DEBT ADJUSTMENT IN VICTORIA

1936 NEW ZEALAND BUDGET 267

Several major weaknesses in the old method of taxation remain under the new provisions. Companies are still to be taxed on their profits. It is understood that a change over to the more equitable system of taxing the recipients of dividends, and making the company responsible for tax on undistributed profits only, would r,esult in a heavy fall in tax receipts, unless the rates of tax were greatly increased. The opportune time to make such a change is while revenue is buoyant and expenditure is still down to economy levels. Such opportunities are not of frequent occurrence, and it is regrettable that the present one h3s been missed. Dividends and tas-free interest are to be nsed, as before, to increase the rate of tax payable on assessable incomes. Farmers on land under €3,000 in unimproved value are still to be exempt from Income Tax. The allowance of 15% of assessable income as a maximum exemption for insurance premiums paid is still to provide a profitable form of investment for the receivers of large incomes, classed somewhat arbitrarily in many cases as earned income (a taxpayer with assessable income of €610 would pay 2 j - in the pound in Income Tax, and could, therefore, receive a return of 10% on an investment in insurance, plus a reauction in tax rate on the balance of his income and bonuses on the policy).

L a d 5"as.-The graduated Land Tax, which was abolished as a depression measure, is reinstated with a slightly changed graduation. The usual liberal mortgage exemptions are allowed. No distinction is made between rural and urban land, so that the new provisions will press very heavily on those businesses with large holdings of business premises in cities.

Death Duties.-It is rather surprising that no provision has been made for an increase in death duties, as there would appear to be ample scope for an extension of this form of tax, preferably as an offset to a reduction in indirect taxation.

Indirect Taxation.-Perhaps the least satisfactory feature of the Budget on the revenue side is the reliance on the ,expan- sion of revenue from indirect taxation, at the rates instituted as emergency measures in the depression period, to finance new expenditure of a recurring nature. In particular, the Sales Tax, which the Prime Minister is pledged to repeal, is expected to yield €2,900,000. Its growing importance as a source of revenue is likely to make its repeal extremely diff?cult. One of the weakest features of State finance in the depression was the de-

268 THE ECONOMIC RECORD DEC.

pendence on Customs duties as a main source of revenue. The provision for a record yield of €9,100,000 serves as a reminder that, apart from the inequity of this form of tax, it is likely to be extremely unstable under changing conditions.

Ezpenditum-On the expenditure side, special features, apart from the final instalment of the restoration of salary cuts, are as follows:-A new invalidity pensions scheme for blind or totally incapacitated people is expected to cost €830,000 for the remainder of the current year. Easier conditions, and a s m d increase in old-age pensions, are to cost over half a million poundh for the balance of the year. Other adjustments in pensions make up the total increase to €1,800,000. Provision has been made in several votes for grants from the Consolidated Fund to capital accounts for the relief of unemployment. The charge to revenue is made on the principle that the works undertaken are not likely to be directly reproductive. The net result is, of course, that the Consolidated Fund is again relieving or subsidizing the Unemployment Fund to the extent of probably not less than €1,000,000, in adiiition to which the costs of admin- istering the Employment Department are transferred from the special fund t o the Consolidated Fund. This is certainly pre- ferable to an increase in the Wage Tax.

The Education vote is increased by €654,000, largely owing to salary restorations, but making provision also fo r additional free transport to schools, additional allowance to school com- mittees, and the reopening of two training colleges. The Health vote includes provision for free milk at schools and increased grants to Hospital Boards.

Capital Etpendit we.-As already suggested, the major financial proposals fall outside the scope of the revenue account for the current year. The part of the Government plan which involves immediate State expenditure on a large scale is a com- prehensive programme of public works. Approximately, €6,000,000 is to be spent, apart from the grants from revenue, in the construction of transport facilities, hydro-electric works, schools, post o5ces and public buildings, and in land development. In addition, the Government has commenced a housing scheme, Rhich is expected to cost €S,000,000 in the 6rst pear. These plans .are based on the twofold purpose of providing necessary public facilities, and in the process stimulating pur- chasing power as a necessary factor in recovery.

I n the preliminary discussion of these proposals, the “use

1936 RELIEF OF MORTGAGORS IN NEW ZEALAND 269

of the public credit” has figured largely as being the obvious method of finance. The actual financial proposals have not been made public, but the Government has obtained authority to borrow up to €13,000,000 in the current year. Although the authority is to “borrow ” it, it is not known whether there is to be a public loan issue, or what portion is to be in effect an issue of credit through the Reserve Bank. The Minister of Finance has stated, according to the press, that €3,000,000 of the funds required are to be “created by the Reserve Bank by way of loan to the Gov,ernment. ” The Minister has also indicated that he is aware of the dangers of relying to too great an estent on this method of hancing, and in view of the contingent liability to finance the Dairy Industry Account by Reserve Bank cr.edit, it seems unlikely that the whole of the requirementsfor the current year wil l be raised in this way.

b y funds raised by the usual form of loans will be sought on the local money market, as the Government has a strong objection to borrowing overseas. While it is generally r.ecog- nized that the time may have arrived: when overseas borrowing might be reduced, it is too often assumed that the present measure of development might have been attained without overseas borrowing. The main burden borne to-day on account of ov,erseas borrowing arises, not from the source of the funds, but from the unproductive nature of the work undertaken, and it may yet be learned that the expenditure of internal loan funds not immediately reproductive, however desirable, may leave an equalIy oppressive burden to be carried. L. ‘8. HOLT.

Auckland University College.

RELIEF OF MORTGAGORS IN NEW ZEALAND b i d s t much other legislative activity, the Labour Gov-

ernment has overhauled the legislation enacted under the previous Government for the relief of mortgagors.’

The new enactment supersedes all previous legislation. That legislation provided two independent methods by which relief might be obtained. Any mortgagor might make application for reduction in his rate of interest, for remission or capitali- zation of arrears of interest, or for postponement of payment of principal. Under this machinery no writing 08 of principal moneys was possible. In addition, farmer mortgagors had the

1. For a diacuaion of esrlier lepi.l.tion nee Economic Racad. May. 1932. p. 110: December. 1934. p- 266. and June, 1935, p.,,86. The new rnacrment is “The Mortgagon and Lessees Rehabilitation Act, 1936.


right to ask for a stay order, and if this were granted their affairs, including their farming operations, were placed in the hands of a trustee for a period of five years (or such shorter period as might be agreed upon), and a t the end of that period their liabilities were adjusted in accordance with the provisions of the Act.

The new legislation abolishes completely the fist of these t x o methods (subject to limited saving clauses in r.espect of existing orders) and any mortgagor in whose favour an order has been made must make fresh application under the new act if he wishes any further relief. The second method has, in substance, been retained, subject, however, to the following important modifications: (1) The act is available to all mortgagors, whether farmers or not; (2) the five-year period is eliminated and mortgagors are entitled to immediate adjustment of their liabilities; (3) the method by which mortgages are to be written down is substantially modified. The Court of Review is retained as also are the Adjustment Commissions, subject t o possible changes in personnel.

All applications for adjustment must be made before 31st January, 1937. An Adjustment Commission then proceeds to determine the basic value of the property over which the applicant’s mortgage or mortgages are secured. In the case of farm lands the basic value is to be an amount equal to the “net annual income that can be derived from the lands by the aver- age efficient farmer,” capitalized‘ a t a rate to be fixed by Order- in-Council and then reduced or increased by such amount as the Commission deems necessary “in order to make it a fair value to serve as a basis for the adjustment of the liabilities of the applicant.” The net income is to be determined on the basis of such prices as may be fixed for the purpose by Order- in-Council, or in default of any Order-in-Conncil, by the Court.

If the basic value of the property is less than the total amount of the principal and other moneys secured by the mortgage or mortgages upon the property the amount s o secured is deemed to be reduced to an amount equal to the basic value. The balance of the indebtedness previoiuly owing under the mortgage and, in the case of farmer mortgagors, all other unsecured debts or liabilities, are discharged except in so f a r as the Commission orders to the contrary. When any mortgage has been so reduced the Commission (unless it converts the mortgage into a table mortgage payable by instalments) is to fix what amount in its opinion the mortgagor will be able to borrow on the security of the property a t the end of a period of five

1936 DEBT ADJUSTMENT IN VICTORIA 271

years, and that sum becomes payable a t the end of that period. The balance is payable on such later date as the Commission orders. The mortgagee may be ordered to take a second mortgage for this balance on the expiry of the five-year period.

The Commissions are also given a general power t o amend the terms and conditions of mortgages, whether or not they have been reduced under the provisions of the Act. They may also authorize the borrowing of money for the improvement of mort- gaged farms, and the giving of security for such borrowing in priority to esisting mortgages. Where a mortgage has been reduced, the property may not be sold before January I, 1941, without the leave of the Court. This provision was presumably inserted to prevent speculation in land, but it may prove somewhat burdensome.

A provision which will entail a considerable amount of work on the part of lending institutions is one which requires that all guarantors of mortgages and all mortgagors except the present owner of the property must be notified on or before December 31, 1936, that the mortgagee intends to hold them liable; failing which, they cease t o be liable.

The chief advantage of the present legislation is that it makes for finality in mortgage adjustments within a reasonable period. As was pointed out in a previous review in this journal, it was a weakness of the earlier legislation that the duration of certain forms of relief was indefinite. No doubt a strong poli- tical reason for the acceleration of adjustment was that the farmers objected strongly t o being placed on a budget for 8

period of five years. It is to be noted that the Act contains no provision for

awarding to the mortgagor an equity in the property over and above the amount of the mortgage indebtedness. Such a pro- posal was made by the preceding Government, but owing to opposition was not given effect to. Perhaps the Government hopes that the same result may be achieved by a raising of the guaranteed prices for farm products in the years following the

W. H. COCKER. . making of adjustments.

Auckland.

DEBT ADJUSTMENT IN VICTORIA “Our gentry are, generally speaking, in debt,” said Sir

Richard Steele in the Bpectator of June 4, 1711. “Our farmers are, generally speaking, very much in debt,” we might say of Australia to-day, and with more reason to be perturbed, because

272 !t’HE ECONOMIC RECORD DEC.

i t is a different and much more serious matter for farmers to be restricted because of burdensome debt obligations to-day than i t was for eighteenth century country gentlemen. Sir Richard’s friend, Jack Truepenny, borrowed “ to keep up a farce of retinue and grandeur within his own house,” which he carried too far, and so had “to shrink a t the expectation of surly demands at his doors.” But all that happened when Jack’s weditors finally claimed him was that a few things of purely personal importance to Jack, like choice Burgundy (if there mas any left), equipages, etc., changed hands, while Jack changed his residence. Unfortunate for Jack and his friends, no doubt, but not so for the community a t large, who probably thought a turn in Newgate would teach Jack a lesson in pru- dence. But with our farmer it is W e r e n t ; he generally doesn’t borrow “ to keep up a farce of retinue and grandeur within his own house,” but t o develop the productive resources of his farm, and that concerns not only himself, but the whole community. His capacity to meet his obligations is dependent upon the earning po-?ier of the capital represented by the debt, Thich is, in turn, dependent upon economic conditions quite beyond his control-the world market. Now Jack could be accused of imprudence, but it would be unreasonable to accuse primary producers generally of the same thing because in 1928 and the years previous to that they did not foresee the economic holocaust of 1939, which wrecked the market for primary pro- duce, and so did not re-date their borrowing accordingly. It is not possible to meet obligatims fixed in accordance with the anticipated earning power of the resources represented a t one period, with the reduced earning power of these resources a t a later period consequent on an unpredictable change in economic conditions. Strict enforcement of legal claims in such cir- cumstances would paralyze the industry. This would occur in any and every branch of industry if the debt structure mere allowed to get out of line with economic conditions, instead of being roughly controlled as it is through equity shares. Ev.en then there is considerable 4‘slack,1J which is taken up by the periodical forcible destruction of fixed debts through bankrupt- cies. The farmer’s debts being fised, he cannot declare smaller dividends, or none a t all, until conditions improve, o r write off some of the debt altogether, and so many legislative attempts have been made in all parts of the world where the problem is acute to adjust the debt structure in accordance with the conditions produced by the world depression. A scheme has been in


operation in Victoria now for nearly a year, and the following is a brief review of the main features of the legislation, a short comparison with the legislation in the other States, and a review of the latest figures r,egarding the operation of the Act.

In March, 1935, the Commonwealth Qavernment passed an Act providing for the distribution of €12,000,000 amongst the States for the purpose of facilitating the adjustment of farmers’ debts by means of direct cash payments to creditors if necessary. The money was to be distributed on the basis of the requirements of various States, to be decided on in accordance with the approximate amount of debt to be adjusted in each, and on the condition that each State enacted legislation setting up the necessary administrative and legal machinery t o handle plans for debt adjustment. Victoria was allotted €3,000,000 out of the €12,000,000, and The Farmers’ Debts Adjustment Act was passed in November, 1935, and came into operation on December 24.

The administration of the Act is under the central control of a specially appointed Board of three members, and the local control of forty Conciliation’ Officers situated at convenient points throughout farming areas. Any farmer may apply for an adjustment of his debts by sending an application showing his assets and liabilities, description of property, etc., t o the nearest Conciliation Officer. A stay order, protecting the farmer against action by his creditors during its operation, is then issued. If the Board considers that, as a result of a plan of debt adjustment, the farmer mill have “a reasonable prospect of carrying on his farming operations successfully,” and that such a plan is necessary to that end, it arranges for a valuation of the farmer’s assets. If the plan is not considered necessary, or likely to be successful, the application is dismissed.

If the application is accepted, the machinery for bringing about an agreement between the farmer and his creditor is put into operation. This provides for three meetings between farmer and creditors, if necessary. At the first meeting the farmer sub- mits a plan, and if agreement is reached between all, or the greatest possible number of creditors present, either on the plan in its original form or as subsequently amended at the meeting, and the plan agreed to is confirmed by the Board, it becomes binding on all creditors who have agreed to it. If no agreement is reached at this meeting the Board may submit a modified plan to a second meeting of farmer and creditors, and if the plan is accepted by all creditors present at the meeting it


becomes binding on all the creditors of the farmer, secured and unsecured, xhether they were present or not. The Board’s plan cannot be altered at this meeting. Failing agreement a t the second meeting, the Board may submit its modified plan, either in its original form or as further modified, to a third meeting, and if it is agreed to by a simple majority in number and value of the unsecured creditors present it becomes binding on all unsecured creditors and any secured creditors Tho have agreed to it. This leaves any secured creditors who have not agreed to the plan still to be considered, and it is here that the Act has special features. The Board may suspend the rights of any such secured creditors for a period not esceeding five years, during which it may guarantee interest payments on the debts affected a t a rate not exceeding 4%. At the end of the period of suspension the Board may value the farmer’s assets held against his secured debt, and write ofE any of the debt in excess of this value.

This is the complete procedure which might be used to bring about agreements, but it is anticipated that in most cases agreements will be finalized a t the second meeting, if not at the first, so that it will not be necessary to have recourse to the compulsory provisions. Experience has so far supported this view. There are two major features of the Act vhich might be remarked upon. Firstly, there is the provision for cash payments by the Board to creditors. This is likely to be a strong inducement to many creditors to come to agreements who other- wise might not. The absence of such a provision has seriously weakened previous attempts a t debt adjustment. No p a p e n t s may be made by the Board in respect of Crown debts, but the writing off of these debts in whole or in part may be included in plans. Secondly, there are the compulsory provisions which might be used if voluntary action fails. Here a comparison might be made with legislation in other States. In New South Wales, agreements are quite voluntary, and if such an agreement cannot be arrived at, then the most the Board can do is extend the stay order. After this lapses things are, of course, as they vere. Advances may be made t o the farmer from the Rural Bank. But there is no provision, as in Victoria, for compul- sorily reducing the amount of the farmer’s secured and unsecured debts in the event of the failure of Foluntary agreement. For any alleviation of his burden the farmer must depend on voluntary agreement. In South Australia. a “requi-


site majority” of unsecured creditors may carry an agreement binding on all unsecured creditors, but the consent of any secured creditor is required before his position can be affected. In Tasmania, a relief order may b.e issued to any farmer who has entered into an agreement with his unsecured creditors, protecting him from action by his secured creditors for a period not exceeding five years. In Queensland and Western Australia, agreements are voluntary, though in the latter State a four-fifths majority of creditors can carry an agreement which shall be binding on all but first mortgagees, whose consent to any adjustment affecting them must be obtained. The compulsory provisions in Victoria thus go further than those in other States, in that they apply also to the secured creditors. This means of dealing with the secured debts problem is an important feature, as it is the secured debts which are vital t o the farmer. Unsecured creditors, who are generally willing to accept some payment rather than risk getting nothing, can usually be brought t o agreement, but under an entirely voluntary scheme as regards secured creditors there is nothing to prevent these from holding out and maintaining their rights to the full value of their debts. However, legislation on the whole question of debt adjustment is, throughout Australia, of a tentative nature just at present, and is liable to be modified considerably as more experience is gained.

The scheme has been in operation in Victoria now for nearly a year, and some statistics are available to indicate the extent of operation. These figures are for the period to Octo- ber 28, 1936. Up to that date 2,651 applications had been received by the Board involving about 30,000 creditors. Aggre- gate liabilities shown by farmers on applications amounted to S11,127,805, and their assets to €9,306,802, a deficiency of €1,821,003. These figures are, of course, subject to all sorts of complications in their interpretation, but a rough guide is all that can be espected in such cases. Adjustment had been brought about in 143 cases, 113 at the first meeting, and 30 a t the second. In all, 647 meetings of creditors had been held. The amount of negotiation entailed in each case makes it inevi- table that it will be some time before adjustments begin to catch up with applications.

University of Nelbourne. E. E. WARD.

Documents

DEBT ADJUSTMENT IN VICTORIA