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War Economy

Up to Two-fifths of all Output Diverted to War Purposes

page 251

Up to Two-fifths of all Output Diverted to War Purposes

IN the two most difficult years, 1942–43 and 1943–44, over two-fifths of all New Zealand's output was required for war. The preceding chapters give some impression of the wide range of direct wartime controls over manpower, materials and production, and of their effectiveness in allocating resources to war purposes. Essential as were these controls to the successful conduct of a major war, they would certainly have failed, without the backing of an adequate financial policy, to divert enough of the national output to war purposes.

The fact was that, apart from capital formation and normal government expenditure, the people had, at the outbreak of war, incomes high enough to buy and consume more than two-thirds of the national output each year. Increases in government expenditure might achieve an immediate diversion of output to war purposes, but they tended also to raise private incomes, thereby giving the private sector the purchasing power to compete for a larger share of output, and hindering the Government in its efforts to bring about further diversions to war purposes. Thus, quite apart from the obvious inflationary effects of competing for scarce output under these conditions, the system would tend to be self-defeating. In short, diversion on the scale required was unlikely to be possible unless financial policy included a concerted effort to take purchasing power out of the hands of the people.

Even in time of war, when the need for personal sacrifices was widely recognised, extensive reductions of the purchasing power in the hands of the public were not likely to meet with universal acclaim. Furthermore, there was always the risk that the disincentive effects of high taxation would retard the war effort.

page 252

However, any attempt to finance the war with budget deficits,1 for example, by extensive Reserve Bank borrowing, would not only have been inflationary but would almost certainly have failed to divert sufficient of the real national output away from the private sector of the economy.

1 The expression ‘budget deficit’ means different things to different people. It is used here in a broad sense, to indicate a situation where the Government takes less from the public by taxation and borrowing than it pays out.