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War Economy

Long-term Contracts and Lump Sum Payments

Long-term Contracts and Lump Sum Payments

Early in 1944 the United Kingdom Government initiated discussions to arrange long-term contracts for the purchase of meat and dairy produce. Finally, in July 1944, these contracts were completed, providing for substantially increased prices for New Zealand produce and the purchase of the exportable surplus of dairy produce page 327 and meat for a period of four years, prices being firm at agreed rates for the first two years, and thereafter subject to review ‘on substantial grounds’.

In addition to these contracts for meat and dairy produce, the United Kingdom Government agreed to pay a lump sum of £12 million sterling ‘as compensation to meet the abnormal increase in prices of New Zealand imports from the United Kingdom from 1939 to the present.’ Further, the United Kingdom Government agreed to pay New Zealand a lump-sum payment of £4 million sterling per annum for the period of four years towards the cost of economic stabilisation in New Zealand, and in recognition of the fact that benefit accrued to the United Kingdom through New Zealand's economic stabilisation policy.

The 1944 annual report of the New Zealand Dairy Board contained a report of a statement by the Prime Minister:1

‘He explained that at the commencement of the war, New Zealand agreed to sell the whole of the exportable surplus of produce to Great Britain at prices generally in line with the then ruling prices. It was emphasised that New Zealand did not wish to make any profit out of the war, but made a reservation that the position should be reviewed if the cost of imports from the United Kingdom rose significantly. The substance of this reservation was repeated from time to time, but circumstances rendered it inappropriate to press for general revision. However, when a proposal was received from the United Kingdom that we should make contracts for our exportable surplus of dairy produce and meat covering the production of the next four years, the Government considered that before any such contracts were made, the whole of the growing disparity between the level of prices at which goods were sold to the United Kingdom and were purchased from that country should be discussed with the United Kingdom Government. Our case was that since the war began, import prices into New Zealand had risen substantially more than export prices. It was essential to the welfare of New Zealand that we should obtain a reasonable settlement for the past period and a better basis for future contracts. Otherwise, we would have reached the end of the war short of the sterling funds required to help in the restoration of our productive resources and to generally make good all the wear and tear of the war years. The Prime Minister referred briefly to the Government policy of stabilisation with the holding of costs involving very large subsidies, and he said that the British Government recognised that our production costs had been held at a much

1 p. 4.

page 328 lower level than would otherwise have been the case, by the stabilisation scheme, and agreed that New Zealand should be compensated for her increases in costs, whether these were borne by the farmer, by the State through subsidies and cost allowances, by the whole community through the higher price paid for articles outside the range of that stabilisation scheme, or deferred and still to be met.’

Both New Zealand and the United Kingdom achieved a substantial measure of price stability from about the end of 1942, but, whereas New Zealand prices were then 14 per cent above their level at the outbreak of war, those in the United Kingdom had risen by 29 per cent. In other words, the United Kingdom stabilised at prices which had risen twice as much as those in New Zealand.

New Zealand, in paying for imports from the United Kingdom, suffered by having to pay the proportionately higher prices. For the most part, the burden of the difference in trading conditions fell on the New Zealand taxpayers, who had to meet the cost of subsidies, which the Government, under the stabilisation scheme, usually paid out to prevent increased prices of imports from reflecting into New Zealand prices.1 The upsurge in United Kingdom prices also depreciated the real value of New Zealand's overseas exchange reserves which accumulated because of lower spending on imports during the war.

These facts affected both the settlement with the United Kingdom and the decision as to the disposal of funds in New Zealand.

Full information concerning the lump-sum payments was given to the dairy and meat industry leaders, who later expressed themselves as satisfied that these payments were not being paid in respect of produce sold to the United Kingdom.2 The sums were not therefore credited to the producers' stabilisation accounts.

1 Subsidies to keep down the prices of imported items entering into farm costs were usually charged to the farm stabilisation accounts, but farmers, along with wage earners and others, benefited from subsidies to keep down the cost of consumer goods and services.

2 Letter of 24 March 1945 to Chairman of the Economic Stabilisation Commission. Copy in New Zealand Meat Producers' Board annual report, 1945, p. 6.