10,892,000, and to 3i per cent. £17,220,000. Upon the War Loans and Conversion Loan maturing at periods from 1942 to 1948 the saving would bring the total saving up to £33,099,000 and £51,089,000 respectively.