8.—3,

Section Xll.—Balancing the Budget. A preliminary budget deficit of £9-26 m. for 1932-33 with a possible reduction to £8-66 m. should the Hoover moratorium be continued, demands drastic action in public finance. Adjustable expenditure, embracing all expenditure other than debt charges, unemployment, and. exchange, was £14-47 m. in 1929-30, and is estimated at £13-10 m. in 1932-33. Adopting 25 per cent, as a standard for economies on the amount for 1929-30, the expenditure for 1932-33 should be reduced to £10-85 m. This would yield £2-25 m. in further economies. By reducing the unemployment expenditure from £2-9 m. to £2 m. and making the whole expenditure a charge upon special direct unemployment taxation, the Budget would be relieved by a further £1-45 m. An interest adjustment of 20 per cent, down to a minimum of 3§ per cent, would save a net amount of £0-3 m. The total economies would amount to £4 m. On the revenue side taxation could be increased by £1 m. by amendments and extensions of existing taxes. A special sales-tax to replace part of the loss on account of Customs revenue might yield a further £1 m. Reductions in wages and salaries in the Post Office and Railways would increase the net revenue from these Departments by £0-6 m. The total revenue would thus be increased by £2-6 m. and the total contribution towards the Budget deficit would be £6-6 m., leaving an uncovered deficit of £2-06 m. This is regarded as a manageable amount which can be reduced later, either automatically as trade recovers and unemployment expenditure declines, or by further special economies and taxation. Section XIII.— Local-body Finance. Local-body revenue is not immediately disturbed by a depression, but it cannot escape suffering from the decline in national income and land-values. Total receipts of local bodies exclusive of loan funds amounted to £16-76 m. in 1929-30. A moderate estimate of the probable decline would be 20 per cent., bringing this down to £13-41 m. for 1932-33. Expenditure consists of interest £3-09 m., debt service £1-15 m., and " all other " £11-71 m. Applying the standard of 25-per-cent. reduction to " all other " expenditure, savings of £2-93 m. would be possible. With an interest adjustment on a plan similar to that adopted by the Government, but with a 4-per-cent. minimam rate, there would be net saving of £0-39 m. The total savings would then be £3-32 m., against a deficit of £3-35 m. The balance of £30,000 could be made up from further economies. These proposals would have a varying incidence upon individual local authorities, and any adjustments among local authorities should be considered as part of a general review of local-body finance. Section XlV.—Banking Policy and Treasury Bills.* The resources of the banks depend upon their deposits and cash reserves. In both respects the position of the New Zealand banking system is strong. A decline in current or free deposits from £22-18 m. in the December quarter, 1928, to £16-14 m. in the same quarter for 1931, has taken place, but fixed deposits have risen from £29-48 m. to £34-64 m. The increase in fixed deposits shows that capital is available for investment when economic oonditions improve. Such an improvement depends on the rapidity and thoroughness of the readjustment. In addition to financing private enterprise, the banks may be asked to supply credit to the Government to meet deficits until Budget equilibrium is restored, to finance redemption of loans, and to sustain essentia] loan expenditure. In normal conditions a deficit in the Budget would be regarded as unsound public finance, but at a time like the present a Budget deficit may be unavoidable. Provided that the Budget deficit is kept within manageable limits, the banks should be able to finance the requirements of the Government without impairing their resources. The financing of such a deficit by means of Treasury bills then becomes part of the process of readjustment, and helps to ease the general economic situation, and sustain spending - power. The financing of some uncompleted public works by similar means is, on balance, desirable. The soundness of financing external requirements by means of Treasury bills depends on the extent to which funds are available in London from the balance of payments, and it will be necessary to bring down imports so that the balance of trade is adequate. The present requirements of Government and local bodies in London are about £14 m., though this amount may be reduced. With such a reduction, imports would require to be reduced to about £18 m. if existing reserves were not to be drawn upon. The issue of Treasury bills involves an increase in the public debt. Where this debt is increased on account of the Budget deficit, there can be no immediate provision from earning assets for payment of interest and sinking fund, but as part of a general plan of readjustment the transaction is not unsound on this account. If associated with an exchange policy that sustains the internal price level, the real burden of the debt might still be less than under a policy that combined parity of exchange, the immediate balancing of the budget, and the consequent fall in internal prices.*

* See Addendum by Mr. Park.

37