Salient. An Organ of Student Opinion at Victoria College, Wellington, N.Z. Vol. 13, No. 10. June 1st, 1950
The Economic Consequences of Mr. Holland — Sub Sid, sed non subsidia
The Economic Consequences of Mr. Holland
Sub Sid, sed non subsidia
On Friday, May 5, Mr. Holland an Minister of Finance, announced the reduction or abolition of subsidies on butter, milk, eggs, bread, tea, flour, coal and wool, and imminent increases in the cost of railway fares and freights, and telephone charges. This step has been estimated by Mr. Holland to bring about a gross saving in Government expenditure of up to £12m per year.
All these commodities and services are, in economic terms, in inelastic demand. That is, they are basic for living and, with an increase in price as caused by such a move as this, will suffer no decrease in demand. Hence the same amounts will be used as before, but more money will be needed to do so; as a result the £ will buy less and the cost of living will rise. Mr. Holland realises this, and estimates that (disregarding the wool subsidy, the abolition of which will not be effected until next season) the resultant increase in the cost of living will be About 4%.To meet this increase "the Government would immediately draw the attention of the Arbitration Court to the removal of subsidies so that that factor could be taken into account and a cost of living bonus declared to compensate for higher costs." In addition, "Social Security Benefits would be increased and special provision made for those thrifty people whose small incomes are derived from their own resources. Primary producers will get higher payments to compensate for their increased costs in production."
"Before analysing the effects of Mr. Holland's policy statement, two other remarks of his should be noted. He said, "it will be necessary to find some millions of pounds to meet the cost of the new military training scheme authorised by the people last year. Then we must make provision to stop a recurrence of the deficit in the Social Security Fund."
What will be the consequences of these actions? Mr. Holland says that the removal of subsidies will lead to a rise in the cost of living of about 4%. Mr. Holland has here left us at the real beginning of the problem. As that well-known Tory economist; Professor Tocker, said, "if prices rise, on an average and over the whole field it will have been caused less by the abolition of subsidies than by changes such as the devaluation of sterling and proposed increases in wages and social security benefits, and subsequently in costs."
So we find that in all spheres the cost of production will rise because the basic cost of labour will rise. While it is certain that a very large percentage of business firms are capable of meeting this most modest increase in costs out of profit, it is equally certain that in Free Enterprise Planless Capitalist Society they will not be required to do so and in fact will be allowed—nay, encouraged—to make greater profits to make allowances for their own increase in the cost of living and to give them greater "incentives" to ....? (increase their profits perhaps?). After all subsidy removal on flour and increased labour costs may cause an increase in the cost of a bun to 1½d, but the actual price will be 1½d. But the public suffers this sort of thing.
Thus throughout the whole economy increased prices will act and react on increased costs. The subsidy on coal is lifted. That together with increased labour charges raises the price of coal ex mine. The removal of the subsidy on freight costs still further will be added to the coal cost. The cost of coal thus raised to NZR still further raises operating costs and must be later met by another cumulative increase in freight or passenger charges. Again this will affect the price of coal among other things, as well as manufactured goods, gas supplied and domestic coal. The merry spiral goes on.
The increased prices on wool—not included in the mythical "4%" cost of living rise will be another example of this spiral effect. So it will 'be with all commodities—even. those seemingly not immediately affected by subsidies.
Will adequate bonuses be granted to all wage and salary earners to compensate for these growing increases? We believe that some increase will be given—perhaps "to the extent of a 7½% wage bonus—but at the same time it seems likely that the final effect on the cost of living of the subsidy removal will be a rise of between 10 and 15%. It is also clear that if there is to be any rise it should be a fiat rate increase of say £25 per year. The increases, whatever they are to be, will of course be further reduced by Social Security tax further Increasing the difference between prices and wages: although at the same time it will pay for the added cost of increasing social security benefits.
You may argue that Mr. Holland is saving £12m a year in expenditure and so taxation will be reduced. But of the £12m, some part will be taken in increased departmental expenditure with salary rises and other rising costs. Another £5m or £6m will be taken in the cost of military training. The abolition of the [unclear: recurrence] of the deficit in the Social Security Fund will probably count for the rest of the £12m "saved." In addition, Mr. Holland will have to provide for the reduction or abolition of the 33 1-3% surcharge on unearned income and thus "compensate those thrifty people." Certainly nothing can be expected in the way of tax reduction for those in the lower income group except perhaps the raising of the level of exemption. This may be the raising of the level to £300 and the abolition of the £10 rebate.
But suppose that he makes all the Government enterprises pay, and does bring about a stable balance of prices and costs at the new higher figure. And suppose that he succeeds also in getting enough money from loans to allow for a curtailed works expenditure without having to have recourse to Reserve Bank credit. Will the resultant economy of New Zealand be based on a firmer foundation that before? We think not.
These economies will in the future be able to be paralleled with Mr. Churchill's action in 1924 when he brought Britain back to the gold standard at too high a parity. If the Prime Minister does stabilise the economy (which we doubt) he will do so at too high a level of costs and hence of prices. It is not possible for us to build an economy unrelated to overseas conditions—especially in Great Britain. It is unlikely that there will be an increase in the return from our staple exports—. in fact decreased prices are likely within the next year or two. This means a smaller return to the farmers who are now faced with increased costs—in two years it will possibly cost the farmer more to produce his goods than he will get for them. There are certain limited funds belonging to farmers held in pool accounts but the use of these at high prices will prove somewhat embarrassing to the P.M.: he will meet the opposition of farmers in using funds at such a time, and he will possibly have to raise further loan monies to compensate for the sale of farmers' investments; and of course he will be able to subsidise the farmers, thus proving the fallacy of his anti-subsidy crusade and risking his political neck.
At the same time costs of New Zealand manufactured goods will be too high to allow them to compete with imported goods. The result then will be either large scale unemployment and overseas loans, or more rigid Import and exchange control—not a happy thought for a National Government. To make New Zealand economy stable, costs and profits must be lowered. Mr. Holland will achieve the reverse. Wages, especially those of the basic group, will be further than ever behind the cost of living and the workers' share of the national income (most of all when taxation is taken into account) will be much less. There can be little doubt that as a result of these economies, a slump is brought appreciably nearer.