the new zealand budget, 1942–1943

1942 THE NEW ZEALAND BUDGET, 1942-43 217

6. The conclusion is inescapable that the permanent aliena- tion of the individual's right to decide for himself what. goods he will buy and what work he will do would be both intolerable and unnecessary. This is not to say that such control should be liquidated on the morrow of the armistice. Liquidation will necessarily take time, perhaps several years, and it would be a disaster if the Commonwealth Government's war-time ccntrols were abruptly termiiated six months after the cessaticii of hostilities. The present proposal for the reform of the Consti- tution is justifiable if it mould prevent such a disaster. On the other hand it would be an equal disaster if reform of the Consti- tution permitted the perpetuation of authoritarian war-time controls. The future of economic and social progress rule aloag tracks completely divergent from those of a war economy. No more suitable epitaph on war-time controls can be found than that which Sir Wi-lliam Beveridge inscribed on the final page of the record of his work at the British Ministry of Food during the last war. "It opened no ways t o permanent advance . . . A treadmill that has ground no corn. "I7

WILFRED PREST. University of Melbourne . 17. Beveridpe. British Food Control. p. 344.

THE XEW ZEALAND BUDGET, 1942-1943 The statement covering the results of the previous year's

hanc ia l operations and disclosing the proposed commitments for the coming year was presented to the House during April- a t least two months earlier than usual and before the accounts for the previous year were completed. It was therefore necessary to issue a supplement during June when the previous estimates were completed and confirmed. The early presentation of the accounts was necessary to enable full benefit to be taken of the proposed increases in certain taxes. So colossal are the commitments for the coming year that no opportunity for improving the revenue could be neglected.

The customary detailed picture of the economic position of the Dominion is absent. Instead of the usual twelve to fifteen pages followed' by some twenty pages of statistics, this year's financial statement comprises seven pages and the supplement, but a single leaflet. However, within this limited survey, the Prime Minister in his first budget aslActing Minister of Finance has managed to disclose proposals which are likely to have a

218 THE ECONOMIC RECORD DEC.

profound influence on the economic l i e and development of this Dominion.

Expenditure.-Changes in presentation make comparison with previous years’ expenditure difficult, but the following table a.fYords a comparison of the volume of public expenditure during the three war years with the pre-war volume:-

TABLE I Public Expenditure, 1939-1943

Showing actzd expenditure during financia2 years ended 31st March, 1939-1942, and estimated expenditure, 1942-1943l

(in S m.) Year Ended 31st March

1939 1940 1941 1942 1943 Consolidated Fund .. .. 28.7 33.8 32.5 32.3 32.6 War Expenses .. .. .. .. 2.1 7.1 33.7 70.6 133.0 Social Security Fund .. 11.5 13.7 15.0 15.0 16.5 National Development .. 26.3 28.9 20.6 19.6 4.5

68.6 83.5 101.8 137.5 186.6

Japan’s entry into the war has made greater demands upon the people of the Pacific and the Prime RIinister assures us that “our whole economy must become diverted towards placing New Zealand on a complete war footing.”2 If this has been achieved by his Budget, it has not been a t the cost of civil expenature and social services. The Consolidated Fund increase is mainly due to increased debt charges. Some small economies appear to have been made in some departments, notably High- ways Expenditure. The savings of E2m. in the annual votes, which the Treasurer asserted‘ to be possible, are largely illusory. They consist principally of Elm. less in the Agriculture and’ Labour vote, respectively, but this is due to certain expenses of the former Department being transferred to the T a r Expenses Account and the decrease in the Employment Promotion Ex- penditure of the latter Department, due to the shortage of labour, is indirectly a similar transfer.‘

No one would wish to see a reduction in the Social Services 1. These figures are taken from various Parliamentary Papers. Various amend-

ments have been made to make them comparable. There was no Social Security Fund in 1989; the -re given is that of the Employment Fromotion Fund, which was later merged with the Social Securitp Fund. PI- a tranaf.er of ESm. from the allocation for penaiona in the Consolidated Fund. To avoid double counting an amount varying from Olm. to E8.6m. has been subtracted from the Consolidated Fund. 194048. as it represents a transfer to the S0ci.l Secnrib Fund. The National Development Account prior to 1942 has been compiled from the figures given for Public Works Expenditure in the Financial Statements plus the amount spent on howins a8 shown by the Reserve Bank Report.

2. Financial Statement. p. 1.


Expenditure, but it is to be hoped that the cost of maintaining these at a high level will not have adverse reactions elsewhere that will more than compensate f o r the welfare gained.

It is pleasing to note that no attempt has been made to maintain Public Works at a high level. Such a situation would be most inconsistent with a “complete war footing.” The policy this year is to provide a care and maintenance service with certain justifiable exce‘ptions-notably Slm. will be provided for hydro-electric construction and &lm. for housing. One notes, however, that it is still proposed to carry on with the Land Development programme for rehabilitation to the extent of about another &lm.

Receipts.-It is anticipated that there will be a substantial fall in certain sources of revenue to the Consolidated Fund. Accordingly the estimates allow for a decreased yield of over E2m. from Customs Duty, Sales Tax and Petrol Tax. On the other hand the accounts for the year ended 31st March, 1942, showed a satisfactory surplus of S1.7m. Taking this into account the expenditure “cuts” and transfers previously noted permit a balance t o be struck with a margin of some S200,OOO for contingencies.

The War Expenses Account presented a much more dificult problem. The Minister was faced here with a deficit of S106m., after taking into account the War Taxation previously levied? and the usual transfer from the Consolidated Fund of Sl.5m.

In a survey of war-time economic conditions, the Minister gives some illuminating f i , ~ e s . ~ The volume of goods available for consumption has decreased siuce the outbreak of war by over 30 per cent. But the spending-power of the community has increased by over 10 per cent. Under such conditions, an in- flationary situation can be avoided only by reducing this excessive spending power. The most equitable way of doing this would be by increased taxation. As this would involve nearly doubling the present amount derived from all types of taxation and mould mean taking on the average about half of everyone’s income, this would be impracticable in its entirety. Obviously it would have such an effect on the ability and willingness to work and save, even in a time when sacrifices are more or less cheerfully borne, that production would be crippled. The principle adopted is, therefore, to tax to the economic limit and bridge the gap by borrowing.

3. cf. Economic Recod, December, 1941, p. 268. 4. Financial Statement B-6. p. 5.


Income tax, although the most equitable form of taxation, would be neither sufficiently effective nor productive. Kearly 70 per cent. of the aggregate private incomes is beyond its scope, while a large proportion of the additional spending p o r e goes to those who would not be touched by increases here. The taxation increases are, therefore, designed to bring all classes of the community within the net and include an increase from 15 per cent. to 333 per cent. in! the super-tax added to ordinary income tax, excess profits tax raised from 60 per cent. t o 75 per cent., an increase of 6d. in the E in the National Security tax of l/-, and certain commodity taxes. Briefly, these are an additional 10 per cent. sales tax on all goods save a certain exempted list of necessaries, and heavy increases in the duty on beer,5 ~ n e s , spirits and tobacco. An increase of 1/- per gallon is made in the price of beer, an additional twopence per packet of ten in the price of cigarettes and an additional fivepence per ounce on tobacco. The net result of these taxes is that the War Expenses Account will benefit to the extent of E14.4m., leaving E91.6m. to he financed by borrowing. M6m. of this will be borrowed from the United Kingdom under the Memoran- dum of Security Agreement; ElOm. under lease-lend procedure with the United States and B5.6m. in internal loans.

Public Debt.-The amount outstanding on 31st March, 1942, was B85.4.m. The net increase of B6m. for the year is made up of an increase in the internal debb of %Om. and a decrease of overseas debt of E4m. B2m. was borrowed for the War Expenses Account, including E8.3m. in London. However, over a m . of loan moneys mas spent on public works, and i%.5m. on housing.

On the other hand a high export price level and the fact that this is, under present conditions, not reflected in increased imports has freed funds which can be, and are being, used to relieve the burden of the overseas debt-our most diBcult hurdle in times of falling prices. S10.5m. was converted to internal floating debt and a sum of ElOm. was made available in London to meet charges in respect of the Dominion’s war expenses.

It is interesting to note that war purposes now account for a very significant proportion of the public debt, even in this young country. E105m. (including E44m. in respect of the

5. Sumptuaro consideration. also appear to be present h e m The tax is impmed on a basin which mi bring about nn estimated reduction in the alcoholio eontehf of 26 per cent.


present w a r ) - o r over 27 per cent. of the fotal debt-is allocated under this head.

Prices.-For the year ended 30th June, 1942, exports reached a new high level of E 7 h . This means an increase in both the income and the expenditure of the Dominion. A t the same time the volume of goods available for use has shown a considerable decrease. It is not surprising, theref ore, that prices of consumable goods should show some increases. It is a tribute to the Government's fhancial and rationing policy that they are as yet well under control. For example, between August, 1939, and June, 1942, retail prices (all groups) show a rise of some 10 per cent. This, however, is in par t accounted for by increases in sales tax. The food group, which is for the most part exempt from sales tax, shows an increase of 4.5 per cent. only. Recently the Government has been making more use of its power to stabilize the prices of essential commodities.

The Reserve Bank gives an interesting analysis of the causes of the increase of the supply of money in New Zealand between the outbreak of war and March, 1942. E42m. of the total increase of E42.8m. (from 84.4m. to E97.2m.) is accounted for as follows :

Em. (1) Net Income from Overseas .. . . .. .. 22.3 (2) Credit Expansion in New Zealand:

(a) Advances by Reserve Bank . . . . . . 9.8 (b) Increase of holdings of securities by

Trading Banks . . . . . . . . . . 13.9 Less decrease for advances . . . . . , 4.0 9.9

542 0

Although normal wage rates show a continuing upward trend (due to Arbitration Court Awards and competition among employers owing to shortages in the supply of labour), the effective wage rate in June, 1942, was approximately at the same level as before the outbreak of war.

Condusa'ons.-It has often been emphasized by the Govern- ment that the real costs of the war must come from current production, and that we should pay as we go.6 As a corollary, it is said, the obvious method of finance is taxation. This curtails civilian consumption in the most equitable way and the sacrifke falls on the present generation. While this accords

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6. cf., for example, Budget, 1940. p. 2 : 1942. D. 5.


with the principles of orthodox finance, a careful study of the present Budget leaves one with the uncomfortable impression that insufficient attention is being paid to the other and no less important resource at the disposal of a community a t war. I refer to the desirability, even the necessity, of maximking production. More effort and better organization must play their part. Beyond a certain limit, taxation affects not merely the willingness, but‘ also the ability to work and save. It is a question whether that limit has not been reached in New Zealand now.7

It by no means follows that taxation necessarily throws the burden and sacrifice on the present. If industrial concerns fail to build up reserves for the replacement of worn out and obsolete plant and machinery, it is future production that will suffer. Commodity taxation of conventional necessities may impair the physical efficiency of the future. Direct taxation subject to graduated rates is only one-third of the total taxation. An analysis of the burden would probably reveal that the taxation system as a whole is appreciably regressive for small incomes where commodity taxation has a dominant role.

One feels t.hat the t k e has come to develop new ideas even a t the expense of orthodoxy. Mr. Keynes’s plan of deferred pay or compulsory saving could have been given some recog- nition. Greater efforts might have been made to curtail the less necessary civil expenditure, and attain greater eEciemcy in departmental control. The following quotation from the Auditor-Geperal’s report is significant : “My two previous reports drew att.ention to the unsatisfactory state of army stores accounting and, although I am able to report this year that a decided general improvement has taken place the position at several stores was such that the audit office could not regard it as satisfactory. ”*

No criticism can be levelled a t the magnitude of New Zealand’s war effort as revealed by the Budget expenditure. Greater initiative and imagination might, however, make it more effective.

Auckland. H. W. KING.

7. In his report to shareholders :be chairman of directors of the Farmers’ Trading Co.. Auckland, said recently: “his year we have been called upon to find in reads cash over 26 per cent. of the total paid-up capital. This meant the payment to the Government of €6/6/- for each Sl to the shareholders.”

The excess p d t . tax taka approdmately €450 from €600 additional incoma earned by an individual with a normal assessable income of E1.OOO.

8. Parliamentary Paper B.l. Pt. II. P. XI.

the new zealand budget, 1942–1943

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