6.2  The difficulty of measuring saving

Coverage

National product and income accounts only partially capture illegal and hidden economy activities and the saving rate is probably biased downward. This is because underground economic activity is likely to be larger on the income side than the consumption side. Moreover, national accounts measures of saving do not account for household production and only partly include natural resources.

Estimates of the size of the hidden economy in New Zealand suggest that over the period 1968 to 1994 underground economic activity varied between 6.8 and 11.3 percent of measured (real) GDP (see Giles, 1999). These estimates are derived from a latent variable model and information from a currency-demand model.

Figure 6.2 - Net national saving unadjusted and adjusted for hidden economy activity

Source: Statistics New Zealand, Giles (1999) and authors’ estimates.

Taking into account hidden economy activities raises measured saving. Figure 6.2 plots net national saving as a percent of GDP together with saving adjusted for the hidden economy. To calculate the adjusted saving rate we first multiply Giles’ hidden/measured GDP ratio by national disposable income and by measured GDP. We then calculate the adjusted saving rate by subtracting final consumption expenditure from the adjusted national disposable income measure and divide by adjusted GDP.

On average, the adjustment adds less than 9 percent to disposable income and GDP but changes the saving rate dramatically. On average, the saving rate is twice as high. It should be noted, however, that the adjusted measure of saving rate is likely to be biased upward as it does not include the hidden economy on the consumption side, like the consumption of illegal drugs, for example.[22]

Depreciation

The economic notion of saving as an accretion to net wealth means that net saving, i.e. gross saving adjusted for depreciation, is the relevant measure. Depreciation cannot be measured directly and is approximated by consumption of fixed capital. In New Zealand, consumption of fixed capital is compiled within the capital stock model, based on a mixture of sources. It represents an estimate of the average useful life of an asset and may or not coincide with tax depreciation rates.

By definition net national saving will be lower than gross saving, with the difference possibly increasing. In a study of seven (large) OECD countries Shafer, Elmeskov and Tease (1992) show that over time net national saving rates have been falling faster than gross ratios. This has also occurred in New Zealand to some extent. Gross and net national saving as a percent of GDP, plotted in Figure 6.3, appear to have diverged more over the 1990s than in earlier years.

Figure 6.3 - Gross and net national saving (as a percent of GDP)

Source: Statistics New Zealand and authors’ estimates.

The larger fall in net national saving rates can, in part, be attributed to a change in the mix of investment goods toward a higher proportion of components with shorter service lives. In other words, falling net saving rates may in part be a function of the nature of the capital stock (and depreciation rates) and not necessarily a reflection of a decline in the propensity to save.

Sectoral saving rates

Household saving includes retained earnings by unincorporated businesses, such as partnerships, farms and family owned enterprises. These retained earnings more properly belong in the category of business saving, and it may be more appropriate to use private saving, the total of household and business saving, rather than distinguishing between the two.

Another argument for focusing on the total of household and business saving is that households are the ultimate recipients of business earnings and there is a tendency for variations in business saving to be offset by changes in household saving. Households are indifferent between dividends and retained earnings as both represent equivalent accretions to shareholder wealth.

Using pooled time series and cross section data for a sample of OECD countries, Dean, Durand, Fallon and Hoeller (1989), for example, find that a one dollar increase in business saving is offset by a fall of 80 cents in household saving. Edey and Britten-Jones (1991) find similar results for Australia.

6.3  The economic meaningfulness of conventional measures of saving

Saving as measured in the national accounts does not correspond very closely to theoretical concepts of saving because of classification, valuation and because they neglect the effects of inflation.

Classification

Conventional measures of saving include some items as current consumption or business expenses that economic measures of saving would classify as investment expenditure. Examples include:

(i) Final consumption expenditure generally includes outlays on consumer durables such as appliances, furniture and motor vehicles.

(ii) All investment in the intangible capital of health and education, whether by the government or household sector, is treated as current consumption expenses, whereas clearly a very significant part of both these items represent saving in an economic sense.

(iii) Expenditure on research and development (R&D) by businesses is treated as a current expense rather than part of business saving.

(iv) Some items of capital expenditure made by central and local governments are treated as current consumption expenditure. Significant items of defence expenditure (such as the purchase of frigates), which are arguably investment as they provide a flow of defence services over time, are included as current government outlays and hence reduce the measured level of saving.

(v) Some investment in land and natural resources, especially by unincorporated businesses counted within the household sector, is treated as current outlays, reducing measured saving by the household sector.

Re-defining national accounts measures of saving to include expenditure on items that provide consumption benefits over time as investment raises measured saving. Moreover, the difference between conventional and extended measures of saving will increase if the components causing the difference assume greater importance over time. Also, the discrepancy will be larger in countries where these factors are relatively more important. For example, when allowances are made for educational investment, energy, mineral and net forest depletion and carbon dioxide damage, New Zealand’s national saving rate in 1998, according to the World Bank, would have been almost six percentage points higher.[23] This adjustment for New Zealand is higher than for Australia, Canada, the United Kingdom, the United States or the average of high-income countries. This issue comes back to internationally accepted conventions. Excluding natural resources may be appropriate for many countries, but maybe not for economies where they contribute a relatively important proportion to economic activity.

Valuation

Flow measures of saving typically do not incorporate capital gains and losses as part of income and hence saving. A comprehensive concept of income is the maximum value of consumption that is consistent with a sustainable financial position. Lester (1996), for example, corrects household income in Australia for changes in the real value of household assets (excluding housing) and finds that the adjustment removes the downward trend in household saving. Gale and Sabelhaus (1999), constructing extended measures of household saving for the United States, find similar result. When an allowance is made for capital gains “the current adjusted household saving rate is the highest in at least forty years” (p. 210).

Inflation

Interest payments in the national accounts are included fully as a component of current income, without accounting for the erosion of the real value of financial assets and gains on debt due to inflation. This issue is discussed further in the next section.