Graphic: An Encyclopaedia of New Zealand 1966.

FINANCE, PUBLIC

The Colonial Era

Capital Expenditure

Before 1870 public works to develop the colony were mainly a responsibility of the various provincial councils. Until then, and for many years after, communications were the prime need, most of the loans raised being spent on railways. As no comprehensive scheme of public works could be carried out by the separate efforts of the provinces, the Vogel administration of 1870 decided to borrow £10 million for main trunk railways, roads, and other national works in conjunction with schemes for the promotion of immigration. Expenditure was to be spread over 10 years. But the demands for local works soon brought a departure from this policy; expenditure increased at a much more rapid rate and to a far greater extent than had been contemplated. Funds on this scale could not be provided indefinitely and the sudden curtailment of public works aggravated the severe depression of the 1880s and early 1890s. Of the £16.5 million spent on railway construction during 1870–1900, just over 50 per cent (£8.5 million) was spent in the first 10 years, and 85 per cent by 1890. Total public works expenditure fell from £1.3 to 1.5 million per annum over 1884–85 to 1886–87, to under £1 million in 1887–88, and to as little as £330,000 in 1890–91. Not until 1900–01 did it again exceed £1 million; after 1905–06 it exceeded £2 million. In the 30 years from 1870 to 1900 railways accounted for 41 per cent of public works expenditure; roads, 16 per cent; and public buildings and immigration, about 7 per cent each. By the turn of the century railway activity revived and the drive to complete the Wellington-Auckland Main Trunk line brought railway construction to over £1 million annually from 1905–06 onwards, ranging from 40 per cent to 60 per cent of the expenditure on public works. In 1913–14 railways still accounted for 42 per cent, and roads, telecommunications, and public buildings, each about 14 per cent of the public works expenditure.

The Advances to Settlers Act of 1894, when there was still an acute depression, gave relief to farmers paying excessive rates of interest. Loans were at 5 per cent, and the policy was successful in leading to a general decline in interest rates. In the first five years of the legislation 11,000 settlers applied for advances, 60 per cent of the amount being required to repay mortgages carrying over 5–per-cent interest. In the first 10 years £4.2 million of loans were authorised to 13,300 people. In the first 15 years £9.3 million was advanced.

An Advances to Workers Act followed in 1906 to assist people on small incomes to provide their own homes. Interest was also at 5 per cent. These two Acts led to the creation of what is now the State Advances Corporation. For many years loans on farms rather than on houses were the chief activity. In the first 10 years to 31 March 1916, £3.1 million was advanced to 12,000 people for housing.

Because the capital needs of the young colony were in inverse proportion to savings, community development had to be financed almost wholly by overseas loans until about the turn of the century. Thereafter, particularly during the First World War, there was an increase in the proportion of loan money raised locally.

Source of Public Debt
31 March Amount Outstanding Origin
London Australia New Zealand
£(million) per cent per cent per cent
1900 47.9 90.4 0.4 9.2
1910 74.9 77.1 5.5 17.4
1914 99.7 78.8 4.4 16.8

Borrowing on this scale imposed a heavy burden of debt services on a necessarily limited revenue, as well as on export earnings.

Burden of Debt Services
As Percentage of Revenue *
1880–1881 46.4
1889–1890 48.3
1899–1900 31.1
1909–1910 26.0
1913–1914 23.6

*Excluding Treasury and Deficiency Bills.

In 1880–81 service of the overseas debt cost about 20 per cent of the export earnings; in 1913–14 it was about 10 per cent.

Revenue

As usual in a young colony struggling to develop its resources and become a viable economic community, the narrow tax base led to customs duties being for many years not only the principal form of taxation but also the main source of revenue. In 1875–76 customs were 69 per cent of revenue (then £1.8 million), but had declined to 42 per cent in 1880–81, when the Railways and the Post Office brought in 34 per cent and the property tax 7 per cent.

In 1891 land and income taxes were introduced to replace the property tax and, in time, provide more revenue to finance the liberal era of Ballance and Seddon. The land tax on unimproved value was graduated in order to encourage the subdivision of large farms, and there was a penal rate on absentee owners. Incomes over £300 paid 6d. in the pound; over £1,000, 1s.; companies paid 1s., without the exemption. But in 1899–1900, customs, though exceeded by railway and Post Office receipts, still brought in 34 per cent of the revenue and the two new taxes only 7 per cent (land tax, £293,000; income tax, £129,000). By 1913–14 the pattern was:

Per Cent
Railways and Post Office 43
Customs 28
Land and income taxes 11
Stamp duties 10
Other 8
100

Even then, customs supplied 49 per cent of the non-trading revenue, against 19 per cent from land and income taxes.

Expenditure

With such limited sources of revenue to support so large a public debt, the Government was equally limited in what services it could provide. For many years only the bare essentials could be paid for and, even then, there was at times recourse to Treasury and Deficiency Bills. In 1875–76, apart from debt services, the only non-trading expenditure over £100,000 was on the armed constabulary. After the abolition of the provinces, education, by 1880–81, was costing the Government £263,000 (primary education was made free and compulsory in 1877), and £473,000 by 1899–1900. A new type of social service, old-age pensions (1898), a major change in education by the introduction of free (but not compulsory) secondary schooling (1903), brought a redirection of Government expenditure that was eventually to have profound effects on political thought and public finance. Widows' and miners' pensions followed in 1911 and 1915, together with successive improvements of the education system.

Nature of Expenditure (Consolidated Fund)

1899–1900 1913–14
per cent per cent
Trading (operating expenses, Railways and Post Office) 27·8 35·3*
Debt services 34·0 24·4
Education (excluding buildings) 8·5 9·6
Law and order 4·6 3·5
Defence 2·8 4·1
Production and industry 4·O 4·0
Pensions 3·1 3·8
Other 15·2 15·3
100·0 100·

*Trading receipts exceeded operating expenses by £11 million.

Next Part: First World War


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This information was published in 1966 in An Encyclopaedia of New Zealand, edited by A. H. McLintock. It has not been corrected and will not be updated.

Up-to-date information can be found elsewhere in Te Ara.


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