264 THE ECONOMIC RECORD DEC.

public discussion, prior to the 1937 Session, a draft Bill in this connection.

E. P. NEALE. duckland University College.

THE NEW ZEALAND ACCOUNTS FOR 1935-6 AND THE

The Budget for 1935-6 provided for an estimated surplus of €13,500 in the Consolidated Fund, after including as revenue some S800,OOO of windfall receipts, in the form of profit on the sale of gold €231,000, and profit on the conversion of silver coinage f575,OOO. The year actually closed with a surplus of €281,800 without the use of the silver coinage profits, which are now brought in to assist in the balancing of Mr. Nash’s 1936-7 Budget.

“The main feature in the year’s operations, and the only one that is important from the point of view of the current year’s Budget,” says Xr. Nash in his Budget Speech, “was the buoyancy of the revenue. The surplus of €281,000 realized was entirely due to this factor.” The buoyancy of the revenue is certainly an important factor, involving, as i t did, increases in Customs revenue (S’i37,000), Sales Tax (€292,000) , and Income Tax (€784,000), and reflecting in the first two items the con- tinuance of the upward trend of the previous year, so markedly recorded in the Income Tax yield, which is levied on incomes received during 1934-5. There are, however, aspects of the 1935-6 results of equal importance to the immediate future of State finance.

For the first time since the depression began, revenue and expenditure balanced without the aid of windfall items or loan moneys (omitting liability on the loan from the British Govern- ment, which formerly cost €1,650,000 per year, and which now appears to be regarded as a closed account).

The close agreement between the actual results and the esti- mates, especially in espenditure, is another satisfactory feature, emphasizing the return to stability in State finance, and provid- ing a basis for planned erpansion very different from that offered by the shrinking revenues and increasing expenditure of the depression years.

The 1935-6 accounts represent the closing phase of the depression period, and justify the steps taken in 1933 to rehabi- litate the current revenue position by the imposition of ad&-

BUDGET FOR 1936-7

1936 NEW ZEALAND BUDGET 265

tional revenue burdens as part of the cost of achieving equilibrium in industry. During the year the Public Debt was increased by nearly €2,0000,000. Over half of this amount was accounted for by loan conversion and repayment costs, the bal- ance being on account of expansion of public works. The drastic restriction of capital expenditure in the depression years is open to criticism as contributing to the deepening of the crisis, but it must be admitted that the policy, however unfavourable a t the time, now offers a most favourable background for the expansionist policy of the new Gov,ernment.

The 1936-7 Birdget.-The features of special interest in the 1936-7 Budget are those which reflect the operation of the new policy measures of the Labour Government. By the nature of the proposals the Consolidated Fund reflects only a small part of the financial effects of the new policy in the current year. The Budget is balanced at approximately €31,000,000, involving an increase in revenue and expenditure of approximately €5,000,000. Of this amount, .approximately €4,500,000 is pro- vided by additional reeeipts from taxation, and over €500,000 from silver coinage profits. Of the additional receipts from taxation, only €1,000,000 from Income Tax and €800,000 from Land Tax are due to new tax levies, the balance being due t o increased returns at the old rates.

Income Taz.-Prior to the depr,ession, Income Tax mas levied on a graduated scale, the rate of increase being reduced a t several stages as the size of the income increased until a maxi- mum rate was reached. Companies were taxed on profits at the same rate as individuals, and dividends were not taxed t o the recipient. Income from certain Government War Stock was tax free.

As emergency measures in the depression, additional Income Tax was collected, partly by percentage additions to the tax as calculated according to the scale, partly by a flat rate additional charge on all assessable income of individuals ov.er f500, and partly by including all tax-free income and company dividends for the purpose of h i n g the rate of tax, on the graduated scale, payable on assessable income. Tax payable on unearned income of individuals, but not of companies, was increased by 33 1-370. The system thus adjusted had lost all semblance of equity, especially when considered in conjunction with the tax for unemployment relief on incomes and wages a t a flat rate, prac- tically without exemptions.

266 !I’HE ECONOMIC RECORD DEC.

T i t h returning prosperity during the past year or tmo, there have been no adjustments of the emergency measures except a series of reductions in the separate Unemployment Tax. In the 1936-7 Budget provision is made for a further increase in Income Tax yield of €1,000,000. The 1Iinister com- ments that, “recognizing that the present system is not as equit- able as it might be, it is intended to remodel the whole system.” The 1936 Budget proposals must be regarded as but a minor instalment in the process of remodelling. For the failure to make more far-reaching changes in the interests of equity, the somewhat vague election reassurances of the Prime Minister on the subject of taxation are probably largely responsible.

The new proposals are as follows :-The old graduated scale with percentage additions is abandoned in favour of a new graduated scale. The special exemption of €210, reduced from €260 as a depression measure, is to remain, but is not to be reducible, as in the past, as income increases in size. The exemption of €50 for a wife is no longer t o be reducible as income increases. Unemployment Tax is no longer to be allowed as an exemption in calculating taxable income.

The additional burden of the new proposals calls for sub- stantial increases in the tax payable in the group of taxpayers with assessable incomes from €300 to €700. Tax payable by a single man with assessable income of B O O will be increased by 12570, the percentage increase falling to 50% at €600 and to 2570 at 5700. The greater percentage addition in this group than in the later groups is the result of the allowance of a fixed special exemption and a straightening of the line of pro- gressive graduation. The new graduated scale raises the rates over the whole field, steepens the graduation as compared with the old scale from approximately €4,000 onwards, and widens the gap still further between the new and old scales between E6,000 and E9,000. Under the old scale, the rate of progression was reduced a t €1,500, B,900, €5,900, and finally the magmum rate mas reached a t €8,100. Under the new scale, there is one alteration in the rate of increase a t €5,500. There would appear to be no justification fo r any variation in the rate of progres- sion up to the maximum rate fked. The new maximum in the case of all incomes is reached at €8,950. The new and old m a s - mum rates are shown in the following table:-

Individual Company Earned Unearned

Old New Old New Old New 5110.2 a12 719.6 10110.6 5110.2 716

1936 NEW ZEALAND BUDGET 267

Several major weaknesses in the old method of taxation remain under the new provisions. Companies are still to be taxed on their profits. It is understood that a change over to the more equitable system of taxing the recipients of dividends, and making the company responsible for tax on undistributed profits only, would r,esult in a heavy fall in tax receipts, unless the rates of tax were greatly increased. The opportune time to make such a change is while revenue is buoyant and expenditure is still down to economy levels. Such opportunities are not of frequent occurrence, and it is regrettable that the present one h3s been missed. Dividends and tas-free interest are to be nsed, as before, to increase the rate of tax payable on assessable incomes. Farmers on land under €3,000 in unimproved value are still to be exempt from Income Tax. The allowance of 15% of assessable income as a maximum exemption for insurance premiums paid is still to provide a profitable form of investment for the receivers of large incomes, classed somewhat arbitrarily in many cases as earned income (a taxpayer with assessable income of €610 would pay 2 j - in the pound in Income Tax, and could, therefore, receive a return of 10% on an investment in insurance, plus a reauction in tax rate on the balance of his income and bonuses on the policy).

L a d 5"as.-The graduated Land Tax, which was abolished as a depression measure, is reinstated with a slightly changed graduation. The usual liberal mortgage exemptions are allowed. No distinction is made between rural and urban land, so that the new provisions will press very heavily on those businesses with large holdings of business premises in cities.

Death Duties.-It is rather surprising that no provision has been made for an increase in death duties, as there would appear to be ample scope for an extension of this form of tax, preferably as an offset to a reduction in indirect taxation.

Indirect Taxation.-Perhaps the least satisfactory feature of the Budget on the revenue side is the reliance on the ,expan- sion of revenue from indirect taxation, at the rates instituted as emergency measures in the depression period, to finance new expenditure of a recurring nature. In particular, the Sales Tax, which the Prime Minister is pledged to repeal, is expected to yield €2,900,000. Its growing importance as a source of revenue is likely to make its repeal extremely diff?cult. One of the weakest features of State finance in the depression was the de-

268 THE ECONOMIC RECORD DEC.

pendence on Customs duties as a main source of revenue. The provision for a record yield of €9,100,000 serves as a reminder that, apart from the inequity of this form of tax, it is likely to be extremely unstable under changing conditions.

Ezpenditum-On the expenditure side, special features, apart from the final instalment of the restoration of salary cuts, are as follows:-A new invalidity pensions scheme for blind or totally incapacitated people is expected to cost €830,000 for the remainder of the current year. Easier conditions, and a s m d increase in old-age pensions, are to cost over half a million poundh for the balance of the year. Other adjustments in pen- sions make up the total increase to €1,800,000. Provision has been made in several votes for grants from the Consolidated Fund to capital accounts for the relief of unemployment. The charge to revenue is made on the principle that the works under- taken are not likely to be directly reproductive. The net result is, of course, that the Consolidated Fund is again relieving or subsidizing the Unemployment Fund to the extent of probably not less than €1,000,000, in adiiition to which the costs of admin- istering the Employment Department are transferred from the special fund t o the Consolidated Fund. This is certainly pre- ferable to an increase in the Wage Tax.

The Education vote is increased by €654,000, largely owing to salary restorations, but making provision also fo r additional free transport to schools, additional allowance to school com- mittees, and the reopening of two training colleges. The Health vote includes provision for free milk at schools and increased grants to Hospital Boards.

Capital Etpendit we.-As already suggested, the major financial proposals fall outside the scope of the revenue account for the current year. The part of the Government plan which involves immediate State expenditure on a large scale is a com- prehensive programme of public works. Approximately, €6,000,000 is to be spent, apart from the grants from revenue, in the construction of transport facilities, hydro-electric works, schools, post o5ces and public buildings, and in land develop- ment. In addition, the Government has commenced a housing scheme, Rhich is expected to cost €S,000,000 in the 6rst pear. These plans .are based on the twofold purpose of providing necessary public facilities, and in the process stimulating pur- chasing power as a necessary factor in recovery.

I n the preliminary discussion of these proposals, the “use

1936 RELIEF OF MORTGAGORS IN NEW ZEALAND 269

of the public credit” has figured largely as being the obvious method of finance. The actual financial proposals have not been made public, but the Government has obtained authority to borrow up to €13,000,000 in the current year. Although the authority is to “borrow ” it, it is not known whether there is to be a public loan issue, or what portion is to be in effect an issue of credit through the Reserve Bank. The Minister of Finance has stated, according to the press, that €3,000,000 of the funds required are to be “created by the Reserve Bank by way of loan to the Gov,ernment. ” The Minister has also indicated that he is aware of the dangers of relying to too great an estent on this method of hancing, and in view of the contingent liability to finance the Dairy Industry Account by Reserve Bank cr.edit, it seems unlikely that the whole of the requirementsfor the cur- rent year wil l be raised in this way.

b y funds raised by the usual form of loans will be sought on the local money market, as the Government has a strong objection to borrowing overseas. While it is generally r.ecog- nized that the time may have arrived: when overseas borrowing might be reduced, it is too often assumed that the present measure of development might have been attained without over- seas borrowing. The main burden borne to-day on account of ov,erseas borrowing arises, not from the source of the funds, but from the unproductive nature of the work undertaken, and it may yet be learned that the expenditure of internal loan funds not immediately reproductive, however desirable, may leave an equalIy oppressive burden to be carried. L. ‘8. HOLT.

Auckland University College.

RELIEF OF MORTGAGORS IN NEW ZEALAND b i d s t much other legislative activity, the Labour Gov-

ernment has overhauled the legislation enacted under the pre- vious Government for the relief of mortgagors.’

The new enactment supersedes all previous legislation. That legislation provided two independent methods by which relief might be obtained. Any mortgagor might make applica- tion for reduction in his rate of interest, for remission or capitali- zation of arrears of interest, or for postponement of payment of principal. Under this machinery no writing 08 of principal moneys was possible. In addition, farmer mortgagors had the

1. For a diacuaion of esrlier lepi.l.tion nee Economic Racad. May. 1932. p. 110: December. 1934. p- 266. and June, 1935, p.,,86. The new rnacrment is “The Mortgagon and Lessees Rehabilitation Act, 1936.