Budget watchers divided on where axe will fall

Press, 29 July 1976, Page 1

Budget watchers divided on where axe will fall

By

ADRIAN BROKKING,

commercial editor

A tough Budget tonight, but difficult to pick. On that there is general agreement in Wellington by those close to the sources of political power, those who often have some inkling beforehand of what the Budget max bring.

But otherwise there is a marked difference of opinion between economists and journalists about its contents.

The last time that happened. four years ago, the journalists were right and the economists wrong. Let us hope that this time it will be the other way round, for the journalists’ predictions are bad medicine indeed.

They predict that the Budget will concentrate on the external deficit, because the Government feels that it cannot do much — for political reasons — about the internal deficit. But then they go on to contradict themselves by forecasting that the ante on liquor, cigarettes, and petrol will be raised. In fact, increases of up to 20c a packet of cigarettes are being mentioned.

Taxation will be left this time, they say, because the introduction of National’s superannuation scheme in effect already means an increase in taxes.

The journalists do not see much in the Budget for the farming sector. The farmers will probably keep the fertiliser subsidy, and may count themselves lucky at that, they say. Both journalists and economists agree that the Government has so far only tinkered with New Zealand's problems. The economists’ Budget predictions are a bit easier on the public. This group thinks that over-all taxation will be much the same, with no increases on the indirect side. They expect selective

import controls, except on goods for manufacturing exports and for farmers. Most economists hope the Government has been persuaded that New Zealand’s economic recovery has been faster than it gives itself credit for, and contend that the Government should approach further restraints in a spirit of caution.

They reinforce those arguments with the observation that timing is against the Government. In the absence of guidelines for even mediumterm economic policy, most of the Budget measures will be short term, they say.

It may be accepted that the Budget will pay close attention to the deficit in the balance of payments, which is the persistent problem facing the country. At the heart of this problem is the failure to generate a trade surplus to finance the deficit on "invisible” payments. In spite of a substantial increase in export receipts in the latest year, about S7SOM, or 50 per cent, these were still about S2SOM less than import payments, while the deficit on "invisibles” was 5425 M. Most economists would say that in this area the Government has little room to manoeuvre.

Drastic interference with import schedules is likely to upset many people, especially abroad. One reason why the Budget is later than usual may be that the Government needed time to “square off” some of New Zealand’s trading partners. Another constraint is

that the level of imports necessary to support the social and economic activity to which we have become accustomed is a remarkably constant ratio is gross national product. In the 10 years to 1972 that ratio hardly varied from 20 per cent. Since then it has risen sharply: 23.3 per cent in 1974, 29 per cent in 1975, and 27.9 per cent in 1976. This suggests that severe import controls might substantially depress economic activity. It also gives grounds for thinking that conversely the mere depressing of consumer demand may not of itself suffice to correct the balance of payments. However, I think that we may take it that there will be an increase in import control, on a very selective basis. We may also expect measures to encourage exports, also on a selective basis. Overseas travel allowances and private imports are also likely to come under fire.

Two years ago, the Budget showed an increase in net Government expenditure of about 25 per cent, and last year the rise was about 17 per cent. This year Government expenditure is likely to increase less, say a rise of the order of 10 per cent. Even this relatively modest increase would leave an uncomfortably large internal deficit, maybe as much as S7OOM. A large internal deficit is one of the main causes of inflation, and the Government must pay particular attention to reducing the gap between its expenditure and its receipts. One of the cleanest ways to do this —from a purely economic point of view—would be by increased taxation. I should therefore not be surprised if the Budget raised personal income tax as much as 10 per cent, although perhaps as a temporary measure; a

sort of temporary compulsory saving, as has been done before. If this were done proportionately, as a fixed surcharge on normally calculated tax, there would be equally loud howls from everybody, and a lot is to be said for that.

In attacking inflation, the Government has shown greater resolve to reduce the growth in consumers' money incomes.

Raising the price of liquor, tobacco, and petrol would have a marked deflationary effect However, a “black Budget” of this nature would show’ great political courage, even if the circumstances for such a move are more favourable than they were in 1958. I do not think that the Government at the moment is prepared to stick out its neck that far.