First World War
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:
|Year||Loans Authorised||Raised in New Zealand||Advanced by United Kingdom Government||£(million) Total Raised|
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.