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1934.

THE PARLIAMENT OF THE COMMONWEALTH O F AUSTRALIA .

ROYAL COMMISSION

ON TH:U:

WHEAT, FLOUR AND BREAD INDUSTRIES.

SUPPLEMENT TO THE FIRST REPORT OF THE

Presented by Command ; ordered to be printed , 28th November, 1934.

[001t of P aper. - Preparation, not given ; 840 copies; approximate cost of printing and publishing, £18.)

Printed and Published for th e Gon;n...'O !E)iT of th e CO).DIO:'lWEA LT!l of AusTR.\ LIA by L . F. JOHNSTO:'l, Co mmonwealth Govcrnmment Printer, Canberr a .

No. 10.- F.5620.-PRICR 9v.

U .. "' S :J.:, .. )

) JDN 1938

'ROYAL COMMISSION ON T-HE WHEAT, FLOUR AND BREAD INDUSTRIES.

SUPPLEMENT TO FIRST REPORT.

'To the Right Honorable SIR IsAAC ALFRED IsAACS, a Member of His Majesty's Most Honorable Privy Council, Knight Grand Cross of the Most Distinguished Order of Saint Michael and Saint George, Governor-General and Commander-in-Chief in and over the Commonwealth of Australia.

MAY IT PLEASE YouR ExcELLENCY:

On 31st July, 1934, this Commission presented to you its First Report upon certain of the matters into which it was directed to inquire by Letters Patent under your hand dated 25th January, 1934. 2. In that Report were included the following findings and recommendations, namely:-

" FINDINGS.

(i) The industry of growing wheat is in a serious financial position . . ' (ii) The measures of financial relief provided by the Commonwealth and State Governments, and the protection afforded to debtor farnwrs by legislation enacted by State Governments, have, in the majority of ca.ses, merely helped

farmers to reduce their losses. (iii) Notwithstanding the financial assistance given by the Commonwealth and State Governments, and the fact that the production per acre over the last three years has been higher than can be regarded as normal, the growing of wheat

has been unprofitable at the average of the prices which have ruled since 1930. (iv) The costs of producing wheat vary with the infinite variety of circumstances of · individual farmers and farms. Approximately 50 per cent. of the wheat-growers can produce wheat at a cost of 3s. per bushel, or less, at their local sidings,

while a further 25 per cent. can do so at costs up to 3s. IO!d. per bushel. NoTE.-These figures are based upon an examination of the working costs of nearly 500 farmers distributed over all the chief wheat -growing districts. The Commission, after a detailed review of the industry, is satisfied

that the costs revealed by this survey are, in general, representative, but they are subject to a further review when the Commission has its analysis of all the information now under examination. The above costs include a m.inimum maintenance wage for the farmer

and his assistants, all expenditure necessary for the production of the crop, interest, rates and taxes payable by the fann er. They do not include any return to the farmer for his capital invested in the undertaking and have been reduced by profits from all side lines produced on the farrn. (v) The earnings from individual efforts in the industry have been for some years out

· of conformity with those in most other industries, and, in a large nu1nber of cases, farmers have been enabled to continue to work their farms by reason only of the assistance-usually unpaid-which has been rendered by members of their families. (vi) Many wheat-farmers whose main source of livelihood is the growing of wheat have

at present little or no margin of assets over liabilities. (vii) In many cases, interest payments are not being and cannot be made. (viii) The financial difficulties of wheat-growers are producing serious financial difficulties for traders, storekeepers and others who are dependent upon t he industry.

(ix) The situation is especially serious in the areas of light rainfall and variable soil conditions, for the development of which Governments have been responsible and in which they are now the principal creditors. (x) The reserves of fodder, which prudent farming requires as a safeguard against

unfavorable seasons, have been, in many areas, seriously depleted.

(xi) In a large numbers of cases farm plant and equipment has either reached, or is reaching rapidly, a state of serious disrepair. Many farmers are unable to find the finance to replace or even reasonably to maintain their plant and implements.

(xii) Wheat-farmers in all parts of the Commonwealth are becomina discouraged, and this discouragement has been accentuated in many by the fear of dispossession.

(xiii) The practice of selling wheat for consumption in Australia at approximately the world parity prices for export wheat has been of benefit t o the Australian consumer to the extent of approximately Is. per bushel as compared with the prices which would have been paid for wheat imported dut y fr ee. Although there have been some compensations to the wheat-growers from the community, the wheat industry is in marked contrast to certain other primary industries in that there is no controlled price for that portion of its product which is

consumed in Australia; and the industry has suffered in consequence.

(xiv) The wheat industry has an undoubted claim to assistance from the community. This claim is the greater because-(a) the industry probably provides more direct employment than any other single industry in Australia;

(b) the industry provides almost 20 per cent. of the freight earnings of, and approximately the same percentage of the t ot al tonnage of goods carried by the railways of the four principal wheat-producing States; (c) numerous towns and townships throughout the four principal wheat­

producing States are dependent in a larger or smaller degree upon the industry for their existence ; . (d) the industry contributes a substantial proportion of Australian credits overseas; (e) 13,622,358 of the 23 ,978,157 tons of cargo shipped from Australian ports

in the period from 1927-1928 to 1931-1932 was provided by the wheat industry (vide Commonwealth Year-Book 1933).

RECOMMENDATIONS.

(i) That the policy applied to most other rural industries of ensuring better returns by means of the principle of a home consumption price of that part of the product consumed within the Commonwealth should be applied to the wheat industry. (ii) That in respect of the coming season the Commonwealth Government should

provide financial assistance for wheat-growers who have sown wheat for grain during 1934. (iii) That such assistance be provided as to part by an excise! on flour used -within the Commonwealth and as to the remainder by a contribution from other

Commonwealth moneys. (iv) That on the basis of present conditions, including the present prices of about 3s. per bushel for fair average quality wheat free on rails at the principal Australian shipping ports, the amount of such assistance should be £4,000,000.

This amount should, however, be subject to review when the quantity of wheat likely to be produced from the coming harvest is at least approximately known and there is a better indication than is at present available as to the prices likely to obtain in respect to the coming crop . .

NoTE.-The Commission will make a final recommendation on this matter before the coming crop is harvested. '

(v) That the rate of excise which should be imposed on flour used within the Commonwealth should be variable in order to provide progressively more funds as wheat prices fall and progressively less funds

as wheat prices rise.

Such rates should, therefore, be based on the world parity price of wheat free on trucks at the principal ports of shipment. The excise should be imposed, however, with due regard to its effect on the price of bread.

(vi) That action should be taken to impose or vary qustoms duties on. wheat and flour · in order to render the operation of the excise effective to maintain the

assistance to the industry. (vii) That portion of the amount provided for the assistance of the industry should be distributed by the Commonwealth as a bounty per bushel of wheat produced.

NoTE.-In view of the present uncertainties as to the coming harvest, particularly in some States, and as to the price likely to be realized, the Commission is not prepared at this stage to recommend either the proportion of such total amount which should be applied to the payment of the bounty

or the methods which should be adopted for the distribution of the remainder. A further recommendation will be submitted later. (viii) That the Commonwealth Government should urge upon the Governments of the States the necessity of taking steps effectively to protect against

dispossession wheat-farmers who are worthy of such protection. Nom.-With reference to Recommendation (iv) the phrase ' the present prices of about 3s. per bushel' is used intentionally because of the differences between the simultaneous f.o.r. prices at different principal Australian shipping ports."

3. As will be noted from the foregoing, the Commission deferred its final recommendations on certain matters until it 'Was in possession of further information as to the harvest of the present season and the prices likely to be realized for the wheat produced.

4. The Commission now submits the following further recommendations, namely :­ RECOMMENDATION No. !.-(Supplementary to Recommendations (ii), (iii), and (iv) of the Commission's First Report.) That, in respect of the present season, the Commonwealth Government provide financial assistance to the amount of £4,000,000 for distribution to wheat-growers who have

sown wheat for grain during 1934; and that part of the said amount of £4 ,000,000 be provided by applying the receipts for the period 1st January to 30th June, 1935, from the excis!3 duty and the sales tax on flour hereinafter mentioned, and that the remainder be provided from other Commonwealth moneys.

5. World wheat supplies have fallen considerably owing to the recent poor harvests in certain parts of the world ; consequently the statistical position has improved, and, from the point of view of the producer, is better than it has been for four years. The present weakness of the market is probably due to circumstances which are likely to alter in the near future. It is reasonable to hope that the prices which will be obtained for the present wheat crop will average

approximately 3s. per bushel for fair average quality wheat free on rails at the principal Australian ports.

6. Although the difficulties of obtaining reliable forecasts of the yields of wheat available for sale from the present Australian harvest are greater than usual, the Commission is of opinion, after close consultation with the best authorities in the various States, that the saleable crop will approximate to 120,000,000 bushels of wheat. If this yield be achieved, it will be rather higher than the total yield which was anticipated by the Commission at the time its First Report was in preparation.

7. RECOMMENDATION No. 2.-(Supplementary to Recommendation (vii) of the Commission's First Report.) A.-That the said amount of £4,000,000 be made available by the Commonwealth to the States for distribution by the States as agents of the Commonwealth.

That payments to wheat-growers in the Territory for the Seat of Government be made by the State of N ew South Wales ; and that the amounts made available to that State pursuant to sub-clauses (i) and (iv) of clause B hereof, should rnake provision therefor. Such provision has already been made in the allocation in sub-clause (ii) of clause B hereof.

B.-(i) That from the £4,000 ,000 the Commonwealth make available to each State such amount as is necessary to enable that State to pay on behalf of the Commonwealth a bounty of threep ence per bushel of marketable wheat produced in that State from the 1934-35 harvest and sold or delivered for sale, and that the State pay such bounty of threepence per bushel.

NoTE.-The payment of this bounty is estimated to require £1,500,000 on the basis of 120,000,000 bushels of marketable wheat.

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(ii) That from £4,000,000 the Commonwealth make available following additional amounts namely:-T o N ew South Wales ,, V ictoria

,, Smdh Australia , , liV estern Australia , , Queensland ,, T asmania

Total

£

585,750 420,000 472,500 408,000

37,500 3,000

1,926,750

(iii) T hat the amount made available to a State in terms of sub-clause (ii) above be used by that State for the payment on behalf of the Commonwealth to each wheat-grower who bona fide sowed wheat for grain during the autumn and winter of 1934 (notwithstanding that such crop sown for grain may have been, for seasonal or other reasons, subsequently cut for hay) of a sum for each acre of land so sown calculated by dividing the total amount of money made available to the Government of the State by the number of acres sown to wheat for grain in that State.

The said sum paid p er acre is to be additional to any payment received by a wheat-grower under sub-clause B (i). ·

NoTE. ---It is estimated that the total amount made available .to the States, namely,£1,926,750, will, in respect of 12,845,000 acres sown to wheat­ which latter total is based on figures supplied by various Departments-admit of a payment under this sub-clause of 3s. per acre.

(iv) T hat the Commonwealth make available to the States the balance of the £4,000,000 in such proportions as may be determined by the Minister for Commerce upon a further recommendation which will be submitted by this Commission after it has consulted with representatives of the Governments of each of the States.

(v) T hat such amounts after they have been determined in accordance with the terms of clause B (iv), be applied, at the discretion of the Government of the State, as a grant from the Commonwealth towards the of wheat-grl!wers who have experienced specially adverse farming conditions dur·ing the present wheat year.

NoTE.-It is estimated, on the basis of the figures set out above, following sub-clauses B (i) and (ii) that the amount available for utilization for the purposes set out in sub-clause B (v) will be £573,250. ·

8. It will be noted that the Commission recommends that the assistance for wheat-growers who have sown wheat for grain during 1934 shall be distributed partly in the form of a bounty on production, part ly on an acreage basis, and partly as a contribution towards relieving individual cases of special hardship due to adverse conditions peculiar to the season. , .

9. During the past three years assistance has been rendered to the industry by the Commonwealth; in the first year by a bounty per bushel of wheat marketed, and in the second and third years by payment t o fanners on an acreage basis.

- 10. The Commission is of opinion that financial assistance to wheat-farmers on an acreage basis is unsound as part of a permanent scheme, because it tends to encourage extensive and speculative farming, and offers no incentive for efficiency. However, having in view that seasonal conditions during 1934 have been abnormal, and that general measures of rehabilitation have not yet been applied t o the wheat industry, the Commission has come to the conclusion that the recommendations submitted herewith as for 1934-35 represent the best compromise under the circumstances.

II. RECOMMENDATION No. 3.-(Supplementary to Recommendations (iii), (v) and (vi) of the Commission's First Report). (i) That legislation be to provide for the operation, as from 1st January, 1935, 'of an excise duty on flour manufactured and consumed in Australia.

(ii) T hat the amount of such excise duty be the difference between the sum of £12 per short ton and the price of flour delivered Melbourne and suburbs, fixed and declared from time to time by the Flour Millers' Association of Victoria, sub}ect to the Advisory Committee referred to hereinafter being satisfied that such price is fair and reasonable.

.,

If the . said Committee is not satisfied that the price so fixed and by the Flour Millers' Association of Victoria is fair and reasonable, the excise duty shall be the difference between the sum . of £12 per short ton and a price to be recommended to the Minister by the Committee and an excise duty at such rate shall be levied and collected from a date determined by the M iniste1·.

NoTE.-l\felbounie prices have been taken as the basis for calculation of the amount of excise duty for application throughout the Commonwealth, because Melbourne conditions are considered to be a reasonable average of those in the main centres of population in Australia. .

The following figures have been prepared for purposes of illustration only :-

Price f.o.r. Williamstown of f.a.q. wheat per bushel.

B. d.

2 6

3 0

3 6

4 0

4 6

Prlee of ftour per abort ton deHvere4 Melbourne or suburbs.

£ s. d.

6 18 0

8 2 0

9 6 0

10 10 0

11 14 0

Amount of exclae per ton of flour.

£ s. d.

5 2 0

3 18 0

2 14 0

1 10 0

0 6 0

This Commission's later report on the flour industry will discuss the relationship between the price of wheat and the price of flour. Without prejudice to its ultimate findings, the Commission considers at. present, having regard to existing conditions in the industry, including prices of wheat o:ffals, rates of wages, interest rates and costs

of distribution, that £12 per short ton delivered Melbourne a.nd suburbs corresponds to a price of between 4s. 6d. and 5s. per bushel of f.a.q. wheat free on rails Williamstown. (iii) That provision be made in the legislation for the constitution of an Advisory Committee consisting of the Comptroller-General of (Chairman), the Secretary

of the Commonwealth Treasury, the Secretary of the Department of Commerce, and the Commonwealth Statistician, and that the Committee have the following duties assigned to them by regulations made under the Act, namely:-(a) to review at such times as may be considered necessary by the Minister

. the price of flour fixed and declared by the Flour Millers' Association of Victoria and for the purposes of such review to cbnfer with representatives of the flour industry and such other persons as the Committee may decide. In the event of the Committee not being

satisfied that such price is fair and reasonable to recommend to the Minister the price of flour per short ton which should be adopted as the basis of the calculation of the Excise Duty. (b) to submit, for the approval of the Minister, such additional regulations

as in its opinion should be made to prescribe the methods of computing or to facilitate the operation of the excise duty. (iv) That the Commonwealth Treasurer cause to be kept a special assistance account to which shall be credited-

( a) the receipts from the excise duty on flour during the period lst July to 31st March in each financial year; and (b) a sum equal to the estimated receipts from the ·excise duty during the period 1st April to 30th June of each financial year, such sum to be so

credited not later than the fifteenth day of April in such financial year. (v) That in order to promde financwl assistance to wheat-growers in. future years, the amount at credit in the special assistance account on the sixteenth day of April be distributed each year as early as possible after the said s1,xteenth day of Aprd but within the last quarter of the financial year by the Department of Commerce or other appropriate Department in such manner as will be recommended by this Commission in its report dealing with the rehabilitation of the industry.

(vi) If after the closing of accounts for the financial year it is found that the sum referred to in sub-clause (iv) (b) of this Recommendation has been over-estimated, the account shall, in the first quarter of the next succeeding year, be debited with the difference between the estimated amount and the amount of duty actually collected and conversely, if the said amount referred to in sub-clause (iv) (b) is found to have been underestimated, the acco_unt

shaU be credited with the difference between the estimated amount and the amount actually oollected.

)

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12. RECOMMENDATION No. 4.-(Supplementary to Recommendation (vi) of the Commission's First Report.) -!hat, coin_cidently with the. enactment of legislation to provide for the operation .of the exmse duty, No. 3, steps. be taken to impose or vary custo:ns

on wheat and flour order to render the operatwn of the excise effective to the assistance to the industry.

RECOMMENDATION No. 5.

(i) That legislation be enacted to provide for the operation as from 1st January, 1935, of a tax on flour th en in the possession of millers, bakers, merchants andjor such others as may be determined by the Treasurer of the Commonwealth, and that such legislation remain in operation for a sufficient time only to ensure that payment of the excise provided for in R ecommendation No. 3 or its equivalent in tax, has been made.

( ii) That the amount of the tax payable on each . short ton of flour as from 1st January, 1935, be equal to the amount of the excise duty per short ton of flour payable from the 1st January, 1935. '

13. In its First Report, the Commission made the following observations, namely:-­ " Pending an improvement in the general level of wheat prices as a result of international agreement or other causes, considerable aid to the industry is essential. " In the past three years, Australia has endeavoured to hold the position by financial contributions from the Commonwealth and State Governments which have been in the form of annual grants based upon no particular policy or guarantee to the industry. Future assistance should be placed upon a systematic basis in justice to the industry and to the peace of mind of the community.

" It is unthinkable that the industry should be left to find its own level. The industry is too important, and its collapse would be disastrous to the whole economic and social system."

* * * * * * * * *

"Having in view the necessities of the farmers, and recognizing the desirability of adding as little as possible to the cost of living in Australia, the Commission is satisfied that the wheat-farmers are entitled to share in the· benefits accorded to other industries by the protection policy of the nation. This can best be achieved by contributions to be o};tained by an excise on flour, which excise should be arranged so as to provide more money as the world parity price of wheat falls and less money as it rises. The cost per head of population in Australia of an excise on flour will be small, but the help to the farmer will be considerable and the adoption of this principle will be the first step towards removing the farmer from reliance upon the annual grants of money. This method of annual grants has a distinct tendency to create a JUstified feeling of resentment in the rn.inds of recipients who are in distress through no fault of their own and in spite of their genuine efforts."

" The Commission is satisfied that the small effect upon the cost of living caused by the excise on flour for horne consumption-much smaller than the effect of other rises in essential which pass unnoticed-will be more than compensated to the community by the consequent improvement in the position and mental outlook of the wheat -farmers of Australia."

14. The further study of the problems of the industry by the Commission since July has confirmed it.in the views quoted above.- ·

The Commission is convinced of the serious financial position of the industry. It is aware that Governments and creditors have already been contributing to prevent the collapse of the wheat-farming structure. It considers that the time has co.me when a,Il forms of assistance must be placed on a systematic basis. Efficient wheat-farmers In reasonable wheat-growing districts will then have some assurance for the future ·and encouragement to persevere with farming as the means of a livelihood.

15. The Commission considers that all sections of the community should assist in the rehabilitation of the industry. The first step in this programme is the provision of an addition to wheat prices when they are low. This provision can best be made through a home consumption price for flour secured through the opera-tion of the excise duty already recommended.

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16. The Commission has endeavoured to ascertain bow much this will mean in added costs of living to the people of Australia. On the basis of a minimum production of 1,330 2-lb. loaves of bread from each short ton of flour (2,000 lb.) an increase or decrease of £5 lOs. in the price of flour represents one penny per 2-lb. loaf of bread. Allowance must, however, be made for other costs such as the necessity for a greater or less provision for bad debts, and the increased or decreased capital represented in stocks of flour. Pending the completion of the investigation of the bread industry, the Commission considers that an increase of £5 per ton in the cost of flour may be expected to result in an increase of one penny in the price of a 2-lb. loaf of bread to the consumer.

Evidence before the Commission has shown that the average consumption of bread per household in Australia is between six and seven 2-lb. loaves per week, and, allowing in addition for household consumption of flour, the cost to the average Australian household due to the proposed home consumption price of flour, without making any allowance for wage adjustments, in accordance with the "cost of living", will be approximately-

(!) 1d. per day when wheat is 2s. 6d. per bushel f.o.r. principal Australian ports­ at which price more than half the Australian wheat farmers can meet no payments for rent or interest and can make only a very austere living. (2) !d. per day when wheat is 3s. 6d. per bushel f.o.r. principal Australian ports­

at which 'price about half of the Australian wheat farmers can continue in production under present conditions. (3) Nothing when wheat is at 4s. 9d. per bushel f.o.r. principal Australian ports­ at which price four-fifths of the Australian wheat farmers can make a fair

and reasonable living.

1 17. The relation of the profits and losses of the flour and bread industries to the prices

of bread will be discussed in the Commission's reports on these industries.

18. The nation as a whole must understand that the contribution through the home consumption price for flour will not in itself save and the· wheat-growing industry. -,Further contributions must come from other sources and these will be dealt with in detail in

the Commission's Second Report.

The serious financial position of the wheat industry-and probably a similar position exists in a number of other primary industries- is creating a critical situation. This situation demands contributions from, and the sympathetic co-operation of all sections of the community.

19. However, the whole policy of maintenance of home prices for primary industries, although at present accepted in Australia, may not necessarily be conducive to the maximum ultimate good. The Commission considers that the time has com.e when the whole matter should be reviewed. It therefore feels that it would not be facing its duty without making the

following recommendation :-RECOMMENDATION No. 6.-(Supplementary to Recommendation (i) of Commission's First Report.) That the Commonwealth Government appoint an expert committee to consider and report as to whether the policy of maintaining a home price in excess of world parity is the

best means of rendering financial assistance to the primary industries.

20 In its First Report and in this Supplement the Commission has recommended that the policy applied to most other ·rural industries of ensuring better returns by means of the principle of · a home consumption price for that part of the product consumed within the Commonwealth should be applied to the wheat industry. .

This policy has wide application not only in Australia but also in many other countries. The Commission recognizes that the ultimate economic effects of the policy vary according to the different conditions in the various countries with respect to the rapidity of the reflection of increased costs of Jiving on the rates paid to the wage-earners. In some countries, under the stress of econon1ic d'epression which prevents a readjustment of wage rates to the cost of living,

an artificially maintained price results in a reduction of the standard of living of the working population. In Australia, however, an increase in the cost of living is reflected fairly quickly in higher wage rates and in increased costs of production. These increased costs may be borne by the employer in the form of reduced profits or increased losses, by the Governments in the

form of greater deficits, by the community in the form of increased taxation, and ultimately by the exporting primary producers in the form of higher charges for essential goods and services.

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21. In view of this uncertainty as to the final incidence of such increases the Commission is not fully satisfied that the policy of maintaining a home price higher than the product can command in the world's markets is, in normal circumstances, the best means of supplying financial help to an exporting primary industry. It would be of advantage to have any doubts in this connexion resolved, particularly in view of the wide range of primary industries to which the policy has already been applied by the Parliaments of the Commonwealth and the States, and of

the cumulative interactions upon all other primary industries nfany increased costs which may result from this form of assistance to any one primary

22. It is for this reason, and with a desire that the Government should have before it the various aspects of the matter, that the Commission submits attached to this Report (Appendix A) a memorandum prepared at the Commission's request by Professor L. F. Giblin, Ritchie Research Professor of Economics at the University of Melbourne, in which the subject is dealt with in an unbiased manner. The Commission, however, after fully considering the n1emorandum, is satisfied that assistance in the form of a home consumption price for flour is unavoidable, in the light of conditions now' existing in the industry, and so long as this form of assistance is

applied to other primary industries.

23. RECOMMENDATION N 0. 7. ( i) That in order to ensure that payment of the bounty of threepence per bushel vide Recommendation No. 2 (b) is made only on wheat produced from the present harvest-' a) steps be taken immediately to obtain declarations from the owners or

holders of wheat as to the · quantity of wheat (other than wheat produced from the present harvest) which is held, and the place or places at which it is stored or held; suitable p enalties for obtaining or attempting to pbtain the bounty in

respect of wheat other than that produceif from the present harvest be provided for in any Commonwealth or State legislation enacted in connexion with such payment. 24. The operation of an excise duty on flour manufactured and used in· Australia is not necessarily inconsist ent with controlled marketing, and the Commission desires to emphasize that nothing contained in this Supplement to the First Report should be taken to indicate its views on this subj ect, which views will be expressed in the Commission's Seeond and final Report.

I

25. The preparation of this Second Report . on the industries of growing, handling and marketing wheat, which will be the final report on these subjects, is well advanced. It is hoped to submit this Second Report before the end of the present year. The Commission will then be able to devote its whole attention to the investigation of the flour and bread industries, in relation to which considerable oral evidenee has already been giveL., and much written information supplied which is now in course of tabulation and examination.

27th November, 1934.

We have the honour to be, Your Excellency's Most Obedient Servants, HERBERT GEPP, Chairman. T. S. CHEEDLE /

C. ,V. HARPER ..

E. P.M. SHEEDY Commissioners. S.M. WADHAM

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APPENDIX "A".

MEMORANDUM BY PROFESSOR L. F. GIBLIN.

THE HoME-PRICE AND THE ExPORT INDUSTRIES.

1. The term "home-price'' is applied to export commodities, when by any means t heir price is ra.ised above what it would be under free trading conditions, i.e., above the net price they would fetch if exported (export parity). The price at which the commodity can be imported, duty free, is called import parity, and the difference between them is chiefly a matter of freights. Up to import parity, it may be possible for producers to maintain a home price by combination without help from Governments. Beyond import parity, a home price can be maintained by producers only under a customs duty against imports. ,

2. Butter may be taken for an illustration. For the last six months, the home price for butter has been greater than export parity by 62s. per cwt.-or 6. 7d. per lb. Import parity is the price at which New Zealand butter could be landed duty free in Australia. The cost of shipping butter from Australia or New Zealand to London is about ld. per lb., and the cost from New Zealand to Australia can safely be covered by the same figu re . Import parity will be,

therefore, about ld. per lb. higher than export parity. The home price is therefore 6. 7d. per lb. above export parity, and at least 5. 7d. per lb. above import For rough purposes, we may say without qualification that the home price raises the price of butter 6d. per lb. 3. It is obvious that the effects of raising the price of a commodity in this way are exactly comparable with the

effects of raising the price of Australian products by a tariff against imports. The effects of raising the prices of imports by Customs duties or home products by Excise will also be comparable, except for the important consideration that the higher price paid in customs or excise goes into public revenue ap.d lightens other taxation on the average by the , same amount.

4. No one, in general, would willingly raise-the price of the necessaries of life. All tradition is against it. When, however, an important primary industry like dairying is threatened with disaster on account of a fall in world prices, it is felt to be reasonable that the whole c.ommunity should contribute to help it over the lean times. Such a contribution is felt, by the public and the press, to be made by a home price. Each consumer is called upon to do his share to sustain the threatened industry.

5. This conception of the home price as sharing among all the nation the burden of assisting a distressed industry will be seen on consideration to be entirely mistaken. We may first, however, assume that the burden is really spread over all consumers, and one or two consequences. 6. A tax on any necessity is bad, because it exacts a much higher rate of taxation from the poor than from the rich. It is particularly bad when the commodity is used by children as much, or even more than, by adults, as with sugar, butter and bread. In such a case the tax becomes regressive to an appalling degree. A bachelor with an income

of £1,000 per annum would pay an additional15s. per annum through the home price of butt ei;. He would contribute less than one-fifth of a penny in the£ of his income tc;> relieve the depressed industry. A basic wage earner, with wife and three children, would contribute over £3 or about 5d. in the £ of his income. 7. A moderate tax of this nature may be used as complementary to a steeply progressive income tax to make

a balanced scheme of taxation as a whole. It is defensible only in countries like Great Britain where the final incidence of the tax is very different from what it in Australia (see below). Even in such a case, it discriminates very unhappily against families, _though it may be allowable in emergency, where immediate revenue is of paramount importance, regardless of economic consequences.

8. Another consideration is that there is no reason, beyond practical convenience, why a tax for the relief of butter producers should be on butter more than on any other commodity. The tax is meant to be on the consumer as such, and might just as well be on any other article of large consumption, bread or boots, petrol or beer. When it can be shown as below that a tax . on butter has most unfortunate economic consequences, it is reasonable to consider whether there are not other commodities less subject to such consequences, from which the necessary

revenue could be raised. 9. The reasons for using the home price rather than any open form of taxation for giving assistance to the dairy industry are chiefly political. It has the appearance of relieving Governments fro m direct responsibility in the matter and certainly makes the matter less liable to discussion in Parliament. This suits t he producer, because a subsidy once gained in this way is likely to continue without criticism even when circumst ances no longer justify it. Land values are restored or even enhanced, so that financial interests are also favorably disposed to a home price.

With Governments, producers and money interests in the unholy alliance, criticism can safely be dismissed as " academic ". 10. We may now return and consider the assumption that a home price distributes the burden over the whole body of consumers.

11. The easyacceptance of this assumption is intelligible enough, because it would be very fairly justified for Great Britain or the United States of America, or in fact for most countries. It is less true of a number of countries, and Australia is in the extreme position where it is not justified at all, in the case of a number of commodities. 12. The difference lies in the relation of wages to prices in different countries. Economic opinion would at one time have assumed some general adjustment of wages to all retail prices, but so slow and partial that it could be

almost disregarded over the short period. The experience of the last generation has modifi ed this view. On the one hand, nominal wage ,rates have in general become more rigid, so that adjustment to prices is even slower and more partial that was expected. On the other hand, some countries have developed methods of wage determination which link wages with prices in a most intimate connexion. This adjustment for closeness and rapidity has been carried further in Australia than in any other country.

13. The 'method of wage determination in Australia is familiar and need not be described in detail ; over a large field, probably about half of the whole, wages are varied directly or indirectly, in accordance with the awards of the Federal Arbitration Court. These awards adjust wages exactly and rapidly, in accordance with the average movements in retail price of a number of important articles of general consumption. Most other wages are adjusted

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by State courts, a little n:ore and not quite S

exception to this regular adJustment Is to ,be found amoung wage-earners in rural industry, many of whom are not subject to award rates or collective agreements. The number of rural employees so exempt is, however, probably less than 5 per cent. of all consumers. 14. This wages with certain retail prices can be tested by results. If a.ctual. average

wage of all wage-earners (mcludmg rural workers) be compared with the index-numbers of retail pnces smce the War, a very close correspondence will be found. For example, during the depression period, retail prices have fallen _20 since 1928 in and a:rerage wages have also fallen 20 per cent. In Great Britain, by contrast,

reta1l pr1ees fell 17 per cent. m the same tune, and wages about 5 per cent. in spite of the urgent pressure to restore competitive power in export industry.

15. In Australia then, nearly all wages (and a large proportion of salaries) will be varied fairly closely and rapidly in accordance with retail price movements. The consumers of Australia may be roughly divided up into the following percentages:-Employers, six, of whom two are farming.

Working on own account, seventeen, of whom seven are farming. Employees, 77, of whom seven are farming. For many commodities (e.g., motor cars, books, wine) consumption would have little relation to numbers and would depend more on income. The commodities included in the retail price regimen are, however, all necessaries in universal use in approximately the same quantity for each individual regardless of income. Indeed for some of them such as bread, the consumption would be greater the lower the income. It follows, that in the case of any commodities included in the retail price regimen, the burden of a home price (or of a direct tax) will fall in the first place in the proportions given in the above table, 77 per cent. on wages 1.nd salaries, and the remainder on industry direct. The amount falling on wages and salaries will nearly all be passed on to employers, through increased wages and somewhat exaggerated in t he process. Most of this adjustment will take place within six mont4s and the remainder within the twelve months following. It follows that within a comparatively shQrt time, nearly the whole of the assistance given

by the home price will be an addition to the costs of production. The wage-earner will be carrying nothing and will even be directly benefited by the process after a few months of lag during which he will carry the higher prices. In the case of butter, the raising of the home price by 6d. per lb. puts a total burden of about £5,000,000 per annum on consumers in the first instance. Within a year, most of this will be passed on and be an addition to the costs of production of all kinds.

16. It will be noted that this effect can be predicted with confidence in respect to any commodity included in the retail price regimen, and most exactly with respect to the basic foods of bread, butter and sugar. For commodities outside the regimen, consumption may have little relation to the numbers of consumers, and there will be no passing on of the cost through wages on to industry, except possibly in the long run and to a small degree.

17. So far the effect of a home price (or of a direct tax on a commodity) can be stated with certainty, subject only to minor disagreements as to the :figures given above. The further effects of this addition to the costs of all production are more controversial, particularly in respect to quantities. I will attempt to describe here chiefly the broad general effects on which I think common opinion would be in substantial agreement. Any figures given in illustration will be understood to be subject to a considerable error of estimation.

18. Production in the fullest sense (i.e., of both goods and services) may be idvided into two broad· classes, sheltered industry and unsheltered industry. By unsheltered industry is meant ind1,1stry which for any cause is unable to raise the price of its product appreciably when its costs of production are increased. Sheltered industry on the other hand can in general to a large extent recoup itself far increased costs due to higher prices. There will be a fairly wide intermediate zone in which industry, though theoretically able to raise prices in response to increased costs, will in practice be able to do so only partially or slowly, or may be able by Government action to throw the increased costs on the taxpayer without raising prices.

19. When an industry is confined to supplying the Australian market and is not subject to outside competition it can in general raise prices to cover increased costs and is sheltered. Examples are coal and all fuel 1 ;bricks and all building construction, the cinema, trams. When an industry depends on a world market, for its price, and supplies only a moderate fraction of the world demand, it is almost entirely unable to get a higher price on account of its increased costs unless these are shared by other exporting countries. Such industries in Australia are wheat, gold, butter and to a slightly less degree, wool.

20. If we neglect for the moment the intermediate zone, the effects will be broadly as follows :-Unsheltered industry will continue to bear its share of the assistance to butter, including what is passed on to it by its immediate employees. Sheltered industry will raise its prices to cover increased costs. These prices will affect wide range of commodities and services and a good many will be outside the retail price regimen and the increases will then be borne by consumers finally, without further addition to wages and costs. But very much the greater amount of price increase will refer to items included in the "All-Items" index of prices, and this amount will again fall on industry,

sheltered or unsheltered. What falls on unsheltered industry will remain there. What falls on sheltered industry will again be met by higher prices; of which again some will rest on consumers but the greater will be passed on through wages and will be divided between sheltered and unsheltered industry. So the process goes on until sheltered industry has passed on finally all increased costs. The final position will be that the total cost of the £5,000,000 given

in assistance to butter production will be divided between unspeltered industry, consumers with fixed incomes and consumers generally. Much the greater part will fall on unsheltered industry.

21. There are a number of qualificationS' of this broad result. Sheltered primary industry without an effective marketing organization (such as potato-growing) will not be able quickly and effectively to obtain an increased price, and in the interval some of the cost may fall on rent or interest, or on the taxpayer through Government assistance to that industry. Transport is a very important sheltered industry, but in respect to railway freights, Governments may choose to throw the increased costs on the taxpayer rather than to cover them by higher freights and fares. Public control again may force some semi-monopolistic industry, such as gas, to put some of the increased cost on

the shareholders rather than on the consumer. Further conditions of competition at any time may, for a while, though not permanently, delay the raising of. prices in sheltered industry.

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22. On the other side, unsheltered industry is not entirely export industry. Production competing actively with imports would be also unsheltered, until it could obtain additional tariff protection, which would probably, however, not be long delayed. Under present circumstances, however, the amount of added costs carried by industry competing with imports be very great.

23. There is no doubt that the major part of the assistance given to butter by a home price is provided by export industry. Some share, however, is borne by-(1) Sheltered farming (temporarily). (2) Manufacturers competing with imports (probably temporarily).

(3) Fixed incomes. ( 4) Consumers in respect to expenditure outside retail price regimen. (5) Governments through taxation. The amounts carried by each of these cannot be estimated accurately and the estim:>.tes of competent inquirers would vary considerably. I have no doubt, however, that the final estimate of the amount falling on export industry would be brought out by any competent inquiry at from 60 per cent. to 80 per' cent. of the total. That is to say, that of the £5,000,000 assistance for butter, between £3,000,000 and £4,000,000 is borne by export production.

24. The amount that falls on the export producer may come from­ (1) Reduction of profits. (2) Reduction of the standard of living of himself and employees not on award rates. (3) Interest or rent due by the producer. (4) Taxation through Government assistance.

25. The proportion falling on different classes of export production will be roughly proportional to the total costs of production in that industry (including profits) because the increased price of butter has been diffused through the whole range of sheltered goods and services. The producer humself, however, may be relieved of more or less of the burden in different industries. In some, more may be carried by Government assistance, by not raising freights,

or in other ways. Another industry may be in such an unprofitable position that a good deal has to be carried, or at least for a time, by interest and rent.

26. The effects of a home price (or excise duty) on sugar and bread or flour would be almost exactly the same as those outlined above for butter. The same general effect would be found for any commodity in the retail price regimen, but the qualifications would become more considerable for commodities outside t he group of basic necessities, of which neither the amount consumed nor the quality is liable to much variation.

27. The broad result of the above discussion is to show that assistance by a home price to any export industry is mostly paid by the export industries as a whole. Assistance to butter in this way is paid chiefly by wool, wheat, gold and butter itself. In these circumstances there seems to be urgent need to consider all applications of the home price to export industry in relation to one another, so that the relative net assistance or burden to the various export

industries will be in accordance with some considered principle or plan, and not the haphazard result of varying abilities to exert political pressure.

Printed a nd Published for the GovERNMENT of the CoMMONWEALTH of Am by L. F. JoHNSTON, Commonwealth Governmment P r inter, Canberra.