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War Economy

Finance: Two and a half Years of National Income Diverted to War Purposes 1

Finance: Two and a half Years of National Income Diverted to War Purposes 1

With up to 30 per cent of the labour force serving in the forces, it was inevitable that the financial cost of war to New Zealand would take a very high proportion of available funds. In fact, expenditure on the Navy, Army and Air Force reached nearly 12 per cent of the national income in 1940–41, rising to 19 per cent in 1941–42, and to nearly 42 per cent in 1942–43. With all costs incidental to the conduct of war included, as measured by expenditure through the War Expenses Account, the proportion of the national income going to war purposes reached 50 per cent for each of the years 1942–43 and 1943–44.

Chart 16 shows the costs of war expressed as percentages of national income.

chart of expenditure statistics

Chart 16

1 The War Expenses Account as a measure of the cost of war is examined more fully in Chapter 10. Comparison against National Income gives the best indication of the burden of the cost of war. When considering diversion of resources, comparison against Gross National Product is better, as is done in Chapter 10. Note, however, that pay and allowances of special wartime forces were included in National Income, but were not liable for taxes on income.

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The full costs of war over the six years 1939–40 to 1945–46 have been estimated at close to £700 million, which was equivalent to the entire national income for two and a half years, diverted to war purposes.

War expenditure on this scale was naturally not possible without very drastic curtailment of other expenditure, both for consumption and for capital formation. Even allowing for wartime restraints on other types of expenditure, the pressure on available resources was to make it most difficult to maintain reasonable stability or balance in the economy. It was fortunate that the Government was able to win a measure of support from all sections of the community for its stabilisation policy; otherwise, wartime financial pressures on a consumer market depleted of goods and on a labour market depleted of manpower would have led to rapid inflation.

Part of the costs of war had to be met in foreign exchange. Nearly £61 million was paid overseas to meet the costs of the 2nd New Zealand Expeditionary Force. This was a drain on New Zealand's overseas exchange earnings, taking foreign exchange which would otherwise have been available to pay for imports.1 The cost was equivalent to the value of about one full year's imports at that time.

Under Reverse Lend-Lease, New Zealand supplied the United States with goods and services which, for accounting purposes, have been set down at £82 million. A similar quantity2 of goods and services for war purposes was received from the United States under Lend-Lease. Nevertheless the sacrifice for New Zealand was high. All these transactions were concerned with the war effort and a very considerable proportion of the £82 million supplied by New Zealand, and, in effect, exchanged for war supplies, was in the form of goods which would have been available to earn foreign exchange had it not been for the war. In fact, the largescale diversion of foreign-exchange-earning exports to become non-earning supplies to allies in the Pacific was to cause considerable alarm in 1942 and later, when it was feared that New Zealand would be left with quite inadequate funds to pay for needed imports.3

The overall requirements of foreign exchange to meet war commitments probably reached close to £150 million,4 equivalent to New Zealand's export earnings for about two years. Because of

1 Often in the war years it was supply shortages rather than funds shortages which restricted imports.

2 The value for accounting purposes was set higher, but New Zealand kept a tighter control over costs and prices.

3 See also Chapter 10.

4 Only a rough approximation can be made. Information on overseas exchange transactions for the war years is quite inadequate. See also Chapter 14.

page 78 the comparatively fixed nature of export earnings, this external impact was just as great a strain on the New Zealand economy as was the much larger sum of money used for war purposes in New Zealand. Without restriction of private imports, for which machinery had already been provided in 1938, aided by the fact that many of the goods New Zealanders would have liked to import were not available at the time, it might well have proved impossible to find overseas funds to meet so large a commitment. As it turned out, overseas assets, which had been dangerously low in 1930, were to reach quite a healthy level in the later war years.1

1 See also Chapter 14.