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Saving in New Zealand - Issues and Options

Section A - Saving policy in context

This paper focuses on how increased national saving can reduce risks to the economy and improve growth prospects

The implications of national saving for economic growth and risks to the economy are the focus of this paper. It does not explicitly address other saving-related objectives such as retirement income adequacy. However, policy options to raise national saving should be considered in the context of not only growth and rebalancing objectives but also in terms of the potential interplay with other objectives, such as equity. This paper will partially address some of these issues as policy options are laid out.

Individual private saving decisions reflect personal circumstances, with a myriad of choices that change over time. Individuals generally make the best choices for themselves. What seems uncontroversial is that government policies can have intended as well as unintended impacts on individuals’ saving decisions.

The choices people make at an individual level can affect New Zealand's overall indebtedness, the composition of economic activity, and growth prospects

These individual saving decisions add up at the national level and may have negative implications for economic performance, especially if they have been biased by poor policy or information. These negative implications include distortions in the type of economic activity that takes place, imbalances in the economy represented by the accumulation of high levels of economy-wide debt, and a reduced capability of the economy to grow over time.

This document is interested in the role that government can play in improving national saving. This can be: directly, whether by raising its own saving or by encouraging saving through subsidisation or compulsion; or indirectly, through overall government policy settings (such as tax) that might negatively impact on private saving decisions.

Saving policies are part of a broader package of growth-enhancing policies within the Government's growth agenda

Finally, it is important to consider saving as just one part of a very complex economy. While increased national saving could contribute to a stronger and more balanced economy, there are many other - potentially more significant - factors that should also be considered. For example, the quality of New Zealand's capital stock, the efficiency of the overall tax system, and the quality of government spending and regulations all have significant influence on the economy.

Why increasing saving matters

Higher national saving would reduce the amount New Zealand needs to borrow offshore

Lifting the level of national saving is not a goal in its own right. Higher national saving means that more domestic funds are available to invest in productive activity at any given interest rate. By increasing the proportion of funding from domestic sources, it also has favourable implications for the nature and extent of imbalances in the economy. This is especially the case given the government’s objective to grow the economy more quickly, which is likely to require higher levels of investment.

Three imbalances stand out for New Zealand:

  • high and persistent current account deficits
  • high private sector debt – particularly household and farm debt, and
  • a significant structural fiscal deficit.

These imbalances are reflected in New Zealand's net foreign asset position, which is one of the most negative in the developed world, while property prices and household balance sheets are over-extended.

New Zealand's level of international debt is one of the highest in the developed world, and is similar to that of countries facing significant economic stress

Many countries with similar imbalances to New Zealand are now experiencing severe fiscal and economic stress. It is fair to say that New Zealand's strong institutions have to date contributed to the resilience of the economy, helping to prevent it from experiencing similar stress. For example, Figure 1 shows that New Zealand's low government debt going into the global financial crisis was likely to have been an important differentiating feature from other countries struggling to cope with high international imbalances. But since the start of 2008, New Zealand's net foreign asset position has deteriorated further from negative 84 percent of GDP to negative 89 percent. Moreover, New Zealand now has a high structural fiscal deficit, and increasing public sector debt.

Figure 1 - Government debt and net foreign asset position (2008)
Figure 1 - Government debt and net foreign asset position.
Source: OECD, IMF, Treasury

International debt cannot continue to grow indefinitely

If these imbalances and trends are not arrested, the potential future loss of investor confidence may grow.

  • The risk to the economy associated with these imbalances can also weigh against economic confidence which, if significant, would reduce investment, further holding back the economy’s potential growth.

It is not just through imbalances that national saving can impact on growth. Growth may be indirectly influenced through lower interest rates and linked to lower interest rates, a lower exchange rate. There is also some evidence that a higher national saving rate is associated with the development of capital markets.

Policies to address imbalances through increasing national saving are mostly complementary with growth-focused policies over the medium-term. Promotion of national saving, depending on how it is done, may have adverse short-term growth impacts. Lower consumption demand may not be immediately offset by growth in investment and exports, which can be expected to occur over the medium-term. Promotion of growth itself can also lead to a medium–term trade-off with imbalances. For example, higher investment growth, if not accompanied by higher saving, would need to be financed from abroad, increasing international liabilities, at least temporarily.

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