Conclusion

Financial system development contributes to economic growth

The economic performance of New Zealand firms is influenced by a wide range of factors. The role of the financial system is one, but only one, of these. There is robust evidence that the level of development of a country’s financial system has a positive influence on economic growth and productivity. The relationship is bi-directional with economic growth also contributing to financial sector development.

The level of development of New Zealand’s financial system is patchy and could be imposing a moderate constraint on firms’ growth

However, in our assessment, the level of development of New Zealand’s financial system is patchy: a large, efficient and sound banking system sits alongside equity, venture capital and debt markets that in size, depth, liquidity and skill base are relatively under-developed. We have therefore concluded that this lack of development in certain parts of New Zealand’s financial system is probably imposing a moderate constraint on the growth and performance of New Zealand firms.

Any Government action needs to be based on a good understanding of the factors responsible for under-development

Any action by government to try to improve the situation ought to be based on a good understanding of what factors are responsible for under-development of the financial system, and the benefits and costs of specific interventions. Possible factors that could be contributing to this under-development include: New Zealand’s low saving performance; high degree of foreign ownership; lack of very large firms; and co-operatives and state-owned enterprise governance structures. The small size of the economy causes the cost of due diligence and investment analysis to be relatively high. In addition, the cost of capital is high relative to other OECD countries. While there is little direct evidence of capital constraints, the demand for capital could be limited due to a lack of firms’ growth ambition and profitable opportunities.

KiwiSaver and recent tax changes have the potential to significantly increase household savings held in the form of financial assets

The recent announcement by the Government of enhancements to KiwiSaver represents a significant development in savings policy that has the potential over time to lead to a significant increase in household saving, held in the form of financial assets, and some increase in national saving. Another significant measure is the recent changes which reduced the tax disadvantage to saving in New Zealand and foreign equities through collective investment vehicles, including superannuation funds.

Further measures may be justified but in-depth investigation is required to determine whether they are worthwhile in cost-benefit terms

Further measures may be justified but need to be based on sound analysis to determine whether they are worthwhile in cost-benefit terms. In addition, there is also a need to continue to add to our knowledge on trends in the financial system including for example, the effect of regulatory settings on our capital markets and firms’ access to finance and factors driving firms’ decisions on whether to list or de-list from the New Zealand stock market or even in which country to locate their various activities.