559. Such in outline is the scheme which we recommend for a temporary modification of the existing system of government. But it follows from what we have said above that such a change would not in itself be sufficient to enable the Island to make a speedy recovery from its present difficulties. An essential corollary to an alteration in the present system of government is that Your Majesty's Government in the United Kingdom should assume general responsibility for the finances of Newfoundland for the time being, on a basis which would result in the Island being relieved in a measure from the present burden of her public debt.

  560. Numerous suggestions have been made to us as to the form which such relief might take. These fall briefly into three categories:--

  (a) Suggestions that the bondholders might be invited to exchange their existing bonds for new bonds running for 30 years and bearing interest at a rate substantially lower than those now in force, such bonds to be guaranteed by Your Majesty's Government in the United Kingdom. It was contemplated by those making these suggestions that a sinking fund of 1 per cent. would be established as soon as conditions permitted. The saving of the Newfoundland Government under this arrangement would of course depend on the new rate chosen; if this were 3 per cent., it would be approximately $2,000,000 per annum less provision for sinking fund. Such a saving would not be sufficient to liquidate the present deficit on the Island's budget (estimated at $3,300,000) and it was suggested that, until such time as the budget could be balanced, a grant-in-aid might be provided annually from the United Kingdom Exchequer.
  (b) Suggestions that Your Majesty's Government in the United Kingdom might see fit to assume responsibility for the debt incurred by Newfoundland for the financing of her efforts in the War. Excluding the War advances of £400,000 made by Your Majesty's Government in the United Kingdom to the Newfoundland Government, the interest payments on which have been suspended under the arrangements consequential on the agreements reached at the Lausanne Conference, the debt incurred by Newfoundland for war purposes amounts to $13,000,000, involving interest charges of approximately $675,000 per annum. It has been the practice to meet these interest charges by fresh borrowing, with the result that, apart altogether from War Pensions, a further $13,000,000 has been added to the capital debt of the Island in this way.
  (c) Suggestions that the Newfoundland Government should take steps to convert its loan obligations to a lower rate of interest as they mature, an operation which would be spread over 25 years, and that in the meantime Your Majesty's Government in the United Kingdom should make an annual subsidy to the Newfoundland Government of such amount as would be required to enable the Island to balance its budget after provision had been made for the payment of interest on the public debt.

  561. We cannot say that we have any partiality for the suggestions at (b) and (c), each of which would place a substantial burden on the United Kingdom taxpayer without effecting any immediate improvement of consequences in Newfoundland's financial position. The fact remains, however, that, under the scheme we have outlined, responsibility for Newfoundland's finances would for the time being be assumed by Your Majesty's Government in the United Kingdom; and we feel that it is only reasonable in the circumstances that, so long as a reduction of the present burden of the debt is achieved, Your Majesty's Government in the United Kingdom should be left complete freedom of action as to the manner in which it should be effected. We do not propose, therefore, to complicate the issue by making detailed recommendations under this head. We accordingly confine ourselves to recording our considered view that a reduction of the present burden of debt is essential to the recovery of the Island, and that our recommendations for a temporary modification of the existing system of government are dependent on such reduction being achieved. So long as this is clearly understood, we consider that it can safely be left to Your Majesty's Government in the United Kingdom to make such arrangements regarding the debt as may be considered just and practicable in the circumstances.