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War Economy

The Role of Fiscal Policy

The Role of Fiscal Policy

The success of New Zealand's economic stabilisation scheme after December 1942 must be attributed in the main to the comprehensiveness and stringency of price, wage and other cost controls, and to the fact that most farm payouts were divorced from export parity. However, success would not have been possible without the backing of the Government's fiscal and monetary policy, aimed at meeting the cost of war from taxation and internal borrowing.

Chart 59, on page 291, showed the rapidly widening gap, in the war years, between private incomes and goods available for use. page 335 Goods available expressed in current prices increased by only £5 million between 1938–39 and 1944–45, whereas aggregate private income increased by £118 million.

National income statistics, when they became available, provided a better measure of income changes. These statistics permit an assessment of the effects of government fiscal policy in reducing the gap between income and goods available.1

Chart 62 shows the effect of direct taxes on income. Between 1938–39 and 1944–45 private income increased 70 per cent, but direct taxes increased 241 per cent. Disposable income, which is private income after deduction of direct taxes, increased, as a result, by 46 per cent. This was still a formidable increase compared with the 4 per cent increase in goods available, but the effect was much less disturbing to the stability of the economy than it would have been had the rates of direct taxation not been accelerated.

chart of economic statistics

Chart 62

1 In following the analysis in the next few pages, it must be remembered that the gap between the two statistical series concerned cannot be studied exhaustively. Services, which may be paid for out of incomes, are not included in goods available. Goods available may be used for capital purposes. They may also be used by the Government, though war stores are specifically excluded. For a variety of reasons there is normally a gap between incomes and goods available. Interest attaches not to the size of the gap in any particular year, which is affected by these statistical differences, but to the way in which it widened over the war years, when civilian services as well as goods were in short supply. Some of the shortages of services are discussed in Chapters 16, 17 and 18.

page 336

The approximate effect of customs and excise duties and other forms of indirect taxation can also be studied. Indirect taxes, by raising the prices of the goods which were available, helped to mop up excess purchasing power. In fact, this form of taxation is often more effective than income taxes as an anti-inflationary measure, because it tends to restrain spending, and, when spending does occur, draws off part of the purchasing power. Subsidies obviously have the opposite effect.1

In Chart 63 the values of goods available have been adjusted to allow for the effects of indirect taxation in raising prices and of subsidies in lowering prices.

The total of indirect taxes less subsidies increased by 47 per cent between 1938–39 and 1944–45. When allowance is made for this change, the market value of goods available increased by 10 per cent compared with their unadjusted increase of 4 per cent. However, as we have seen, disposable income increased by 46 per cent over the same period.

chart of economic statistics

Chart 63

1 As indicated on p. 307, their value as an anti-inflationary measure lies in their ability to arrest spirals or potential spirals.

page 337

Summing up the effects of these changes:

Increases 1938–39 to 1944–45
—— Percentage Increase
Before Taxation  
Private Income 70
Goods Available 4
After Taxation  
Private Income 46
Goods Available 10