The dominant policy objective since the end of the Second World War has been the maintenance of full employment. After the initial period of resettlement of the large number of returned servicemen, there were always many more jobs than people seeking work and labour was generally scarce. Considered from the point of view of promoting full employment, the Government economic policy could thus be regarded as a complete success.

The main weapon used to achieve full employment was a high rate of Government expenditure, supported on occasions by reductions in taxation. On the expenditure side there was a great need for capital reconstruction after the war and particular emphasis was placed on expenditure on transport, communication, and power facilities. Then the “baby boom” of the mid-1940s brought about an increased demand for educational facilities. First, the primary schools, then the secondary schools, and, finally, the universities had to be extended to cope with increased enrolments. In the mid-1950s there was added pressure on resources from the Government-backed housing drive, which gained renewed life in 1958 and 1959 from 3 per cent loans and capitalisation of family benefits. To this must be added the stimulating effects of expenditure on social security benefits. This added to the spending potential of the private sector by providing free services, such as medical treatment, and by transferring income to those who have a high propensity to spend. Direct expenditure by Government or Government-financed housing expenditure thus maintained continual pressure on the country's resources.

The effect on these resources was accentuated by the methods used to finance the expenditure, as over the period Government finances tended to be increasingly dependent on loan money. In one year only (immediately after the 1951 wool boom) was current revenue from taxation and other sources sufficiently buoyant to cover all expenditure. But from then on there was always a gap, often very large, between current revenue and total expenditure. At first it was relatively easy to bridge this gap by borrowing in New Zealand. The economy was very liquid and there were few avenues for investment other than in Government stock. Sufficient loan money was raised to finance a reduction in our overseas indebtedness during the early part of the decade.

In the mid-1950s the Government's total requirements for loan money were beyond the capacity of the domestic market, as there was now greater competition for funds from the private sector. Notwithstanding the proceeds of moderate overseas borrowing for development purposes, the Government's accounts only wavered around overall balance. In recent years a better flow of funds from the domestic market has eased the financing problem, but even with substantial overseas borrowing for balance of payments reasons the Government's accounts have often moved into overall deficit.

Unfortunately, the economy at times became overstrained. At first the result was domestic inflation only, as rising export prices protected the balance of payments. This inflation generated additional Government expenditure as wages and price increases pushed up Government spending on social security benefits, increased the Government's wage bill, and made public works dearer. When export prices ceased to rise and started to slip back during the latter half of the 1950s, the economy became subject to recurring balance of payments crises. The secular rising trend in activity thus gave way to periodic surges, with restrictive import licensing being used to cushion the impact on the balance of payments of the periods of high domestic spending.

Problem of Fluctuating Economy

The basic problem, now that the strong inflationary trend of the early 1950s has been halted, is to find ways and means of avoiding these severe fluctuations. Achieving this will require greater use of fiscal policy as a regulating mechanism, with more attention being paid to the objectives of Government policy other than full employment. The need for this has been brought home by the heavy external deficits we have experienced over recent years and by the growing concern about our continuing ability to attract a large inflow of foreign capital. Even if this could be obtained, there would still be the problem of servicing these loans.

From the nature of its economy New Zealand has a strong propensity to import, a tendency to chronic shortage of overseas funds, and, in recent years, an uncomfortable three-year cycle of exchange crises. To maintain viability in external transactions is now as much at the heart of public finance as are considerations of internal expenditure and receipts on Government account. Budgetary policy must have regard to the influence of Government finance on the balance of payments; and this consideration must also guide economic policy as reflected in the permissible volume of bank lending, conditions of hire purchase, interest rates, wage policy, industrial expansion, and the level of imports.

Provision for the future is another goal that will become increasingly important in formulating of Budget policy. A consistent and coherent policy has to aim at reconciling the demand for a present high level of consumption and the need to save and invest for the future. A rapidly growing population, the expectation of a continued improvement in the standard of living, and the provision of greater assistance to underdeveloped countries, whose progress may well determine our future as a nation, all require the direction of a larger proportion of our current resources to savings and the creation of capital assets. The tax changes and expenditure programmes announced in each Budget must therefore look beyond the needs of the current year.

A greater use of changes in taxation and rates of expenditure to influence the path of the economy is, however, restricted by two factors. First, the nature of Government expenditure has become relatively inflexible. Much is now so entrenched, so closely built into the political, social, and economic structure, that major surgery, though feasible, is hazardous. Change is towards more, rather than less. Government spending: economy takes the form of limiting this propensity of expenditure to increase and proliferate.

There is widespread and long-standing participation by the Government in works and other capital projects, but this expenditure has been held in much closer check than on social services. Some of it, for example, education buildings, is a reflection of a growing essential social service; some is part amenity, part basic service (electricity, telecommunications); some is more economically done or aided by Government on a large scale (land and forest development, soil conservation); and some results from an expansion of policy more on the lines of welfare than on traditional limited assistance (3 per cent house loans). A recurring stimulus to all forms of expenditure is the system of general wage orders. A 5-per-cent general increase in wage rates pushes up Government spending on current account by about £8 million per annum, as well as increasing the cost of works and the operating costs of trading Departments, such as Railways and the Post Office. The cost of servicing the public debt has risen appreciably and will continue to rise until the large volume of low-interest loans issued in the past is converted, on maturity, to present-day rates. On the substantial overseas borrowing in recent years the interest has been higher than on internal loans.

*Conversion loan: no external cash loan.

Note: Yields are gross yields to redemption. There was no external loan and no internal public issue in 1952–53. Where more than one loan was issued in any year, the loan with the highest yield is shown.

Secondly, the political climate that has emerged over a period of years has led to the belief that Budgets should contain only reductions in taxation and never increases, regardless of the economic situation or the endorsement by the people at election time of new programmes of expenditure. When a Budget breaks sharply with this tradition the immediate effect is consternation, though comprehension may follow in time. Even changes in the incidence of taxation aimed at promoting savings or discouraging expenditure, or providing a greater reward for incentive and effort, are fraught with political difficulties.

As about one third of the income tax is paid by companies, there is limited scope for shifting some of it to individuals and thus increasing the opportunity for reinvestment by companies. An unusually high percentage (60 per cent) of taxation is income tax. Though there is a good case on economic grounds for less of this and more of taxes on expenditure, the level of personal and family exemptions from income tax is so high that a substantial shift to a wide range of indirect taxes would affect many who now pay little taxation. Sales tax has been used very little in a discriminating way to discourage expenditure. It arose primarily as a revenue tax in wartime and grew so productive that it became indispensable, even when trimmed to cover relatively non-essential goods. Similarly greater use could be made of trading. Department surpluses to relieve taxation or to provide more funds for capital development of the undertakings themselves.

The role of the Government's financial transactions has broadened over the years, reflecting the evergrowing list of responsibilities accepted by the State. If events in other parts of the world are any guide, then the future should see the Government's power to tax and to spend used in an even more positive manner to promote the development of New Zealand.

by Bernard David Arthur Greig, M.COM., Assistant Secretary to the Treasury, Wellington and Bernard Vincent J. Galvin, B.A.(N.Z.), M.P.A.(HARVARD), Treasury, Wellington.