7  Adjusted measures of saving

This section constructs and reports some adjusted measures of saving for New Zealand in an attempt to produce measures that more closely reflect the economic concept of saving.

7.1  Inflation adjustment

As discussed in section 3, measured household saving in New Zealand has been trending downward for most of the 1990s, while business saving has remained fairly stable, leading to an overall decline in private (household plus business) saving. Part of the fall in the private saving rate has arisen because it was overstated in the past due to inflation. The corollary to this is that government saving was understated.

High and rising inflation often coincides with low and falling real interest rates of (unindexed) financial assets as prices and inflation expectations, and hence nominal interest rates, only adjust sluggishly. This leads to a re-distribution of real wealth from net lenders to net debtors.

During the 1970s and 1980s, the period of high and rising inflation in New Zealand, the government was a net borrower and nominal public debt outstanding was probably overstated as debt was declining in real terms with rising inflation. At the same time, private sector income and saving were also likely overstated as households and businesses were net lenders and the value of their assets declining as inflation rose.

To adjust private saving for the effects of inflation we follow Edey and Britten-Jones' (1991) approach for Australia. Details on the inflation adjustment are contained in Appendix A3. Edey and Britten-Jones correct private saving for inflation and its redistributive effects by adjusting private holdings of claims on the public sector. Private holdings of claims on the public sector are estimated as the sum of notes and coins held by the public plus public holdings of government debt. The effect of this adjustment for Australia is to reduce the level of private saving during the period of high inflation.

Adjusting private saving for the effects of inflation produces similar results in New Zealand, as can be seen from Figure 7.1, which plots measured and inflation adjusted private saving as a fraction of GDP. There are two striking results that emerge from Figure 7.1. First, the recent phenomenon of around zero or negative private saving is not without precedent. The saving rate has been negative on several occasions in the past, once the inflation effect of the redistribution of income away from holders of claims on the public sector is allowed for. Second, the inflation adjusted private saving rate does no longer exhibit a downward trend over the 1990s.

Figure 7.1 - Unadjusted and inflation adjusted private saving rates (as a percent of GDP)

Source: Statistics New Zealand and authors’ estimates.

To test for a changing mean in the unadjusted and inflation adjusted saving rates we apply the Markov switching model used in section 4 (equation 4.4). The probability that the economy has remained in the same (low) saving state is plotted in Figure 7.2 for the unadjusted rate and in Figure 7.3 for the inflation adjusted series. Figure 7.2 shows that the estimates for the unadjusted saving rate suggest two regime shifts. The probability of having remained in the same saving state is low for the years 1979 to 1991 and the first regime shift thus occurred in 1979 and the second in 1992. The private saving rate shifted to a higher average in 1979 (from around 1.8 percent of GDP to about 5.6 percent). Measured private saving remained at this higher level for 13 years until 1991 and then shifted back to the lower average in 1992, where it has remained since.

Figure 7.2 - Probability that saving remained at the same (low) level using unadjusted private saving (in percent)

Source: Authors’ estimates.

Figure 7.3 - Probability that saving remained at the same (low) level using inflation adjusted private saving (in percent)

Source: Authors’ estimates.

In contrast, a different picture emerges from the test for regime shifts of the inflation adjusted private saving rate (Figure 7.3). Over the estimation period, the inflation adjusted private saving rate switched to a higher saving state twice, for one year in 1979 and for two years in 1984-85. Apart for those three years the model suggests that the saving rate, on average, has remained at around 0.9 percent of GDP.

Figure 7.4 - Probability, adjusted saving rate and inflation (in percent)

Interestingly, the regime switches in the inflation adjusted saving rate occurred during the period of high inflation when inflation was temporarily low because of regulatory restrictions (see Figure 7.4). In 1979, inflation fell from around 15 percent to about 11 percent, largely as a result of wage guidelines and selected price freezes ahead of the election in 1978. Inflation fell even more during the wage, price and rent freeze that lasted from June 1982 to March 1985, coinciding with a temporary increase in the inflation adjusted saving rate for two years in 1984-85.

The results for New Zealand and Australia are borne out by similarly adjusted saving rates in other countries that had both high inflation rates and a large stock of government debt (see Shafer, Elmeskov and Tease, 1992). In the United Kingdom, Belgium and Italy, for example, adjusted saving rates were up to 10 percentage points of GDP below their measured (unadjusted) rates.

The adjustment of private saving for inflation induced gains and losses on net holdings of government debt does not account for all the effects of inflation and the magnitude of the correction in New Zealand (and elsewhere) is likely to be understated. Clements (1985) constructs a more fully adjusted measure of private saving for New Zealand for the years 1962 to 1983. In addition to correcting for gains and losses on net holdings of government debt, Clements also adjusts private saving for net capital gains from foreign held debt and the effects of inflation on stock valuation and depreciation.[24] During periods of high and rising inflation the measured saving rate for the private sector will be inflated because of historical cost accounting practices that overstate inventory investment and understate depreciation allowances. Clements finds that over the period 1962-71 the private saving rate fully adjusted for inflation was, on average, about 7.5 percentage points lower than the measured, unadjusted rate and about 12 percentage points lower for the years 1972-83.