May 16, 2022

Reflecting on the infamous Black Budget

Why was the 1958 Black Budget so unpopular?

With Budget day approaching, the timing seems appropriate to discuss the infamous Black Budget, which was announced just under 65 years ago.

As we are celebrating BERL’s 65th birthday, it is a great opportunity to reflect on this politically charged period in the economic history of Aotearoa.

During 2010, DB Breweries released an advertisement campaign depicting the disastrous budget delivered by the Labour-led government in 1958. The takeaway from the advertisement was that the budget doomed the government’s popularity. The taxation of alcohol and automobiles was at odds with the psyche of the New Zealand man, and was seen as a reflection of Finance Minister Arnold Nordmeyer’s Presbyterian austerity. DB Breweries got into trouble for misinformation in this advertisement as they did not give a credible depiction of history during a time where New Zealand’s Law Commission were considering reforms to liqour legislation. However the tale of the Black Budget persists, and tends to come up every couple of budget announcements. So, what really happened? 

The Black Budget has not been discussed in depth often. However, two articles by Rob Vosslamber, written in 2010 and 2012 for the University of Canterbury, deep-dive into the Black Budget from a taxation perspective. 

The New Zealand economy was doing relatively well in the early 1950s. Demand for wool was high and the strong price of butter was propping up the country’s farming exports. Pay-as-you-earn (PAYE) tax was in the process of being introduced, which would see take-home income for workers decrease. During the 1957 election, Labour offered a higher tax rebate than National to ease this introduction, essentially writing off a year of tax for most families. When they were in Opposition, Labour had also promised a generous amount of spending to extend the welfare state. 

Labour, led by Walter Nash, won the 1957 election and Nordmeyer became the Minister of Finance. Their victory was bittersweet. Labour was faced with an unfortunate assessment of the economy from Treasury: exports had slumped considerably, and the previous government had overseen a huge increase in imports. The decisive budget that was delivered in 1958 was primarily focussed on reducing New Zealand’s reliance on imported goods. 

Labour was faced with an unfortunate assessment of the economy

The Black Budget was successful in gaining control over New Zealand’s balance of trade. AU$20 million line of credit was arranged with London Bank in preparation for ramping up government spending, and heavy import controls were imposed on luxury goods, consumer goods, and goods that could be produced locally. The budget was not totally conservative as it also increased disposable income for many New Zealanders on multiple fronts. Benefits were increased (including the universal Family Benefit), low interest housing loans for low-income earners were provided, and superannuation was increased. These measures delivered on Labour’s pre-election promises. 

The budget was not totally conservative, as it also increased disposable income for many New Zealanders on multiple fronts

At the same time, the tax increases that characterised the budget included: 

  • Higher rates for income tax (although this was implementing tax policy from 1954)
  • Reductions in personal exemptions from 375 pounds to 300 pounds
  • Subjection of dividends to income tax
  • Increases in Estate and Gift Duty. 

Most infamously were the increases in the taxes on goods: 

  • Sales tax on vehicles increased 100 percent
  • Custom duty on petrol increased 76 percent
  • Excise tax on tobacco products increased by at least 95 percent
  • Tax on alcohol doubled. 

Despite unions typically supporting Labour, the budget was not popular with them and the term “Black Budget” was coined by Federation of Labour leader FP Walsh. Walsh pulled no punches referring to “Reverend” Nordmeyer’s budget as “an attack on the worker’s standard of living”. The Black Budget term was quickly picked up by National leader, Keith Holyoake, as ammunition against the Labour Party. Notably, most of the Labour caucus were not consulted during the budgeting process and had to “glumly” carry the budget into debate. It did not help that neither Nash nor Nordmeyer smoked, drank, or owned a car. 

A popular perception of the time was that the Black Budget was supporting the high cost welfare state. While high welfare costs certainly did not help to loosen the budget, the driving force behind the hard hits on the New Zealand worker was the impact of the collapsing export price of butter on New Zealand’s balance of trade. Rather than hope for the best, Nash and Nordmeyer were decisive in delivering a budget that kept unemployement low and maintained economic growth, which averted a potential economic crisis. Additionally, as those who earned more generally paid more, it was a relatively equitable budget. The price, unfortunately for Labour, was the next election. 

The story of the Black Budget teaches us that decisive budgets can be unpopular, even if they are technically successful. Budgets are perceived to be tied to the values of the party which implements them, and this perception can sway the political battlefield for decades to come. It is doubtful that we will see another Black Budget from either side of parliament. Being decisive is never easy, or popular.