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Saving in New Zealand - Issues and Options

Section B - The policy options

Forming a policy package to boost national saving

A number of complementary policy changes are likely to be needed to achieve a significant and sustained increase in national saving

A package containing a number of the options outlined in this report could, over the medium to long term, add up to significant desirable changes in the structure of the New Zealand economy and national saving. In forming such a package, the SWG will need to consider how the package fits together, in particular:

  • The timing of change – fiscal consolidation is an option with more immediate effects. Most of the other options would lead to gradual changes in individuals’ saving habits that would build up over time.
  • How to form a package of reinforcing elements to change entrenched saving behaviour. This is likely to require a change to government saving, changes to policies that currently hinder people saving, and may require specific saving incentives or compulsion.
  • The fiscal impact of the overall package has to be considered; cost reductions in other areas could provide fiscal room for initiatives designed to increase national saving. However, lower spending overall is an essential ingredient in achieving higher government saving that boosts national saving.

Guidelines for change

In weighing up and comparing policy options for inclusion in a reform package, it is worth referring to a set of principles or guidelines. There is no one “right” set of guidelines to use. The following are suggested as a starting point:

  • Objectives:The package should reduce New Zealand's vulnerability to externally generated economic or financial shocks - especially by reducing the current account deficit and/or net external liabilities. It should also lift New Zealand's long-term rate of growth, or at least not harm it.
  • Effective: The package should have a high probability of leading to an increase in net national saving and overall, should be welfare-enhancing taking its broad social costs and benefits into account. Each component of the package should be mutually reinforcing for the package to be effective in increasing net national saving.
  • Efficient:The package should allow resources to flow to their most productive use in ways that minimise compliance, administrative and “deadweight” costs, and must not introduce new, unintended distortions between different saving and investment classes.
  • Fair: The package should take into account distributional impacts, ie, it should avoid negative impacts on groups of people that would disadvantage them relative to others given their particular circumstances.
  • Predictable: The package should be easily understood by the public and its effects transparent, so that individuals and firms can plan for their futures with confidence.
  • Stable and enduring: The package should be expected to receive a high degree of public support so that it can realise its benefits over the medium to long term.
  • Affordable: The package should be affordable to individuals, families, businesses, taxpayers and the Government.

No one policy option is likely to satisfy all such conditions simultaneously -a package of measures that can do so will be required.

There are a number of possible reasons why household saving is low

Expenditure and revenue drive government saving. It is more difficult to understand why New Zealand household and business saving might be low. This is something that needs to be better understood so that policy choices address factors that are behind individuals' choices to save. It is likely that overall household and business saving in New Zealand could be low due to a combination of the following factors:

  • Lower incomes – New Zealanders have, on average, lower incomes than people in many of the countries we typically compare ourselves with. This limits our ability to save. New Zealand households may also be seeking to emulate a higher standard of living than our incomes allow.
  • Incentives to save – taxes may be distorting people’s saving and investment decisions.
  • Capital market development – New Zealand has less developed capital markets than many other countries. This means that people have more limited domestic investment options. Many of New Zealand’s largest firms are not publicly listed as they are State Owned Enterprises, in local government ownership, or are held in restrictive forms, eg, co-operatives.
  • The need for precautionary saving – for unexpected events such as sickness or unemployment. New Zealand has a comprehensive safety net, which means people might feel less of a need to save.
  • Retirement income settings – New Zealand provides near-universal publicly-funded superannuation. Many OECD countries have a large component of superannuation met from save-as-you-go compulsory savings schemes.
  • Behavioural factors – these are not unique to New Zealand, but literature suggests that there are a number of behavioural factors that may lead to individuals saving less than they would otherwise choose to (such as inertia and dislike of complexity).

Government policy choices clearly form a key part of the environment that influences how individuals save. The following sets out a potential spectrum of government policy options, which need to work together to drive a change in national saving.

Policies to increase national income should help raise national saving

  • Higher saving through higher growth - income levels are a significant determinant of how much individuals save. If the Government wants to achieve a significant increase in national saving, the broader policy agenda should support this goal. Likewise, the Government's saving policy package should have a positive impact on economic growth as well as boosting national saving.

The Government's growth agenda

The Government's medium-term agenda is designed to lift the long-term trend rate of growth. It is based around six policy drivers and aimed at delivering the following medium-term shifts:

  • A public sector that is substantially more effective with fewer resources than at present, where stronger commercial disciplines are imposed on both existing and new spending, where new forms of delivery are actively tested to ensure that the right things are done and done well, and where the balance sheet is actively managed.
  • A tax and welfare system that gives stronger support to productive investment and saving, removes barriers to participation in work, and encourages people and capital to shift to more productive activity.
  • A world-class regulatory environment that opens up more business opportunities to individuals and firms, and enables resources to flow freely to their most productive uses.
  • Investment in economic and social infrastructure - public and private - that is more responsive to economic demands, user-pays is applied where practical, and infrastructure is better managed.
  • A supply of skills from the school system that show improvements in overall skill levels over time, including a significant reduction in the rates of poorly-achieving school leavers, and a tertiary system that meets the skill needs of a growing economy on an affordable basis.
  • A stronger international focus on science, innovation and trade policies with increasing international flows of people, goods, ideas and capital, stronger linkages between researchers and firms, and a shift of resources from the non-tradeable to the competition-exposed sectors.

The clearest way for government to increase national saving is to increase how much it saves

  • Government as saver - the most direct choice the Government has is how much it saves. Fiscal policy changes may take effect more quickly than other elements of a policy package to boost national saving. Fiscal policy changes should be consistent with the broader package, as some areas of expenditure are positive for household saving or economic growth.
  • Getting the saving environment right - government policies can distort individuals' decisions about how much or how to save. In particular, the tax system can distort saving decisions and some areas of government expenditure can have a significant impact on private saving.

Saving subsidies or compulsion could increase private saving but raise wellbeing and fairness issues

  • Options to subsidise or compel saving - the government can subsidise or compel individuals to save. Depending on design, subsidies and compulsory saving may increase national saving. However, compulsory saving raises difficult wellbeing and fairness issues. This means that coming to a view will require careful consideration.

Broader options

Finally, there are broader areas that have the potential to influence the saving environment. These are noted as part of the broader context but are not discussed further in this document:

  • Macroeconomic prudential and monetary policy settings - good institutional settings are a necessary condition for household saving.
  • Investment options and financial literacy - New Zealand's capital markets are relatively shallow and many of our largest companies are owned by central or local government, or owned in restricted forms (by co-operatives or iwi). Surveys suggest that many New Zealanders are relatively unsophisticated investors. The Capital Market Development Task Force provided recommendations aimed at improving the range and quality of investment options, and improving the quality of financial information available to investors.[9] The Government has developed an Action Plan to respond to these recommendations.[10] The Retirement Commission is also currently co-ordinating a National Strategy for Financial Literacy.
  • Regulation of household debt - many New Zealand households find management of debt challenging. This can be especially significant for low-income households and those with low levels of financial literacy. The Ministry of Consumer Affairs is currently reviewing the Credit Contracts and Consumer Finance Act 2003, which regulates debt provision.[11]

Notes

  • [9]Capital Market Development Taskforce (2009) Capital Markets Matter: Report of the Capital Market Development Taskforce. For example, the Taskforce recommended: the partial listing of state owned enterprises; improving the governance and disclosure of managed funds; developing the bond market (ie, long-term government bonds and inflation-indexed bonds); and investigating the development of the annuities market.
  • [10]Capital Market Development Taskforce - Government Action Plan. The Government is reviewing financial regulation to improve the quality of information and advice available to investors.
  • [11]Ministry of Consumer Affairs (2009) Review of the Operation of the Credit Contracts and Consumer Finance Act 2003. The areas being covered by the review include: credit fees and charges; providing better information to consumers (eg, on mortgage prepayment, and the implications of not paying off credit cards); not allowing the unsolicited extension of credit without the consumer's express agreement; and fringe lending practices.
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