After the Second World War low-interest (3 per cent) housing loans were provided for ex-servicemen through the State Advances Corporation. Both they and civilians benefited from the suspensory loans introduced in 1951 and, later, from more liberal loan limits. Then followed two changes in policy which greatly increased Government lending in a short time. From February 1958 civilians on small incomes were granted 3 per cent loans at a time when the standard State Advances interest rate was 4¾ per cent and the prevailing rate charged by private institutions was 5½ per cent. These loans became much easier to obtain in April 1959, when it became possible for parents to capitalise the family benefit (up to £1,000) to assist in financing a house, making additions, or, in some cases, to reduce or pay off a mortgage.

Many people with families who had been unable to save enough to bridge the gap between the cost of a house and the loan limit were able to obtain a house and slow savers no longer had to wait. On the other hand, the Government was finding up to 100 per cent of the cost and some people of limited financial experience were at short notice entering into large commitments of a new kind and at the same time forgoing the receipt of a regular benefit.

In three years not only did the annual amount of additional finance drawn by State Advances from Treasury more than double but a large backlog of unexercised loan authorisations was also created. This kept drawings at a high level, after the peak of capitalisation had passed. When drawings did fall (in 1963–64), the pattern of lending changed and lifted them again in the following year. A resumption of lending on existing houses and on sharp acceleration in farm lending to increase exports became Government policy. In the late sixties a further upsurge can be expected in lending on new houses required by the young married people who were born just after the war. By that time, too, the change in policy on farm lending should be showing its full effect, with possibly a greater activity in Government lending for urban renewal.

Cheap loans on new houses, by stimulating demand, have led to higher costs of sections and houses. They have also had effects on local authorities. Combined with the policy from the mid-fifties to the mid-sixties of restricting State Advances housing loans to mainly new houses, 3 per cent lending led to a sudden rash of new houses on the periphery of towns, with consequential effects on municipal services and costs, transport systems, and on values in the older residential areas. It may take some years for the recent change in policy on existing houses to revive the inner areas.

The virtual monopoly of State Advances in lending to the low-moderate income group would normally have released more institutional and private funds for lending to people on higher incomes and to farmers, but it so happened that insurance companies turned at that time to large-scale investment in commerce and industry. At the same time the prevailing rate of interest, excluding State Advances, moved up to 6½ per cent, further intensifying the difference in treatment accorded the two income groups.

Though loans for workers' houses had been available from the State Advances Office for many years, little had been done by Governments in providing rental houses. In 1936 the new Government planned the extensive construction of rental houses for those who were unable or unwilling to finance a property. Contracts for over 1,000 of these houses were let by mid-1937.

For some years these houses were financed by the use of Reserve Bank credit or Public Account balances at rates of interest varying from 1 to 4 per cent, but settling down towards 1 per cent. In 1941–42 the Reserve Bank supplied £5 million at 1 per cent and 15 million at 1 per cent. The pooling of all loan moneys in National Development Loans Account from 1 April 1942 brought to a head the question of what rate of interest the Housing Account should pay. It was decided that whereas other capital accounts would pay an average rate of 4 per cent on all funds supplied to date, the Housing Account would pay the 1941–42 rates of 1 and 1½ per cent, and rents would continue on that basis.

Although from 1 April 1956 the Housing Account was formally charged the same rate of interest as other accounts, this did nothing more than reveal the difference in interest, as no change was made in rents and the deficiency was written off.

In 1958 the rents of pre-1950 houses (except those occupied by pensioners) were brought into line with the rents of the more costly houses built since 1950; over the restricted field, the increase averaged 11s. per week. In 1961 there was a general increase averaging 15s. per week (again excepting pensioners) designed to enable the account to pay 3 per cent interest, with which it then became charged. This was the same rate as on State Advances housing loans to persons on small to moderate incomes.

Some multistorey blocks of flats have been built for letting, but the high cost means that even on a 3 per cent basis, rents are higher than many low-income tenants can afford. Local bodies have, however, been encouraged to erect blocks, with the help of 100 per cent State loans, at 3½–4 per cent interest and a higher income limit for tenants.

Following a change of Government in 1949, emphasis was placed on home ownership. Not only was construction of State houses reduced, but tenants were also encouraged to buy “their” houses on very favourable terms, with the help of State Advances loans. Many sales were made, with corresponding relief to the Government from local body rates and maintenance.

By 31 March 1965, over 65,000 rental units (houses or flats) had been built or purchased. Nearly 20,000 had been sold for £50 million. Tenancies at that date were over 46,000. Though applications on hand were still about 10,000, the urgent waiting list (primarily families) had ceased to be a national problem. In some places houses available for reletting were sufficient to cope with the urgent list and, generally, the prime need was no longer large houses for families but small units for pensioners and single persons. In fact, with the ageing of tenants, about one-sixth of State rental houses were occupied by pensioners.

The initial legislative programme of the first Labour Government culminated in the far-reaching Social Security Act of 1938. It is doubtful whether its authors, preoccupied with the social or income-redistributive aspects, visualised the part that would be played by this and related legislation in budgetary exercises of the future. From 1939 the Social Security Fund absorbed the Employment Promotion Fund and the civil pensions hitherto charged to the Consolidated Fund. These were increased and a new one added – universal superannuation – payable without a means test at 65 and intended to absorb eventually the age benefit. Starting at a modest £10 per annum in 1940, it was intended to rise to the maximum of £78 in 1968. The great increase in expenditure on the family benefit that was to take place later was probably not foreseen. The greatest immediate change was the inauguration of a widespread system of medical, hospital, and pharmaceutical benefits which, in turn, were inevitably to have a profound effect on public hospitals and their finance.

The new fund was financed by a charge of 1s. in the pound of income (the old fund had collected 8d.) and a registration of £1 per annum (men; all others, 5s.); all persons over 16 years were liable. The charge was extended to include the income of companies, not because they would benefit directly but because the revenue was needed. The general effect was to replace non-contributory civil pensions with those on a contributory basis, having greater and much wider benefits. The existing contributory unemployment assistance was also extended.

“Contributory” as applied to the new fund was a relative term. The policy was a 50–50 sharing of cost by the payers of the specific taxes (broadly, the beneficiaries) and by the Consolidated Fund (as representative of the community at large), which would otherwise have been relieved of the cost of the existing civil pensions. Of the estimated outgo of £15 million in 1939–40, specific taxes were to finance £8.5 million and the general revenue £6.5 million (5.1 million for existing civil pensions, plus £1.4 million additional). Owing to delay in commencing some benefits, particularly the controversial medical benefits, expenditure that year turned out at only £9.8 million, almost all of which was covered by the specific taxes. The real test – the extent to which the fund had to be supported by general revenue – was yet to come. Meantime, unemployment, which had shown a resurgence during 1939, ceased to be a problem after the outbreak of war, and the demands of the war restrained the development of social services generally.

In 1945 the end of the war led to increases in benefits (mainly age) and a decision to increase the family benefit to 10s. per week from April 1946 and abolish its means test. The social security charge was therefore increased to Is. 6d. in the pound, replacing in part the national security (war) tax. With the return to peacetime economic activity, attention had swung back to social services as the focal point of major policy.

From 1951 Government aid to public hospitals increased as local hospital rating was reduced. When rating was abolished in 1957 local restraint ceased and there was another upsurge in hospital expenditure. Since then the use of new and costly drugs has helped to nearly double the expenditure on pharmaceutical benefits. In 1964–65, total Government expenditure on health was nearly £70 million, more than twice what it was 10 years before. The post-war baby boom at one end of the chain of education and, at the other, an increase in the proportion of secondary-school pupils going on to the universities, has sharply increased the cost of education. The universities now face further pressure as the first wave of young adults born in the late forties reaches their doors. The cost of education, running at over £60 million a year, is two and a half times what it was in 1953–54. Major changes in social security benefits were made in 1958–59, when the family benefit was increased to 15s. per week, and in 1959–60, when capitalisation of this benefit for home ownership was introduced. In 1959–60 also universal superannuation was sharply increased (and again in 1960–61) in order to equate it with the age benefit.

Social services as a whole now account for 44 per cent of total Government expenditure compared with 37 per cent 10 years ago. Though their budgetary importance grew, they remained, despite post-war increases, at 14–16 per cent of the national income from 1946–47 to 1957–58. After a quick rise the percentage has remained at about 18 since 1959–60. Whether this is the start of another “plateau” of stability depends largely on the education and health services, which have an inherent tendency to expand.

*Includes buildings paid for by Government.

†Includes cost of social security administration.

Note: This is based on the conventional presentation, but stabilisation subsidies (£17.3 million 1964–65) can only be described as welfare expenditure: if these be added and an estimate made of the interest concession in the formulation of State house rents (currently returning 3 per cent on capital), the further rental concession to pensioners and the interest concession in 3 per cent housing loans, the aggregate of social services in 1964–65 was over £270 million.

Though the Government bears the cost of repayments of public-hospital loans, the individual boards are responsible for raising the loan money: this they do successfully, partly because the interest and repayments are Government guaranteed, partly because hospitals have a strong appeal to investors.

For simplification of the public accounts, the Consolidated and Social Security Funds were merged from 1 April 1964 in the Consolidated Revenue Account. This should result in a better understanding of social service expenditure because the use of the word “fund” in connection with Social Security was misleading. Any “fund” so closely affected by political considerations, which relied on the general taxpayer for as much as 30 per cent of its receipts, was merely an account. Even as an account it obscured the picture of health services, especially public hospitals, as some large costs were charged to the Consolidated Fund.

The economic strength of the country, with its financial capacity to bear the cost of war, had improved a great deal since 1918. On the other hand, it was realised that modern warfare would be exceedingly costly. The Government therefore decided to tax to the economic limit for war purposes and borrow for essential productive works and for any balance of war requirements (Budget, 1940). This would limit the accretion of unproductive debt.

A ready method of levying more tax was at hand; the principle of the social security tax was extended to a national security tax, first at 1s. in the pound of income, then at 1s. 6d. This was the most productive war tax. An excess profits tax and surcharges on income tax (the peak was 33 1/3 per cent), sales tax raised from 5 to 20 per cent on most items, (except essential household commodities), death duties (at new high rates entirely devoted to war finance), and on customs and beer duty provided most of the remaining war taxes. By 1945–46, the last year of hostilities, war taxation had reached £51.4 million, more than treble that of 1940–41 (£15.7 million), the first complete year. Out of this £51 million, the national security tax, borne by virtually every income earner, accounted for 42 per cent; sales tax, 20 per cent; income tax, 17 per cent; and death duties, 10 per cent. In comparison, ordinary taxation totalled £63.5 million in 1945–46, 40 per cent greater than that of 1940–41 (£45.6 million). Superimposed on a tax level already increased to meet the recent expansion of social security, the amount of war taxation was impressive, but not excessively burdensome in the circumstances. It was largely the proven capacity of the country to bear such a load that led to further increases in welfare expenditure after the war.

As in the previous war, overseas costs were to be financed in the first instance by United Kingdom Government loans: interest was to be the same as that paid by the United Kingdom itself on its war loans. The experience of the depression in servicing a large external debt was too recent to be ignored; at the outset it was resolved to meet out of export earnings as much as possible of the overseas costs of war. In the end, the Government went further and, by March 1946, had repaid the entire £61 million borrowed from the United Kingdom, leaving only the net balance of internal loans (£221 million) as the deadweight burden of the war.

One attempt was made at a compulsory loan, with an interest-free period and then a rate of 2½ per cent, the minimum contribution being related to income. Inevitably in the circumstances of rapidly increasing war expenditure, some recourse was had to Reserve Bank credit. Though Treasury bills increased by £30 million during the war, some of this, however, was for civilian housing. War loans were raised internally in the ordinary way at 2½ per cent short term and 3 per cent long term, supplemented by national savings from 1940, by the Post Office Savings Bank, and by investment of the surplus (“stabilisation”) funds of the dairy and meat industries.

Up to March 1946, £614 million of war (and rehabilitation) expenditure had been incurred, including £81 million reverse lend-lease. Of this, war taxation provided 37 per cent, general taxation provided another 4 per cent and met the interest on war loans, making an overall tax contribution of about 45 per cent. Internal loans provided 36 per cent. Starting in 1942–43, American lend-lease and Canadian mutual aid quickly reached massive proportions and contributed 18 per cent. The peak of annual war expenditure was reached in 1943–44 at £153 million. After 1945–46, war taxes ceased and the declining expenditure was financed from various sources, such as the sale of war assets.

Transactions of an unusual nature took place during and just after the war. In recognition of the disparity between prices of United Kingdom exports to us and our exports to United Kingdom (all the major primary products were sold wholly to United Kingdom on Government to Government contracts), the United Kingdom Government made, in 1944–45, a lump-sum payment of £20 million and undertook to pay £5 million annually for the remaining three years of a new four-year contract. These sums were used for the redemption of war debt.

In addition to paying off the remaining external war debt in 1945–46, the Government took advantage of abundant exchange reserves to redeem £29.6 million of ordinary 4 per cent and 5 per cent external debt, and thus reduced external interest; the 2½ per cent counterpart stock issued internally was taken up by the Reserve Bank and Treasury accounts. Another unusual transaction was a gift of £12.5 million to the United Kingdom Government in 1946–47.

Economic Stabilisation Scheme

An integral and important part of the war effort was the Economic Stabilisation Scheme, which commenced early in 1943, absorbing some preliminary phases such as price control and a limited range of subsidies. By a complex and far-reaching system of economic and financial controls, costs were held in check and the national effort directed into the most urgent and productive channels. Some of the more significant effects were:

1. Restrained costs affected the prices of produce sold under contract to the United Kingdom. Some financial recognition of this was, however, received.

2. From 1944 especially, large farm-industry reserves were accumulated from the difference between overseas contract prices and the internal level of payments under stabilisation policy. The investment of these large and increasing reserves in Government stock was a major factor in post-war Government finance. The reserves, £17 million in July 1946, rose to £63 million at July 1951, by which time surpluses on wool were having a large effect.

3. The second consequence of these reserves has been the underpinning of wool, meat, and dairy prices. The Wool and Meat Boards still rely entirely on their own funds, but Government assistance has been necessary at times to maintain the dairy price-support. Meat reserves have also helped finance producer-owned enterprises.

4. Stabilisation policy kept land prices at 1942 values for nearly 10 years. Thus, in contrast to the unreal boom in land prices just after the First World War, ex-servicemen of the Second World War found rehabilitation, in any case very soundly administered, a great deal easier; those taking up farms at 1942 values were virtually presented with a large capital reserve. When land-sales control was abolished, values generally doubled.

5. Probably the most far-reaching inheritance from stabilisation policy is the system of general wage orders, originally devised to bring controlled wage levels into line with the controlled cost of living.

6. As a quid pro quo for wage restraint (wages were held at award rates), the prices of essential foodstuffs and clothing were held down by price control and subsidies. Most of the main food subsidies are still in operation, long after the counterpart has ceased to operate. Their continuance is now part of welfare state policy.

An exchange crisis occurred in 1938, partly through a flight of capital, but mainly because demand for imports had been overstimulated by recovery from depression, especially by internal budgetary and monetary expansion out of line with the improvement in external receipts. The real cause was one of timing: the enthusiastic practise of an expansionist policy after 1935 was four years too late to assist recovery without creating undesirable side effects. From £40 million at the end of 1934, net overseas assets of the banking system declined steadily to just over £20 million three years later. Some decline was inevitable – and necessary – but the run down after May 1938 was so rapid that the country was for a time unable to meet all its external commitments. Because service of the external debt had priority, commercial payments had to be restricted and personal payments severely curtailed. At the end of December 1938, when drastic controls were established, overseas assets were under £10 million and it was not until two years later that they again exceeded £20 million.

Paradoxically, the situation was saved, more than by any other reason, by the advent of the Second World War, which led to bulk purchase of our exports at favourable prices by the United Kingdom Government. There were, of course, other related factors, including a physical shortage of many imports. From June 1942 the £40 million level had been restored and from the end of 1944 there was another surge upwards. But not since 1938 has the country been free of exchange or import control for an appreciable period. The exigencies of war were followed by recurring exchange crises during post-war expansion; more recently there has been an undue cyclical manifestation. The management of net overseas assets is now at the centre of Government policy.

The great economic depression which began in the United States in 1929 reached New Zealand a year later in the form of a collapse in farm-commodity prices, a disaster for a country virtually dependent on these exports. The number of unemployed, hitherto a few thousands, snowballed with alarming speed from the end of 1930; by June 1931, 50,000 were receiving assistance from the Employment Promotion Fund set up in December 1930; the peak of nearly 80,000 was reached in September 1933. The fund, financed by a levy of £1 per annum on all employed males and a flat-rate tax, first on salaries and wages, then all income (the peak was 1d. in each 1s. 8d.), subsidised a variety of employment, provided chiefly by the State or local bodies. The inability of many unemployed to do hard manual work and the lack of enough suitable projects led to extensive sustenance payments from 1934 until employment improved as the depression faded. Total expenditure developed to about £4 million per annum in 1932–33, with a peak of £6.5 million in 1938–39, when a special effort was made to place all fit men in full-time work. The fund was abolished in 1939, when its operations were absorbed by the new Social Security Fund.

The collapse in prices, loss of business confidence, and unemployment sharply reduced the revenue of Government at the very time when the need for relief expenditure greatly increased. There was then no central bank, nor an appreciation of Keynesian economics: financial orthodoxy demanded a balanced budget in circumstances when a bold policy of deficit financing was essential. (“Deficit financing,” here and later, is used in the restricted sense of meaning recourse to Reserve Bank credits or the depletion of a cash balance at the Bank.) But New Zealand was by no means alone in awaking too late to an understanding of counter-cyclical policy. Salaries of Government employees were cut twice, the intake of staff into Government employment became negligible, and the Arbitration Court was given power to reduce wages, which it did in 1931. Pensions were reduced, all Government securities bearing over 4 per cent interest were virtually compulsorily converted to that rate (the alternative for dissenters being penal tax on the interest), a similar reduction took place in interest payable by local bodies, and elaborate machinery was set up to give relief to mortgagors and tenants. Restoration of cuts in Government salaries and pensions commenced in 1934–35, when revenue started to recover.

Until 1930 the New Zealand pound has been on parity with sterling, but by early 1931 had depreciated to £110: 100. Two years later the Government depreciated the currency to £125:100, where it remained until parity was restored in 1948. The 1933 depreciation was designed to provide some offset to the severe decline in farm incomes, but of course there were contra effects on the cost of imports and service of the overseas debt. It was a highly controversial move that led to the resignation of the Minister of Finance, Downie Stewart. Whatever its beneficial effect on the economy as a whole, the main lift out of the trough of depression was provided externally by an improvement in export prices in 1934.

In August 1934 the Reserve Bank was created, but its ideas on advances to the Government did not, for a time, differ materially from those of the trading banks. This situation changed in 1936 when the Bank became subject to Government policy, but by this time the depression was lifting. The availability of cheap bank credit was, however, a major influence in accelerating recovery.

Despite the collapse in prices, overseas exchange reserves did not drop to a critical level, as they did after the depression was over. This was in part a measure of the lower demand for imports, in part a reflection of increased production by farmers in an endeavour to offset low prices.

Of the various forms of rehabilitation of returned servicemen after the war, land settlement was the best known, the most expensive, and the least successful. Development was left to the individual who borrowed heavily. Unoccupied Crown land was insufficient and often unsuitable for the large number of men returning. Extensive purchases of private land were made during 1918–20, land that was eagerly offered to the Government at exorbitant prices and as eagerly demanded by land-hungry soldiers at uneconomic prices. The common expectation was, apparently, that the sharp post-war boom in export prices would continue. This land boom affected civilians, too, and created much of the excessive mortgage debt that caused trouble, as export prices soon receded and later collapsed in the early 1930s.

By March 1924, £22 million had been advanced to 22,000 ex-servicemen, including £8.5 million for houses other than on farms. Not all of this had to be borrowed; as much as £13.5 million came from accumulated surpluses of revenue in the Consolidated Fund.

The rudimentary development of direct taxation, coupled with a long history of financing from loans any extraordinary expenditure, predisposed the Government to finance the war from loans. The unknown volume of expenditure to which the Dominion was committed, and the expectation that the war would be soon over were also factors in shaping policy. But there was no doubt that taxation would have to be increased to meet loan charges and war pensions.

The initial reaction – as it had so often been with major public works – was to turn to the United Kingdom for loan finance, but with a difference: it was the United Kingdom Government that lent on Treasury bills, the first million pounds at 3½ per cent and a discount of £5 per 100, and the second at 4½ per cent and 1 discount. Later long-term loans were obtained at 5 per cent, and eventually at par. In 1915–16 local borrowing for war purposes began, but the response was insufficient and the 1916 Budget proposed the issue of war bonds at 4½ per cent free of tax. There were second thoughts on this, the legislation not being passed until 1917, by which time greater inducement was necessary. The Budget of that year complained that many people of means, including companies, had subscribed little or nothing to the last loan. The spur was applied by penal income tax. All taxpayers with not less than £700 taxable income in 1915–16 were required to subscribe to the 1917 loan an amount three times their combined land and income tax (excluding excess profits): those who had not subscribed to the 1916 loan had their 1917 ratio raised four and a half times. In 1918 the ratio for the current loan was to be an amount not exceeding six times the average tax of the previous three years. Moreover, those who had to be directed to subscribe would receive only 3 per cent interest, subject to tax; nor did payment of penal tax relieve them of liability to subscribe.

Though the ethics of tax-free interest were hotly debated, these “stick and carrot” methods had the desired effect, as shown in this table of war-loan subscriptions as at 31 March 1920:

Hand in hand with the policy of financing the war by loan money, there was, from the 1915 Budget, a resolute policy of higher taxation to meet the increased debt charges; the lesson of an excessive proportion of revenue being pre-empted to service debt had been well learned. Moreover, public works, State Advances lending, and the like were curtailed; borrowing for normal purposes during 1914–20 was only £20 million.

Although land tax, customs and stamp duties, etc., were sharply increased, by 1915–16 receipts from land tax were for the first time less than those from income tax. Income tax was increased and extended to farm incomes; customs duties were imposed on the new luxuries of cars and petrol; and an excess profits tax was tried for a year but replaced by more income tax, the top rate of which reached 7s. 6d. in the pound, compared with 1s. 4d. pre-war. Nontax revenue was also increased. (The substantial revenue surpluses that arose were invested overseas; by the end of the war the Government had £17m. in London.)

The change in emphasis to direct taxation was not reversed after the war; income tax rates were kept up. Another milestone was passed in the first full year of peace: by 1919–20, 50 per cent of the outstanding debt had been subscribed internally compared with 17 per cent pre-war. Two-thirds of the loans raised during the war were internal.

Though the public debt slightly more than doubled to £201 million by March 1920, increased taxation more than kept pace for a time. During the three years ended March 1918 debt charges absorbed 22 per cent of total revenue, about 2 per cent less than in 1914 and 1915, but heavy borrowing in 1919 and 1920 for soldier settlement and public works swung the pendulum back again.

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.

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

*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:

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)

*Trading receipts exceeded operating expenses by £11 million.

The fertiliser, trace elements, and lime needs of New Zealand soils can be summarised in a simplified form by dividing (most, but not all) soils into four classes. The two larger classes are derived from so-called sedimentary rocks – greywacke (cemented hard sandstones and mudstones), schist (typically found in Otago), and softer mudstones and sandstones. The latter form the basis of many hill-country soils of the North Island. The class of soils with higher mineral fertility occurs in the drier districts (12–25 in. mean annual rainfall). But it also includes the young soils of river flats and the best of the steep hill country in rainier districts. The class with lower mineral fertility occurs in the wetter districts. The other two classes of soils are derived from volcanic ash. They are confined to the North Island. One class is derived from rhyolitic (pumice) ash erupted during the last 2,000 years. Soils derived from these more recent pumice showers are rather low in available trace elements. The other class of soils is derived from older pumice showers and from andesitic ash. Its supply of trace elements generally appears adequate, but phosphorus fixation is high.

The fertiliser elements needed on these four classes of soils and the prevalence of these needs are indicated in the table below.

*Widespread or severe deficiency.

†Moderately widespread or widespread, but moderate deficiency.

‡Sporadic deficiency.

by Cornelius During, B.AGR.SC., formerly Farm Advisory Service, Department of Agriculture, Wellington.