Other formats

    TEI XML file   ePub eBook file  


    mail icontwitter iconBlogspot iconrss icon

War Economy

Towards the Welfare State

Towards the Welfare State

Some of the public works projects inaugurated by the Labour Government in the late 1930s were spectacular, and several, notably the Ngauranga Gorge road and the coast road from Plimmerton to Paekakariki, are still outstanding as monuments to New Zealand's most colourful Minister of Works, Robert Semple. However, in these four pre-war years of Labour government probably the greatest influence on the New Zealand economy was the Social Security Act 1938.

Coming into force in April 1939, this Act provided for a system of monetary benefits on a contributory basis and introduced medical, hospital and maternity benefits. Contributions were to be made at a flat rate on virtually all income. Benefits were payable to those with specific needs or commitments, irrespective of the amount of their previous contribution. The most spectacular change was that medical, hospital and maternity benefits were not to be subject to means test and that superannuation benefits, initially at a low rate, were also universal. The universal superannuation benefits were to co-exist with the more liberal age benefits which were still subject to means test; but they would gradually approach the age benefits in value and ultimately supersede them. Family benefits at this stage remained subject to means test, but in 1940 were extended to an extra child so as to be payable for each child after the first, where the income was under £5 a week.1 The Act also extended the range of other types of benefit with the express purposes of providing for all persons who, through youth or age or misfortune, were not able to share adequately in the national output.

The Social Security Act aroused widespread controversy. As we have seen, its immediate effect was to increase the cost of benefits from £6·8 million in 1938–39 to £12·3 million in 1939–40; but the promise of an increasing rate of universal superannuation gave a warning of considerably heavier commitments to come. There were many who thought that the scheme must break down under its own weight, especially in times of unfavourable overseas trading conditions.

1 Previously payable to each child after the second.

page 11

Many interesting comments are recorded in Hansard where, for example, reference is made to statements by the Farmers' Union:1

‘The Union is rightly concerned respecting the large addition to the imposts of the Government and their possible effect upon the already seriously depleted sterling funds in London. The Union also directs attention to the effect it may have upon New Zealand's credit in London; especially so as £17 million of loan money will fall due in the first year the proposed scheme comes into operation.’

The Farmers' Union said, further:

‘We would emphasise that in our opinion to proceed with the scheme along the lines of the present proposals is imprudent financially. The prospect of a possible £15 million increase in general taxation at some future time is a possibility which cannot be viewed other than with the gravest misgivings.’

The Associated Chambers of Commerce were no less condemnatory. They said:2

‘The Prime Minister and the Minister of Finance put forward the hypothesis that maintenance of the same rate of increase in the exports of New Zealand in the next 40 years as in the last 40, would enable the growing costs to be met. We consider that to place any reliance on such a supposition, as a basis for maintaining the scheme, would be reckless.’

The possible future increase of £15 million in general taxation was to prove to be a masterpiece of under-estimation. Twenty years later social security benefits were to cost an extra £68 million a year. On the other hand the volume of exports was to increase by well over 50 per cent in the same twenty years, justifying the confidence of Michael Savage and Walter Nash.3

Chart 3 gives some impression of the impact of Labour's social security policy on the cost of benefits and pensions.

Apart from the fact that they raised average living standards by providing for those with extra needs or commitments, probably the most important economic influence of the new social security provisions was their very considerable redistribution of income from saving to spending groups and the resulting initial tendency for a higher national total of spending and a smaller national total of

1 NZPD, Vol. 252, p. 371. Quoted by Hon. Mr Cobbe.

2 Ibid. Quoted by Hon. Mr Cobbe.

3 In this 20-year period, export prices were to rise by 208 per cent and consumer prices in New Zealand by 119 per cent. The £ in 1959 would have less than half its 1939 purchasing power.

page 12 saving. However, it did not take very long to become apparent that this boost to spending led to an expansion of the New Zealand domestic market and was an encouragement to productive effort.1 In fact there tended to be a secondary redistribution of income back to selling and producing groups, but with a considerable fillip to economic activity in the process. This secondary redistribution was to saving groups, but often to people who, by ploughing back profits, helped to finance development. There were quite strong links between social security and economic development.2
chart of social security statistics

Chart 3

Unfortunately this internal effect was not the only effect of welfare provisions. The resulting higher national total of spending also raised the propensity to spend on imports, and tended to create overseas exchange difficulties in years when export prices were unfavourable.

1 This encouragement to production tended, while there were unused resources, to offset inflationary aspects of the scheme.

2 See also ‘Social Services and Economic Development’ by J. V. T. Baker in Welfare in New Zealand, edited by K. J. Scott.

page 13

Savage himself was the driving force towards the expansion of social security benefits, just as Robert Semple was the spearhead of public works expansion. However, behind the scenes, as Minister of Finance, Walter Nash—to become Prime Minister two decades later—was effecting a dramatic change in Government financing and financial control in order to make all these changes in works and social security policy possible.

New Zealand entered the war with her welfare provisions leading the world and being rapidly expanded. Wartime changes were to be minor, but generally in an upward direction.