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New Zealand's saving picture (continued)

Private sector

The private sector is made up of businesses and households.

Business debt levels have increased in recent years

Debt levels in the business sector increased as a share of GDP through the mid-2000s. Strong earnings growth and rising asset values helped support this level of debt. However, over the past two years, declining asset values and weaker earnings have increased the burden of this debt, leading many businesses to try to reduce debt (lending to businesses has been contracting since mid-2009).[2] A similar pattern has been observed in the household sector, but on a larger scale. Since households ultimately own most New Zealand businesses, the following sections will focus on household saving and their balance sheets.

Household assets are made up of two main elements: financial assets (such as bank accounts, shares, superannuation funds etc.) and non-financial assets, mainly housing.

Relative to financial assets, housing is a very important component of household balance sheets.[3] In 2009, using Reserve Bank data, around 70 percent of net household wealth was accounted for by housing. This was up from 58 percent in 1992 and is likely to reflect the increase in house prices that occurred over that period. Property prices over the past decade have risen significantly (more than 50 percent in real terms during the last 10 years).

Comparing New Zealand to other countries is difficult because of differences in data collection and presentation. Figure 4 uses OECD data to show the share of gross housing to household net wealth (the sum of financial and non-financial assets less liabilities) across several countries, as well as gross housing as a percent of household disposable income.

Figure 4 - Cross country household wealth data (2007)
Figure 4 - Cross country household wealth data (2007).
Source: OECD, RBA, RBNZ

Figure 4 shows that in New Zealand, the ratio of housing to total net wealth is the highest among comparator countries. It is also worth noting the lower share of housing seen in those countries that did not experience a significant house price boom over the period, such as Japan. Figure 4 also shows that at about five times disposable income, New Zealand's housing to disposable income ratio is comparable to Australia and below that of Italy, France and the UK. New Zealand households hold a relatively lower stock of financial assets compared with other countries.[4]

Household debt levels are high and have doubled in the last 15 years

High debt is the counterpart to very low levels of private saving over a considerable period of time and high property prices. New Zealand's household debt levels doubled in the last 15 years as a fraction of disposable income. They are now around 160 percent of disposable income. That means for every dollar earned, we each owe on average $1.60.

Much of this additional borrowing has been secured against property. Furthermore, as rising property prices have led consumers to feel wealthier, debt has also been used by households to fund increased consumption, while property vendors have also consumed some of the proceeds of their sales. Government and private overseas debt totals around $244 billion (130 percent of GDP for the March quarter 2010). A vast bulk ($219 billion or 117 percent of GDP) of total overseas debt is intermediated via the banking system, and shows up in national statistics as high offshore corporate debt.

Government sector

Saving by general government has declined sharply, increasing the level of government debt 

The recent decline in saving by both central and local government has led to increasing levels of government debt. New Zealand now faces a significant structural fiscal deficit that the Government has committed itself to reducing. Although New Zealand's public debt levels are relatively low by OECD standards, the change in the structural fiscal balance - from surplus to deficit - has been large by OECD standards (Figure 5).

Figure 5 - General government structural budget balances in OECD economies
Figure 5 - General government structural budget balances in OECD economies.
Source: Treasury, OECD

Note: Source is the OECD's cyclically-adjusted estimates in Economic Outlook 2010. The New Zealand estimate has been adjusted by Treasury to reflect the latest Budget. The deterioration is measured by comparing the 2007 CAB with each country's lowest CAB over 2009-2011.

Most of the fall in government saving reflects policy-driven spending increases and tax reductions, rather than the temporary effects of the economic cycle

Most of the deterioration in the Government's fiscal position has been driven by underlying structural factors including:

  • increased government expenditure, and
  • falling government revenue as a result of income tax cuts in 2008 and 2009.

It also partly reflects the impact of New Zealand's recession over 2008 and early 2009, plus subsequent sluggish economic growth.

Notes

  • [2]Reserve Bank of New Zealand (May 2010), Financial Stability Report.
  • [3]The extent to which housing represents national saving depends on a number of circumstances. An increase in the value of the house is ‘saving’ using a stock measure, but it is not ‘saving’ in a flow sense, such as paying off the mortgage funded from offshore.
  • [4]Figure 4 suggests that New Zealand households' relatively low stock of financial assets does not reflect an ‘over investment' in housing (because the stock of housing wealth is not unusually high). Rather it is more a reflection of the low rate of household saving more generally. Later sections in this paper illustrate the fact that investment in housing has been tax preferred over investment in debt or equities, and this helps explain New Zealand preferences for holding wealth in the form of housing rather than financial assets. Even so, these tax distortions do not explain New Zealand's low rate of national saving, other than to the extent that the wealth (or collateral) effect from rising house prices encouraged more consumption at the expense of saving.
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