THE PRESS TUESDAY. JUNE 2. 1981. An inflationary deficit

Press, 2 June 1981, Page 20

THE PRESS TUESDAY. JUNE 2. 1981. An inflationary deficit

A record of sorts was announced last week: a Budget deficit (before borrowing) of $1525 million. It is not a record of which the Government can be proud: indeed, the Minister of Finance (Mr Muldoon) could protest that merely to describe the deficit as a “record” without placing it in its proper perspective would be misleading, at least.

So, to put the deficit in its context (even if the context is not, perhaps, the context exactly as Mr Muldoon sees it), the deficit in current terms, like all money figures these days, must be allowed to be, in part, an inevitable consequence of inflation. (In part, too, the deficit is a cause of inflation, as is argued later in this article.) In the case of the Government’s spending, mainly on wages and salaries of public servants, the increase of 20 per cent in the year ended March is barely above the provisional 18 per cent to 19 per cent increases in wages and salaries for appropriate categories of awards and agreements in the 12 months to December, 1980. Only by reducing staff could this extra spending have been reduced.

Tax revenue, as Mr Muldoon pointed out, was 17 per cent above the 1979-80 level, but 1.7 per cent less than forecast in the Budget. “The reduction results mainly from a fall in income tax receipts from companies.” Of the total tax revenue of $7051 million in 1980-81, no less than $5299 million, or 75 per cent, came from income tax — one of the highest proportions in the Western world. Mr Muldoon is well aware of the political advantages to be gained from a drop in rates of tax applicable to individual incomes, but equally conscious of the need to make up revenue foregone from this source by some other form of tax. Hence the urgency of the debate about a “trade-off” between wage increases and rates of income tax. If Mr Muldoon can persuade the trade unions this year to accept a deal along these lines, that would be a valuable precedent for the next desirable tax move: a reduction in income tax offset by an increase in taxes on

spending (customs, sales tax, beer duty, motor spirits or highways taxes). The snag is that taxes on spending put up prices, and higher prices normally incite trade ■ unions to seek higher wages; but if they can be persuaded that most of their members will save as much in income tax as the extra they have to find in other forms of. taxation, the price-wage spiral may be broken or at least checked.

One of the most significant measures of the impact on the economy, of a Government deficit is the comparison with the Gross Domestic Product. The latest deficit is equal to 6.3 per cent of the G.D.P. estimated for 1980-81, compared with 4.9 per cent the year before, and 8.3 per cent in 1978-79. Ominously, the signs point towards an even larger deficit, in proportion to G.D.P., in the year ending next March, as the General Election is due some four months before the end of this fiscal year. The records show that the deficit in the last -three election years has been as much as double the deficit in the year before the election.

When the Government spends more than it recoups in tax revenue it is, in effect, injecting more money into the economy, thus adding to inflationary pressures. The reduction of inflation should be, in the view of the Economic Monitoring Group, the Government’s top priority in 1981-82. In its latest report to the Planning Council, in April, the group recommended that the Budget deficit for 1981-82 be “contained within 5 per cent of G.D.P.” Only an abrupt change of fiscal direction in the Budget, if not before, can produce that result. The 'free-spending policies being advocated in election year by Labour and Social Credit would certainly not permit any reduction in the Budget deficit. It will be a test of the National Government’s electoral confidence to see whether it attempts to match the spending promises of its political opponents, or whether it is to make an effort to achieve the target set by the Economic Monitoring Group.