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War Economy

Lump Sum Payments

Lump Sum Payments

The negotiations in London resulted in New Zealand receiving a lump sum payment of £15,000,000 in New Zealand currency and further payments of £5,000,000 a year for the following four years. page 383 In the Budget statement on 9 August 1945, Mr Nash outlined the further effect of these payments:1

‘Funds for the unusually large redemptions from Loans Redemption Account2 came mostly from the lump sum payments, received from the United Kingdom under a financial arrangement associated with long term contracts for the sale of our exportable surplus of dairy produce and meat.

‘The agreement reached was announced last year, and honourable members will recollect the provision for the payment of a lump sum of £12,000,000 sterling and £4,000,000 sterling annually for four years to be made by the United Kingdom on account of benefits derived from our stabilisation scheme and as compensation for the substantial increase in prices of goods imported from the United Kingdom. Actual production costs on the farm or in the factory payable by the farmer are covered in the prices arranged for the produce, but the United Kingdom recognised that direct production costs would have been much higher if wages and the cost of living and all the other main items in our economic structure had not been held under our stabilisation scheme at a heavy cost in subsidies, mostly to offset higher prices of imported commodities.

‘An important aspect of the matter was that since the original war contracts for our produce were arranged United Kingdom prices for our imports had risen substantially. As the real price we receive for exports is the volume of imports obtainable in exchange, some readjustment was necessary to protect our external position and this was provided in the lump sum payments.’

It is interesting to notice that the United Kingdom Government accepted the second of these reasons for making lump sum payments, but not the first. Some British critics refused to accept either. Writing on financial policy, Sayers says:3

‘The Chancellor felt bound to record his refusal to accept the “terms of trade argument”, but conceded a cash payment of £12 millions in respect of the past and £4 millions a year for the future, as a contribution towards New Zealand's stabilisation subsidies, and in lieu of price increases. Thus New Zealand took the cash and let the doctrine go. The United Kingdom regarded the payment as substantially justified without any dependence upon the unacceptable doctrine, but there was sharp criticism in the Press. Even the Manchester Guardian saw fit to

1 Parliamentary Paper B-6, p. 10.

2 In 1944–45 £6,250,000 of external debt and £15,166,216 of internal debt were redeemed from this account. (Author's footnote.)

3 R. S. Sayers, History of the Second World War: Financial Policy, 1939–45. United Kingdom Civil Series, HMSO, 1956, p. 303. Values used are in sterling. £100 sterling was then equal to approximately £125 NZ.

page 384 use the headline “A Gift for New Zealand”, and the Chancellor felt obliged to make a further statement, in which he underlined the stabilisation subsidies and added that New Zealand's contribution to the common war effort constituted “A very serious problem for New Zealand”.’

The New Zealand Government found it expedient internally to favour the same argument as the Chancellor. It was necessary to decide promptly whether these payments were due to farmers as an extra return for sale of their products or whether they were due to the New Zealand stabilisation scheme which, by holding down farmers’ costs, had enabled them to produce at the low prices specified in the bulk purchase contracts. The Government took the latter view.

Continuing his 1945 Budget statement Mr Nash said:1

‘As borrowing for War Expenses Account had been increased by payment of stabilisation subsidies out of that account and also by the increased prices for war stores bought overseas, the readjustment in New Zealand was made by crediting the lump sum payment of £12,000,000 sterling, and the first payment of £4,000,000 sterling received prior to 31st March last to Loans Redemption Account for repayment of war debt. The whole community will benefit from relief from taxation to the extent it would otherwise be necessary to provide interest and repayment charges on the amount of debt involved.’

1 Parliamentary Paper B–6, p. 10.