Supporting the agricultural sector : rationale and policy

Abstract

This paper provides a framework within which financial assistance to New Zealand agriculture may be discussed. It reiterates a number of principles that can be found in what may be termed a State of the Art paper given by Bushnell, Durbin and Johnson to the Conference of the New Zealand Association of Economists 12 months ago. Assistance to the agricultural sector involves the Ministry of Agriculture and Fisheries, Department of Scientific and Industrial Research, Ministry of Works and Development, Department of Lands and Survey, Rural Banking and Finance Corporation, Maori Affairs Department and the Forest Service. The assistance provided covers a wide range of areas within the sector, mainly related to subsidies of various forms. (A full breakdown of assistance categories and levels for 1979/80, 1980/81 and 1981/82 is given in the Appendix). For the 1981/82 year, total gross direct assistance was $347 million, of which the Ministry of Agriculture and Fisheries was responsible for $340 million. However, total gross indirect assistance for 1981/82 was $472 million which comprised $203 million of expenditure and $269 million of revenue foregone as a result of interest subsidies. Total gross assistance to the agricultural sector was therefore $819 million in 1981/82. After providing for tax payments on income supplements, the net assistance was $693 million. Such assistance levels must be viewed in the context of the size of the sector and the level of activity of the Government in the total economy. Total net Government expenditure in 1981/82 was $11,197 million. Gross assistance to the agricultural sector consisted of 7.3% of whole Government expenditure and 17.3% of agricultural export earnings. Perhaps a more significant comparison is the relationship between gross Government assistance to agriculture and agricultural proprietors surplus; in 1981/82, the ratio was 66.6% (see Appendix). It is therefore apparent that Government assistance to the agricultural sector constitutes a substantial part of total Government expenditure and represents a major part of the agricultural proprietors' surplus. The identification of an appropriate framework within which such assistance can be evaluated is therefore important. This task has been approached from an efficiency viewpoint, whereby government assistance can only be justified in terms of improving the environment in which the market model operates. No attempt has been made to explain the reasons for existing government assistance to the New Zealand agricultural sector as there may well be considerations other than efficiency which have led to the introduction of various assistance measures.

Five possible justifications for financial assistance, including compensation for trade protection, exchange rate overvaluation, internal protectionism, economic instability, and market failure are reviewed, thereby providing a framework for further analysis of the subject. This is followed by an assessment of the appropriate economic policies for the economy, an assessment of the level of present agricultural assistance that could be justified and some views on future assistance policies.