The role of inflationary finance in New Zealand from 1970-1992

Abstract

A government may attempt to add to its resources through explicit forms of taxation such as income tax and through implicit means such as inflationary finance. The first form of finance is perhaps more transparent to the taxed public than that of the second in which the government may actively induce inflation or passively receive benefits from its presence.

Since the early 1970's New Zealand has experienced persistently high and variable rates of inflation which, following the disinflationary policies post 1984, have been substantially reduced and are expected to remain low. This thesis provides an analysis of the extent to which the government has relied on inflationary finance in contributing to its resources over the study period from 1970 to 1992. It is found that during the high inflation years of the 1970's and early 1980's inflationary finance derived from the debt levy was a major source of financial relief for the government. It is also found that since the disinflation period post 1984, such revenues have instead reverted into substantial real expenditures for the government.