THE NATIONAL INCOME

Press, Volume LXXIV, Issue 22347, 10 March 1938, Page 10

THE NATIONAL INCOME

Analysis of Statistics

[B y. Professor A. H. TO<?KKR, Canterbury University CollefceJ^

This is the first of two articles by Professor Tocker commenting on the recent statement by Mr Colin Clark, the eminent Cambridge economist and statistician, about New Zealand s national income and its distribution.

Estimates of our national income and its distribution, recently given by Mr Colin Clark, of Cambridge University, are so unusual and so challenging as to deserve fuller examination than they have yet received. According to press reports, Mr Clark made three statements, that are, to say the least, surprising:

The National Income

1 That for the year ended March '3l 1937 the national income was almost exactly £2oom.

2. That the net income of the farming community for lU6b-6< was £som., and that the farming community, numbering M per cent, of the population, enjoys 30 per cent, of the income.

3 That the proportion of national 'income taken in taxation is lower than in. most other countries.

In the absence of definition, both of the national income and of the methods and sources used in its computation, which is scarcely to be expected in a short press interview, it is difficult to give any real meaning to these estimates. But the statements made appear to be exceedingly rash as well as dogmatic, and, in the one case where the method of computation is given, so inaccurate as to cast grave suspicion both on the figures given and on the deductions drawn from them. The Farmers' Share Mr Clark is reported to say, "The income of the farming community m 1936-37 amounted to approximately £63 m.. of which approximately £6m. went in wages and £7m. in mortgage Se" having £som. as the net income of the. farmers/ He estimates the national income at £2oom. ana States that the farmers got 30 per cent, of that income. It happens that £JSOm., given as farmers' net income, is 25. pei cent., not 30 per cent., of £2OO m., while £63 m.. given as fanners'gross income, is 31* per cent, of £2oom Where then does the 30 per cent come from? The deduction, that per cent, of the people (the farmers) get 30 per cent, of the income, is demonstrably wrong on Mr Clark s own figures. . , But no one with any acquaintance of farming in New Zealand could accept the figure for farmers' net lncome,obtained by subtracting wages and mortgage interest from gross income. The net income is gross income less all the costs inourred in producing that income. The statement made infers that farmers have no costs to meet other than wages and mortgage interest paid. It ignores all other payments for items such as upkeep and maintenance on the farm, purchase of manures, depreciation and replacement of stock, etc.—l am told the average dairy cow is milked for only about six years, and hence the whole herd has to be replaced about every sixth year. It may omit all payments for contract work done in ploughing, harvesting fencing, draining, etc., as well as rent, rates, and taxes, and interest on loans other than mortgage. It is not possible to say what total farm expenses may be at the present time, but in an article in the "Economic Record" for December, 1936, Mr F. B. Stephens estimates them at from £s3m. to £s7m for the years 1925-26 to 1930-31. Mr Clark puts them at £l3m. for 193637. If Mr Stephens's figures are even approximately right for the present time, then "Mr Clark's omissions from farm expenses may be as much as £4om., and his figure for net farm income £4om. too high. If the estimate of £som. is £4om. too high, then farmers, accepted as 20 per cent, of

A REPLY TO MR COLIN CLARK

the population, get only £ 10m. net, or 5 per cent, of the national income given! Mr Clark's error in calculating net farm income, is manifestly so large that his conclusion regarding the farmers' share of total income must be regarded as worthless. Further, all payments for farm expenses should be counted in the mSomes of the people who receive them, but not in farm incomes, when estimating national income. Since many of these have been included in net farm income, they have probably been counted twice, and since the error involved here may be as much as £4om_ it is possible that the estimate of £2oom\ for the national income may be £4om. too high on account of this error alone.

The first difficulty of the national income lies in deciding what it means, and what it includes ; and reasonable definition, would be. The aggregate of the net incomes after aE related costs have been met, of all the individuals composing• the naUon. The New Zealand Official Year uoot estimates the aggregate private income, and is commendably diffident about assigning any exact meaningto national income. The 1957 Year book, o 643 may be abridged as follows: "Concents of national income are both numerous and widely divergent The concept of aggregate private income ... as used here . . . comprises the sum total of the incomes of all the individuals of the Plus the undistributed portion of Smpany profits." It includes; also» au allowance for items such as free housing and free fuel and light It is? not claimed to be the national income but™ is computed from year to year, on the basis of receipts of employment taxation, and affords a %ery valuable year to year comparison. The offlcS estimate is regarded as possibly on the conservative side. It does not include public income but Mr Stephens, in the "Economic Record, puts the net income from Sgte and municipal trading, the, bestprerieoression year, at about fclm. a jear. In addition; there may. be some ; evasioni of tax and some income jmssed. On the other hand, aggregate private incoml computed from employment tax Returns? would consider incomes before, not after taxes are paid. Hence taxes used to provide incomes from soml pensioners, etc.. wouldl probably be double counted. It would be tedious to try to check up on all such hems but they illustrate the technical difficulty and complexity of computation? and they point the fact that there may be double counting to offset tne items excluded. For present purposes, therefore, we may accept the aggregate private income, as officially computed, as a reasonably close approximation to what the national income would be if u were known. The official figure given tor 1935-36 is £l2O m.. of which £ 1022 m. is income subject to employment tax. the rest is made up of estimates ot exempt income. For 19*6-37 it would be larger. Between 1935-36 and 1936-37 the value of production, as officially estimated—again the figures are comparable from year to year—increased from £114.2 to £ 136.1 m., or by 19 per flent We may reasonably expect the in income to be similar to the in production. The addition of. loftier cent, to the aggregate private iK£Kme of 1935-36 gives us £l43m. as the figure for 1936-37. This should be close to the official figure for the aggregate private income, if and when it is computed for 1936-37 by the methods used in preceding years. ' Mr Clark estimates the national income for 1936-37 at £2oom. He may be right. We do not know what he means by national income, how he has computed it, what are his sources, or to what extent, if any, he has counted the same items twice. We suspect from his computation of net farm income, that he has made at least one large error of double counting and hence of over-estimation. But if Mr Clark is right; then it appears that the officials responsible for collecting employment tax are missing about 25 Der cent of the taxable income, and that they could collect about one-third more lax if they found this missing income. And most of us would trust the tax collectors to find the income rather than a visitor who was in the country too short a time to be familiar with our statistical pitfalls, and who has shown himself to be decidedly casual in matters of arithmetic. (To be Concluded.)