8  Summary and conclusions

The total saving in an economy is by definition equal to total investment. Investment is financed by domestic and foreign saving. The domestic component is the sum of saving by households, firms and the government. The foreign saving component has its counterpart in the current account deficit. For example, an extreme case where net domestic saving was zero, an economy could still be investing solely financed by foreign borrowing and direct investment. New Zealand has relied more heavily on foreign saving in the last decade, financing up to 75 percent of total investment in this manner. This borrowing can expand the capital base and allows the economy to smooth its level of consumption through time. Like a household, the associated debt is “sustainable” provided it can be serviced from future income.

There are two fundamental approaches to the measurement of saving: the flow and the stock approach. The flow approach measures saving as a residual, by subtracting consumption spending from total income. In New Zealand, the net national saving rate, as measured by the conventional flow approach in the national accounts, has been trending downward for the last 30 years. While business saving shows no clear trend, there has been an apparent decline in household saving, offset to some extent by a marked rise in government saving over the 1990s. Flow data on household saving from the Household Economic Survey paint a rather different picture, in part due to definitional differences.

The stock approach to measuring saving is based on the changes in net wealth of households, businesses and the government. In the case of households and businesses, the net wealth measure of saving produces quite different estimates, as the stock approach includes changes in both the quantity and the price of assets in the portfolio. Rising equity prices in the 1990s meant that household net wealth in countries such as Australia, the United Kingdom and the United States was rising strongly, while the flow measure showed a continued decline.

Arguably, when concerns arise about the adequacy of retirement saving, it is the stock (and distribution) of household wealth, which is the more relevant variable, rather than the aggregate rate of the flow of household saving.[27] In fact, nothing about retirement saving adequacy can be inferred from the current levels of household saving. As the population ages, more and more people are retired relative to the working age population. During their working lives people might be saving a high proportion of their incomes, and then drawing down those saving in retirement. It is quite conceivable therefore that an economy could have a high level of private saving for retirement and yet show household saving in aggregate to be zero.

In both the government and household accounts of the System of National Accounts, many items of expenditure are counted as current consumption. Expenditure by individuals and the public sector on education is a case in point. A strong argument can be made that educational expenditure is an investment (as is expenditure on vehicles, defence hardware, consumer durables and some parts of health). The paper illustrates that when these adjustments are made, the net national saving rate could be as high as 13 percent compared to 2.1 percent in the national accounts.

Moreover, adjusting for the effects of inflation removes the so widely cited downward trend in private (household plus business) saving. In fact, we find no evidence that private saving has moved to a lower rate in the past decade when correcting for inflation.

Much of the debate about saving is based on estimates that do not reflect the true, in an economic sense, level of national or household saving. This paper clarifies some of the issues surrounding the measurement and interpretation of the data on saving.