It has been decided that now all the local sensational fuss has died down after the presentation of the budget, that a few comments from those involved in the field of economics and politics would be useful. We intended to present two articles of criticism of the 1961 budget, the first from a "pure 'point of view and the second from a political angle.

Mr Catt is well known to those in the economic "sphere of action" and lectures at the University. We include his article.

Mr Nordmeyer, M.P., was invited to contribute but unfortunately we have not yet received his contribution.

Mr. Catt writes:

Readers of "Salient" will, I assume, be aware of the common-place axiom of modern economics that when drawing up his annual budget, a Minister of Finance must ensure, not that it is in balance,; but rather, that is counteracts any undesirable tendencies that may exist in the economy at the particular time More specifically, when there is excess demand in the economy, he should budget for a surplus and when there is a deficiency of demand he should budget for a deficit. In the present New Zealand context it is clear that there is a high degree of excess demand —(for example, imports so far this year have amounted to £146 million I which is about 20 per cent, more than we can afford)—and, as such, I a markedly surplus budget was I called for. Instead we have had a budget which is virtually unchanged from that of 1960, which was brought down at a time when internal demand was at a much lower level. Indeed, such changes as have been made this year will tend to increase excess demand rather than reduce it.

The Necessity of Anti-Inflationary Measures

Those who have breathed a sigh 'of relief at Mr Lake's leniency in not taking corrective action are short-sighted, in the same manner as a cancer patient who delays the necessary operation. For just as delaying the operation only means that it will be more harrowing in the end, so delay in correcting excess demand will lead in the end to the corrective action having to be. more severe and more likely to disturb production and create unemployment. When excess demand first develops, its removal can be virtually painless, because the maladjustments within the economy will be small and easily corrected by a few measures aimed principally at the amount of credit being granted by banks and other institutions. But once it has been in existence for some time fundamental changes come about as more workers tend to be employed in firms which depend on the state of excess demand for their high level of activity. If this has gone on long enough, it then becomes a much more painful task to restore normality because a larger part of industry will find that it has become over-expanded during the boom. For this reason it is time the New Zealand electorate recognised that early anti-inflationary measures are not the actions or spoil-sports, but are I m fact necessary if real hardship is not to be inflicted at a later date.

Reduction of Trading Bank Advances

What has been said so far assumes that the budgetary corrective action which is called for has merely been delayed. The situation becomes much more serious il the intention is hot to use budgetary restraints at all. For this can only mean that the Minister will have to make such corrective measures as are to be taken much more severe. For example, the usual alternative to the Government's achieving a surplus is to reduce the level of trading bank advances, and a common assumption now being made is that the Minister intends to make this his main line of attack. While it is true that New Zealand's present difficulties do stem mainly from the fact that over the past twelve months trading bank advances have risen by about 25 per cent. it does not follow that appropriate policy is merely to reverse the p roc ess. For there is no guarantee that those firms who borrowed most during this period would be those whose advances would be curtailed most. Moreover, and this is more important, borrowers do not all have equal access to other sources of funds. As a result, when undue emphasis is placed on reducing bank credit, the necessary contraction tends to be concentrated upon a narrow range of smallish firms whose sole source of credit is the banks, other firms being able to escape because of their access to non-bank credit.

It is also commonly believed that a considerable surplus will be achieved by means of reduced government expenditure. I am rather sceptical of this. By and large, the present levels of expenditure cannot he substantially reduced, either because the Government is committed to maintaining them or because, relative to economic and social desirability, they are already trimmed to the bone. It is a mistake to assume that there is any considerable waste in Government expenditures, as anyone who has seen a, Treasury attack on Departmental Estimates will know.

Action Delayed

The final justification sometimes given for the failure of the Budget to tackle present problems is that the Government is going to over-come the basic disequilibrum over a longer period, and in the mean-time it will borrow abroad. This' attitude has much to recommend it, but it does not justify the failure to begin to take action. The longer this is delayed, the greater will be the maladjustments that will have to be corrected within the economy. Moreover, we cannot expect overseas lenders to bail us out indefinitely, and, as such, the longer it is before corrective measures are started, the more likely it is that time will run out and drastic corrective action becomes inevitable.

Unemployment Ahead?

For all these reasons, it seems to me that the 1961 Budget fails to meet the requirements of good fiscal policy. I hope I shall be proved wrong, but my fear is that by 1962 a situation will have developed which is not capable of solution without considerable unemployment. If this should occur, it will be largely because the Government has failed to come to grips with the basic problem of excess demand soon enough and over a wide enough field.