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THE YARRA GLEN REPORT
Solving Local Government Financial Problems
It is worth noting that the root cause of this situation is the same cause which is eroding stability throughout the economy. The explosion of costs and charges, the continual erosion of the value of the dollar through inflation, and the resulting growth of public and private debt, are too obvious to be ignored any longer.
It is also obvious that the all pervading silence, which attends this root-cause, is too consistent to be coincidental. There is a pattern about the solutions, such as they are, which are being propounded, that can only be described as deterministic. In every case it is designed to centralise power and to erode the sanctity of private property and free enterprise.
Local Government may well be the last bastion which we have any chance of defending. Once lost, a great part of our freedom and liberty would be removed in favour of an authoritarian and centralised planning system.
To those who feel as we do, our service in reproducing this report is offered. While in some cases figures quoted refer to conditions which prevailed at the time the investigation was undertaken, in general the principles contained herein are just as applicable, if not more so, as they were in 1959.
The solutions proposed for Local Government can just as easily be applied to education, health, transport and cultural activities or whatever else the Australian people desire, the only limit is the people's capacity and will to produce the results.
For the proposals to be accepted, the mind and mood of the Australian people must be altered to demand the necessary changes required. Only then will financial sovereignty and security be returned to the people.
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BACKGROUND OF REPORT
The basic fact to emerge from an examination of the information supplied, is that the productive capacity of a nation, which might be termed its real credit, is controlled by the creation and issue of financial credit through the banking system. As explained in this Report, the centralised control of credit policy by the Commonwealth, and the Commonwealth's virtual monopoly of the taxation field, places Local Government in the position where it is subordinate to Commonwealth policy. In a genuine democracy, control of policy, not only political, but also economic, must be exercised by the individual members of the community. For this important reason the Committee rejects any suggestion that ratepayers should be forced to suffer a reduction in their standard of living as a result of trying to finance Local Government capital development out of rate increases, and recommends as a fundamental principle that ratepayers through their Local Government should have more effective control of how the nation's productive capacity the real credit is to be used.
If it is assumed that the nation's total productive capacity is at present being used approximately to its maximum (it is readily agreed that some would contest this assumption) it is clear that any increased use of this productive capacity for Local Government must mean a reduction in activities by the Commonwealth and State Governments. Ratepayers must face the fundamental fact that any programme for increasing the financial sovereignty of Local Government must inevitably bring it into conflict with the Commonwealth which, as the history of Federation proves all too clearly, never surrenders voluntarily any powers it has centralised. As finance is the instrument through which centralised control is exercised, this Committee has decided that its Report should be divided into two parts; one dealing as simply as possible with the actual mechanics of the financial system as a necessary background to the recommendations suggested in part two.
It is not suggested that the recommendations in this Report would, even if all were introduced, produce the most desirable permanent relationships between Local Government and the Commonwealth and State Governments. But the Committee is certain that they would be major steps in the right direction of greater responsibilities and increased financial sovereignty for Local Government. This would mean a higher status for Local Government and a stimulus to democratic Self Government at a time when many people have become cynical about the democratic idea. And it is not too much to hope that increasing satisfaction in Local Government would soon be reflected in a healthier state of national life.
PART ONE NATIONAL FINANCE
Governor Eccles, one time head of the Federal Reserve Bank Board
of the United States, said:
(Given in evidence before a Congressional Committee) Mr. R. G.
Hawtrey, previously Assistant Under-Secretary to the British Treasury,
in his "Trade Depression and the Way Out" says:
In his book, The Art of Central Banking, Hawtrey also wrote:-
Lord Keynes, the economist, and wartime Governor of the Bank of England states: "There can be no doubt that all deposits are created by the banks."
Professor A. L. G. Mackay, the well known Australian economist,
has stated in his text book on Economics, that:
In 1939 the Canadian Government's Committee on Banking and Commerce
exhaustively questioned Mr. Graham F. Towers, at that time Governor
of the Central Bank of Canada, on banking practices. The following
are extracts from the Minutes of Proceedings and Evidence Respecting
the Bank of Canada.
The following are further statements by Governor Towers: "Each
and every time a bank makes a loan (or purchases securities),
new bank credit is created new deposits brand new money".
Mr. Towers then made the following important point:
The Committee directs special attention to this statement because it is directly related to the question of obtaining adequate finance for Local Government.
Giving evidence before the New Zealand Royal Commission on monetary
systems in 1955, Mr. H. W. Whyte, Chairman of the Associated Banks
of New Zealand, stated in answer to questions, that banks create
new financial credit when making loans and advances. Mr. Whyte
We now turn to a brief examination of the limits on credit creation
by the banking system, and how those limits are imposed. The creation
and leading of credit by all banks except the Central Bank is
governed by what is described as the "liquidity" of
the banking system. This simply means the amount of legal tender
being held by the banks. Banking practice is that credit should
not be expanded substantially beyond ten times the amount of what
is called "cash at call".
In order to clarify still further the powers of the Central Government to issue new money in several ways as compared with the limits placed upon State and Local Governments, attention is directed to extracts from "Wealth and Income" by Professor Brian Tew, Professor of Economics, University of Nottingham, and formerly Professor of Economics, University of Adelaide. Tew's "Wealth and Income" is a reference text book in economics and commerce at the Melbourne University and makes specific references to the operations of the Australian monetary system.
Tew states that "the central government is in the happy position of being able to issue eligible paper, which the central bank is always willing to buy, or alternately to be able to borrow without limit from the central bank direct. The Central Government, therefore, can always get as much money as it wants by virtue of the privilege accorded to it by the central bank."
The Commonwealth makes considerable use of Treasury Bills, which are IOU's created against the whole nation's credit, to obtain new financial credit. It is not generally appreciated that many Commonwealth Loans are used, not to finance public works as claimed, but to redeem outstanding Treasury Bills, And comparatively few subscriptions to any public loan are from genuine savings, the bulk of the loans coming from a further expansion of credit. It is not felt necessary to outline in detail the mechanics of this, but merely to draw attention to the basic facts.
Although it is a popular fallacy that heavy taxation was imposed during the war primarily to finance the war effort, the facts are, as stated by Professor L. G. Giblin in his History of the Commonwealth Bank from 1924-1945, The Growth of a Central Bank": The (Commonwealth Bank) Board in 1942 recognised that a great expansion of central bank credit was necessary to finance the war and this expansion took predominantly the form of discounting Treasury Bills." (p.309). Heavy taxation was imposed mainly for psychological reasons, as revealed by a former Federal Minister and as an instrument of financial control to prevent "excess purchasing power" accumulating in the hands of private individuals.
Attention is drawn to this important historical fact because with the enormous expansion of Central Bank Credit to finance vast Federal Government's activities during the war, and the continuation of this policy of Federal spending after the war. Those economic advisers advocating a greater degree of centralised governmental financial control were able to justify the introduction in 1941 of the Special Accounts system under which a proportion of the trading banks deposits with the Central Bank are "blocked" or "frozen", and the consolidation of this control in the Chifley Government's 1945 Banking Legislation and the Menzies Government's 1959 Banking Legislation.
Party political controversy should not be allowed to obscure the basic fact, recognised by every objective student of economics, that the present Federal Government's Banking Legislation does not weaken in any way the central control of the expansion of financial credit through the banking system. This point has been candidly admitted by Canberra economist, Professor H. W. Arndt, a political opponent of the Government.
As already explained, the amount of new financial credit which the trading banks can create to loan to individuals, organisations, Local Governments, and semi-governmental instrumentalities, is governed by their holdings of cash and Central Bank credit. And these holdings are dictated by the policy of the Central Bank and the Federal Treasury in deciding just how much cash and Central Bank credit is to be created and how much of the Central Bank credit obtained by the trading banks through deposits is to be "frozen" and how much is to be available for a further expansion of new credit. A recent "unblocking" of trading bank credits with the Central Bank was part of a policy of credit expansion which it was felt the economy required.
If the foregoing facts are borne in mind, it will be readily perceived that even when Local Government is permitted to obtain a certain amount of loan money, the availability of this amount is directly related to the Federal Governments current credit policy. The policy governing money creation in Australia is therefore firmly under control of the Commonwealth and any proposals concerning Local Government finance which ignore this fundamental fact cannot greatly improve the financial status of local Government.
What principles, if any, govern the Commonwealth's policy of credit
The subject of prices brings us to the problem of inflation, a problem that no country has solved in spite of periodic policies of restrictive credit and taxation policies. Although the subject of inflation was considered to be outside the scope of the Committee's investigation, nevertheless it is felt necessary to draw attention to the fact that progressive increases in the general price level must have a serious effect on the future development of Local Government. A study of numerous statements by economists and politicians indicates that what is described as "controlled inflation" is now generally accepted by those controlling national policy.
For various reasons, all inflation bears heaviest upon smaller political and economic units and is a major factor in encouraging the process of centralisation. Measured in realistic terms ie., construction work done and satisfactory services given for man hours expended Local Government is the most efficient sphere of Government in Australia. But increasing financial costs as a result of a national policy of progressive inflation must inevitably lead to suggestions that Local Government be centralised, allegedly in the interests of financial efficiency.
We conclude our brief observations on this question by drawing attention to the glaring contradictions between the fact that real costs ie, man hours worked per unit of production of production in all spheres, Governmental and private, have been reduced with the introduction of power driven machinery while at the same time prices have steadily increased. While a solution to this problem obviously is a national question, bodies primarily concerned with Local Government can make a valuable contribution to the solution by encouraging ratepayers to keep the realities of the situation firmly fixed in their minds.
In seeking a solution to this problem the Committee feel that three fundamental principles must first be discussed and established.
(1) Commonsense and natural justice challenge the idea of using current taxes and rates to finance capital works which as in the case of roads, may last for 50 or more years. New capital works should be financed out of new credits created for the purpose.
(2) The repayment of the credits for capital works should bear a direct relationship to the estimated life of the works. This means that a policy of long term credits for capital development is necessary to ensure that financial bookkeeping reflects physical facts and that the present generation is not asked to make sacrifices for the benefit of future generations.
(3) Local Government rates should not be used to any great extent to finance new construction, but should be devoted primarily to administration maintenance, and the servicing of the charges against capital construction in accordance with the principle contained in the recommendation on loan finance and capital works.
Implementation of the above three principles would go a long way towards solving the basic problem of Local Government finance. But it will be immediately pointed out that even long term credits for new capital construction leaves untouched the problem of the interest burden. In dealing with this question it is necessary to refer back to the factual information on credit creation provided in part one. The actual cost of creating Central Bank credit is small and it is submitted that a share of this credit should be made available to Local Government for the actual cost of creation and administration.
This Central Bank credit is not actual cash saved and loaned by individuals who can claim a dividend on their investments, but is new credit created against the assets and real credit of the whole community The community should, therefore, carry no more than the cost of administration, which according to banking authorities is less than one per cent. Charges in excess of this merely increase the profits of the Central Bank a public utility at the expense of ratepayers.
In support of the above proposal the following extracts from the Australian Royal Commission's Report on Banking (1937) is submitted:
"Because of this power (of credit creation) . . . the Commonwealth Bank . . . can lend to the Governments or to others in a variety of ways, and it can even make money available to the Governments and to others free of any charge . . ." (Section 504).
Subsequently, Mr. Justice Napier, Chairman of the Commission, expanded upon the last clause of the above statement as follows: "This statement means that the Commonwealth Bank can make money available to Governments or to others on such terms as it chooses, even by way of a loan without interest, or even without requiring either interest or repayment of principle."
Local Government is engaged in constructing national assets, such as roads, which increase the real credit of the whole nation and the financing of the construction of these assets should not result in a big proportion of present ratepayers' rates being used to provide benefits for future ratepayers. It should be noted that the reference to road construction excludes private streets, although some thought might be given to applying the principles embodied in the following resolution.
As an addendum to the above recommendation, some consideration may well be given to the necessity of Local Government preparing a proper balance sheet every year which shows not only receipts and expenditure, but also all capital appreciation and depreciation. A proper balance sheet would clearly show how the real assets of Local Government are increasing. This vital information is not computed at present.
LOCAL GOVERNMENT AND THE CONTROL OF CAPITAL INVESTMENT
It is essential that ratepayers and taxpayers realise the significance of the Commonwealth's new policy of transforming the petrol tax into merely one more source of general Commonwealth revenue. This was not only a very shrewd move to offset the mounting pressure in favour of the whole of petrol tax proceeds being distributed to the States and Local Government; it struck a death blow at any remaining hopes of removing the "emergency" rise in petrol tax imposed by the "Little Budget.'' No doubt the Commonwealth has observed that liquid fuel is today regarded as so indispensable that price has little impact upon demand. It should, therefore, be born in mind that the Commonwealth will always regard liquid fuels as most suitable for the obtaining of any increased tax revenue.
A study of the increasing volume of tax from liquid fuels makes it very clear why the Commonwealth has decided to treat all petrol and diesel tax proceeds as part of general revenue and to replace it with a plan which, as already pointed out, is slightly more liberal. Over the past five years the petrol tax has increased by about seventy per cent to its present level of about £55 million ($110million). At present the Commonwealth retains £18 million ($36 million) of this amount. If this £18 million ($36 million) were distributed to all States on an equitable basis, as demanded by the Yarra Glen Conferences, not only would all the States be better off immediately than under the new road plan; their position would improve immeasurably in the future if the total amount of petrol tax continued to be paid to the States.
Some conception of what would have been possible under this policy may be obtained by pointing out that if the seventy per cent. increase in petrol tax over the past five years is maintained over the next five years, the tax will be yielding approximately £95 million ($190 million) during the last year. Under the new agreement the Commonwealth will then be paying £58 million ($116 million) to State road funds if all the States take up their matching grants. The Commonwealth will then be drawing in Federal revenues nearly £37 million ($74 million) more from fuel tax than it is returning to the States. The Commonwealth will, therefore, approximately double its "rake off" under the new arrangements.
PAY ROLL TAX
RATE RELIEF AND SOCIAL SERVICES
EXPENDITURE ON HEALTH SERVICES
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