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Wednesday, 7 December 1960


Mr BURY (Wentworth) .- As the members of his party have done so often, the honorable member for Melbourne Ports (Mr. Crean) has deplored the rates of interest charged by hire-purchase companies. He has left the impression that hire-purchase companies are all great wealthy institutions which operate at high rates of interest; that they extort quite un reasonable rates from their customers and make exorbitant profits. The fact is that competition has severely reduced their profits in the last few years, particularly last year. Far from being loan sharks, the big majority of them who do most of the business are highly responsible financial institutions which do a job which can only be financed at fairly high rates of interest. The facilities that they provide are still nothing like as broad as those enjoyed by American families. The hire-purchase companies, although important in relation to this measure, are only, in the long term, a fringe consideration.

The honorable member for Melbourne Ports pointed out very rightly and properly the trend for companies as a whole to raise more money by means of notes and debentures rather than by share capital. Of course, one of the main ways in which companies raise capital is by ploughing back profits. It is true, for instance, that in 1955, Australian companies listed on the stock exchanges raised nearly £60,000,000 in share capital and only £27,500,000 by debentures, registered notes or deposits. By 1959 this proportion had very much changed. Share capital raisings by listed companies then amounted to £48,700,000 whereas the amount raised in debentures, registered notes and deposits had risen to £140.000.000. That, no doubt, is an increasing tendency. However, I am quite sure that the honorable member for Melbourne Ports will agree that, in examining totals, it is necessary to look at the changed nature of the companies raising money.

One of the big reasons for the big relative change from share capital to notes or borrowings is not a change in the habits of old established companies, but the increasing relative importance of retail companies and hire-purchase companies in relation to the total amounts raised. I have not been able to put my hands quickly on the figures for the whole of Australia, but on examining the companies listed on the Sydney Stock Exchange, I find that of £123,000,000 of debentures and secured notes issued by the middle of September, 75 per cent, was accounted for by hire-purchase companies and retailers, and 4 per cent, by gas companies, the remaining companies holding only about 20 per cent.

This is a completely new picture. At this time, unsecured non-convertible notes totalled £59,000,000 of which hire-purchase companies had issued 40 per cent., manufacturing companies 39 per cent, and remaining companies only 21 per cent. So in considering the change from share capital to borrowed capital it must be remembered that hire-purchase companies and retail traders have recently begun to raise very great sums of capital and this has tilted the total very much in favour of borrowed capital as against share capital.

Now - I am speaking of the Sydney Stock Exchange - the convertible notes were only one-fifth of the total at £47,700,000. The serious part about this measure really is that what it does introduce - a very fundamental type of change in the tax structure - is brought in as a temporary measure and one to deal with the current situation. On the whole, in a free enterprise economy, the basic thing to look after is the money supply. If the money supply is properly regulated and looked after and not allowed to grow excessive, and also if flexibility of interest rates is allowed, a great deal of the distortion and a great deal of the kind of things that have been happening lately would not occur. So far as the honorable member for Melbourne Ports (Mr. Crean) is concerned, it is fair enough from his philosophical viewpoint to deplore rates of interest above a certain notional amount which he thinks is moral and equitable. The rest of his philosophy is controls. He believes in controlling the whole economy; and if you are in a position to apply direct controls, it is logical to say that the rate of interest will be so and so and if m fact that gives rise to excessive demands for capital - which it certainly would - by direct prohibitive measures, you cut off the supply. On that basis, it could be done.

But what, unfortunately, we have been endeavouring to do is to make the bond rate and the bank overdraft and deposit rates fixtures in the economy. Then we have tried, one way or another, to swing the whole economy round to gear in with those particular rates. In a free-enterprise economy, there is nothing holy about a particular rate of interest. If you have a bigger money supply and more inflation and thus better opportunities to make profits, the demand for capital will send the rate up high. If you are not prepared to ration it indirectly by allowing interest rates to rise. you have to ration it by a series of direct measures. That is the basic situation we are in, and so we are led into this kind of measure of a fiscal nature to adjust what ought to be done slowly over a period by good monetary policy and changes in the interest rate.

The danger - and there are several dangers - in a measure of this kind is that it is like walking into a bog in the dark. It is not easy to see what you are doing when you start to play about with the normal way of operating quite a large part of a free-enterprise economy - that is, raising a certain amount of capital and borrowing the balance. It is no good looking at some of the people who have got out of hand in the last few months and pointing to them as though they were typical of the whole economy. This provision to cease to allow the many kinds of borrowings, or the interest payment on them, as an income tax deduction does, in fact, cut across a large part of normal business methods.

It is not only the public utilities that are accepted by this bill - things like building large factories, the bulk ships that are being built at Whyalla which are all financed by notes over a period, as well as pipe lines and all sorts of projects. The characteristic of many of these enterprises is that they have to be planned over a period of years. If you have to put up a large new factory, it may take five years to do the necessary planning, and you have to plan it stage by stage. A company putting up a very large plant cannot suddenly change its methods. It certainly would not in most cases wish to borrow money ahead. It relies on being able to borrow over a period of time. It has no guarantee ahead of time that it can borrow at a particular rate of interest; but when it is thinking in terms of borrowing with a range of 6 to 8 per cent, and suddenly overnight the cost of raising money at 8 per cent, becomes more like 13 per cent., its operations can be severely hampered and thrown out.

It is true, as the Treasurer (Mr. Harold Holt) has indicated, that this is a temporary measure designed to slow down this process in the immediate future. Undoubtedly, for large numbers of companies, that will be something to which they can adjust themselves. The adjustments and scaling down of activities will have a very healthy effect on the economy in present circumstances. On the other hand, there are those whose plans are in full flight, and in the case of some of these it may be very difficult. Another weakness of this bill is related to its likely effect on the inflow of capital from overseas. The general measures taken by the Government to tighten up the economy and constrain intiation are, of course, bull points so far as attracting foreign investment goes. No foreign investor wants to put money into a country which is mismanaged and where affairs are likely to get out of hand. The other measures such as sales tax on cars and tightening of credits are things which, although unpleasant, increase outside confidence in the country rather than the reverse. But when you show that you have suddenly introduced a change in the fiscal system at short notice such as we are doing now, it must raise in some quarters a good deal of hesitation and doubt at a time when it is most important to keep up with the capita! inflow. No doubt, the more sophisticated ones realize that over a period of time whatever temporary set-backs we face, the money will be well placed and things will recover, and the capital will be soundly invested. But rn the minds of some people, a measure which suddenly changes the fiscal system is not one which can be regarded very happily.

I hope, indeed, that this measure does prove temporary, because apart from anything else it confers a tremendous advantage on existing companies and companies which have borrowed quite a lot in the recent past relative to new companies that are just beginning to start operations or plan to start in the near future. So I hope that this will in fact prove to be a temporary measure. As to the permanent measure indicated by the Treasurer - the taxation on convertible notes - I do not think on the whole that any reasonable person anywhere would challenge a measure of this character, because this operation of convertible notes has clearly been closely tied up with measures to dodge taxation which in other spheres is not nearly as much as some people would suppose. I have no hesitation whatever in supporting the measure to tax interest paid on convertible notes which are held by de facto shareholders or people taking appropriate interest in the company.

Before 1 sit down I should like to make one other point. That is, that the Treasurer has gone some way to meet the case of companies which, although they had not borrowed amounts up to 15th November, were caught in full flight, having entered into obligations which otherwise would be extremely embarrassing to them. But other concerns had entered into contracts to do various things, such as erecting buildings or constructing ships, and although they had not already arranged a contract to borrow money they were clearly conducting their operations on the basis that they would be able to raise money of a loan character from other than the banks, which are barred to them in a matter such as this. I hope at a later stage to propose an amendment, which I hope will be acceptable, to meet the position of those businesses. 1 believe that this measure is the product of past failures of taxation policy and policy on interest rates and monetary affairs generally. It certainly will have a considerable effect in slowing down the current plans of many businesses. Whether it will, in fact, be too restrictive - because, after all, the economy has only to move a short distance from a condition of over-supply of money and acute shortage of labour to the opposite - I do not know. However, I trust that this measure, which I hope will be temporary, with limited effect, will have the effect that the Government intends it to have, and will not produce greater dislocation than the Government foresees.







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