The Press FRIDAY, MAY 6, 1966. The U.K. Budget

Press, Volume CV, Issue 31052, 6 May 1966, Page 12

The Press FRIDAY, MAY 6, 1966. The U.K. Budget

British investment in New Zealand is likely to be sharply reduced by the “ voluntary ” restrictions announced in the British Budget by Mr Callaghan. Until details of the measures proposed are announced and the special department of the Bank of England to administer the measures decides how it will interpret the measures, their impact on British investment in New Zealand cannot be measured. It is not even clear from the Chancellor’s speech how “ direct private investment ” is to be defined for this purpose. The New Zealand Government Statistician defines “ overseas direct investment in New Zealand ” as comprising holdings of paid-up capital, intercompany indebtedness, reserves, and “net branch “ assets and other investments ”.

An average of £8 million a year was invested in New Zealand by United Kingdom companies in the 10 years to 1962-63: but of that sum only £3 million was in the form of increased holdings of paid up capital. The retention of profits in New Zealand by subsidiaries and branches of British companies has already been discouraged by the British measures of 1965. Even if all further investment in the form of share capital is stopped by the new measures, the improvement in Britain’s balance of payments will be negligible. But the deterioration in New Zealand’s balance of payments will be proportionately more severe; and the irritation that will be caused, both here and in Britain, will outlive the removal of the 1965 and 1966 restrictions.

The Budget can be construed as antiCommonwealth and pro-European. While Britain is Imposing new restrictions on British investment in the Commonwealth it is removing the 10 per cent surcharge on imports. The import surcharge, from which imports of foodstuffs from the Commonwealth were exempt, particularly affected imports of manufactured goods from the Continent Britain has been severely criticised ever since the import surcharge was imposed, and, with the possibility of an early invitation to discuss joining the European Economic Community, it must have seemed to the Government that removal of the surcharge could not be delayed beyond 1966. In the Commonwealth countries eager to develop their resources with the aid of British capital it will be hoped that these restrictions are no more permanent than the import surcharge, which was first imposed in 1964. The discriminatory rebates to be paid from the new employment tax are also intended to improve the balance of payments. They amount to a subsidy paid by the service industries, supplying mainly the domestic market, to the manufacturing industries, most of which could export some of their output —an export subsidy financed from internal consumption. As such, it conflicts with the spirit, if not the letter, of the General Agreement on Tariffs and Trade: but the import surcharge conflicted with both the spirit and the letter of G.A.T.T. This fiscal novelty will appeal to the academic economist; whether it will prove too cumbersome to administer and too easy to evade remains to be seen. The previously-announced corporation tax (replacing income tax on companies) and betting tax will increase taxation revenue, though not enough to dampen internal demand appreciably. British motorists, smokers, and drinkers have, to the surprise of some, been spared further imposts. But the really notable omission from this Budget concerns Labour’s vaunted “ incomes and prices ” policy. Apparently, after last year’s dismal record in this field, no further attempt is to be made to enforce wage and price stability. Mr Callaghan has pinned his hopes on the restrictions on investment in the Commonwealth and on the employment tax refunds to right the balance of payments. Unless they give early promise of success these measures will need to be supplemented by other, more drastic, steps.