8.—3

109. Swell a stamp duty would tend to keep Up the rate of interest, and might even cause it to rise. It would not conform to a uniform plan of general interest-reduction. During the five years ending the 31st March, 1937, over £26 m. of the internal debt held by the public matures, and a special duty, if still in operation, would tend to_ keep up the rate at which such renewals would be practicable. By making conversion more expensive than it otherwise would be, the duty, if continued, might defeat its own objects. 110. Another method is that adopted last year, under which receivers of investment income became subject to a special income-tax. Under this method the free-of-income-tax securities escape. 111. An alternative method is a voluntary conversion loan, under which, if successful, the internal debt would be converted into new securities bearing a lower rate of interest. If rates on the internal debt, held by the public and commercial Government Departments, embracing maturities up to 1963, were reduced by 20 per cent, to a minimum of 3f per cent., the gross savings in interest would be approximately £0-6 m. If the interest on the public debt were thus reduced, and private interest were also reduced, it would be necessary for the Government lending Departments to extend similar concessions to their borrowers. A general reduction of 20 per cent, in interest to a minimum of -5 per cent, would cost the Budget approximately £0-3 m. Thus the net gain to the Budget would be £0-3 m. If, as appears equitable, the reduction of 20 per cent, in interest were applied also to all loans held by the public bearing not less than 4i per cent., and other loans were reduced to a basis of 31- per cent., the net saving would be greater. If a general reduction in bank deposit, Savings-bank deposit, and all other rates of interest were made, it might be possible to secure an additional gain to the Budget of £0-1 m. on account of a reduction in interest on the public debt held by the other Government Departments. 112. If conversion were successfully undertaken on a voluntary basis as a patriotic effort on the part of the holders of the public debt it would greatly expedite the process of general economic recovery. There could be no objection to reduction in salaries and wages, and general cuts in costs, if all elements of income were contributing simultaneously towards the general sacrifice. Moreover, the fall in the cost of living that has already taken place and the further fall that must take place in order to reduce costs generally will compensate the bondholder for the money loss he incurs in making his contribution through an interest adjustment. His real income from interest on the public debt would in the immediate future be reduced by approximately 10 per cent., and the reduction will be less as the cost of living falls. A feature of a voluntary conversion loan could be the elimination of the problem of conversion of the internal debt during a stated period say, five or seven years. The new bonds could be offered in maturities of different durations, commencing with five or seven years, so that the period of economic adjustment might be completed without the disturbing effect of intervening conversion operations. 113. Assuming, therefore, a 25-per-cent. cut in adjustable expenditure saving £2-25 m., reduction to £2 m. of unemployment expenditure financed from special taxation'saving £1-45 m., and an interest adjustment on a basis of 3| per cent, yielding £0-3 m., the total savings in expenditure would amount to £4 m. This is a substantial contribution towards a deficit of £9-26 m. 114. On the revenue side it might be possible to raise from increases in existing taxes an amount of £1 m. The increase in the special unemployment-tax would make it difficult to raise additional revenue by ordinary income-tax. In any case, the decline in national income is so heavy that there may be some difficulty in reaching the estimate of £3-25 m. 115. One of the chief causes of the fall in revenue is the decline in Customs from £8-9 m. in 1929-30 to an estimated amount of £5 m. in 1932-33. With present low prices for exports the volume of imports must remain low, and little expansion of Customs revenue is to be expected until export prices improve, or a substantial improvement in productivity is made. Pending these developments, it might be possible to secure additional revenue from indirect taxation through a special sales-tax. The economic disadvantages of such a tax are well known, and its adoption would not be contemplated if the necessary revenue were available from other sources. A sales-tax might yield £1 m. 116. With regard to other revenue, there would be an increase in the yield from railway interest and Post Office profits if wages were reduced by a further 10 per cent. Railway interest would rise by £0-4 m. and Post Office profits by £0-2 m., giving a total of £0-6 m. from this source. 117. Summarizing these possible increases in revenue, we have £1 m. from present and new taxation, £1 m. from a special sales-tax, and £0-6 m. from additional interest, fiving a total of £2-6 m. The economies considered above amounted to £4 m., so that the Budget would benefit to the extent of £6-6 m. by economies and new revenue.

Effects of such Taxation.

Special Income-tax on Investment Interest.

Voluntary Conversion Loan.

Effects of Voluntary Conversion.

Relation to Maturities.

Net Effect of Economies.

Increase in the Revenue.

Special Sales-tax.

Other Revenue.

Benefit from Economies and New Revenue.

30