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Saving in New Zealand - Issues and Options

Executive summary

The New Zealand economy faces two key challenges.

The first is to lessen its vulnerabilities ahead of the next economic or financial shock that impacts on New Zealand.

The second is to raise per capita economic performance to achieve future higher living standards for New Zealanders.

No single policy lever is available to comprehensively address these twin challenges.

A successful strategy will come only from a broad set of co-ordinated policies. This document highlights the possible role that saving policy can play in addressing these challenges.[1]

The Government has appointed an independent Savings Working Group (SWG) to provide it with advice on how New Zealand can improve its national saving. This document will be used by the SWG as a basis for discussion and development of its advice.

New Zealand as a whole appears to save less than other countries in the Organisation for Economic Co-operation and Development (OECD). One measure of saving performance, our net national saving rate, has been consistently and significantly below the median of countries in the OECD. Government has contributed positively to national saving over the past 15 years (around 4 percent of GDP on average). By contrast, net private saving (business and households) as a percentage of GDP averaged around negative 1 percent over the same period, suggesting that New Zealand households and firms have been “dis-saving”.

In the wake of the global financial crisis, these trends have recently reversed: general government has become a net dis-saver, reflected in its annual fiscal deficits, while the private sector has become a net saver. Overall, our net national saving rate has remained low throughout the period.

We have a good understanding of the drivers of government saving and dis-saving. The drivers of individual and firm saving decisions are less clear.

What seems uncontroversial is that government policies can have intended as well as unintended impacts on individuals' saving decisions. There may be scope for policy reform to limit distortions arising from government policies that act to encourage private dis-saving.

Lifting the level of national saving should not be seen as a goal in its own right. Improved saving performance would help address economic imbalances, reduce New Zealand’s indebtedness and possibly contribute to improved economic growth.

Low rates of national saving relative to domestic investment are reflected in New Zealand's persistent annual current account deficits, but these are not of themselves a concern. Foreign investment is a necessary and important source of funding given that national investment exceeds saving. However, persistent current account deficits over many years mean that the shortfall in saving has led to a significant accumulation of overseas liabilities.

The country's net foreign asset position (also referred to as the net international investment position) - what it owes the world - is now relatively more negative than elsewhere in the developed world.

Heading into the recent global financial crisis in 2008/09, New Zealand's net foreign asset position stood at around negative 84 percent of GDP while the government had been running surpluses.

Today, the net foreign asset position stands equal to around negative 89 per cent of GDP. By 2014, it is projected to exceed 100 percent of gross domestic product (GDP). Projections are for general government to be dis-saving until 2016.

The Treasury's view is that this outlook leaves New Zealand more vulnerable to an unforeseen change in investor sentiment. Many countries in similar positions to New Zealand are now experiencing fiscal and economic stress.

A key role for the SWG will be to assess the extent of New Zealand's and New Zealanders' vulnerability, and to make recommendations on practical measures that will reduce that.

A package based on some of the options outlined in this report could, over the long-term, be expected to improve New Zealand's national saving which would, in turn, diminish the risk of any future downturn in investor confidence.

This suggests the following continuum of policy choices.

Higher saving through higher growth

The SWG needs to form a view about the relationship between people's income levels and their saving performance. A focus on economic growth (output per worker) is vital to any successful effort to strengthen national saving. Also, higher growth rates increase the capacity of the New Zealand economy to service larger current account deficits while stabilising the net foreign asset position.

Policies to support economic growth are a much broader area of debate and are not covered in this discussion document. However, the link between the Government's growth agenda and improving national saving should be noted. It is important that any package of policies to improve national saving should support rather than undermine the Government’s growth agenda.

Government as saver

The clearest policy lever is any government's fiscal strategy, which determines how much it can save. Policy choices that lead to a significant change in government saving could take effect within a couple of years. There are a number of choices for the Government: how quickly it can move back to surpluses; the extent to which its saving can be sustained over a longer period; and how changes around individual spending areas will influence household saving decisions.

Getting the saving environment right

Existing government policies have intended and unintended effects on individual saving choices. The SWG may want to consider areas where current government policy creates distortions against individual saving:

  • Tax distortions – international evidence suggests that tax is likely to have only a modest impact on how much people save and invest, but that it can have a very significant impact on how people save and invest. The tax system contains two main types of distortions. First, different forms of saving and investment are taxed at different rates. Second, savings income that accumulates over a long period is taxed at high effective rates exacerbated by inflation. This document sets out several options for possible tax reform aimed at reducing saving and investment distortions: reduce income taxes; index the tax base for inflation; provide a discount on interest income; a dual income tax; or introduce a capital gains tax.
  • The impact of government expenditure and transfers on saving – these affect how much individuals need to save. The two areas considered most likely to reduce the need for household saving are student loans and New Zealand Superannuation (NZS). The Government is committed to retaining the current settings of NZS and it has been excluded from the terms of reference of the SWG. The Government has also said it is committed to retaining interest free student loans and the Group is unlikely to consider the student loan scheme in detail. These two areas are discussed in order to cover the full suite of options as part of the broader debate.

Options to subsidise or compel saving

The SWG may also consider options for the Government to incentivise or compel individuals to save. Many governments provide some form of subsidised savings accounts; these are often linked to retirement savings. New Zealand subsidises retirement saving through KiwiSaver, which includes an automatic-enrolment mechanism and a fairly significant subsidy. Some other countries subsidise forms of saving through tax-preferred savings accounts.

Depending on how it is designed, compulsory saving could raise national saving though there may be trade-offs against other objectives. Compulsory saving raises difficult wellbeing and fairness issues. Reaching a view on compulsion will therefore require careful discussion and consideration.

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