1 Introduction

“I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind”

Sir William Thomson (Lord Kelvin)

The purpose of this paper is to review and update the measurement of savings in New Zealand. There have been long-standing concerns about the level of savings, and successive governments have introduced a range of measures to foster greater savings, both public and private. New Zealand is far from unique in this regard; many countries have pursued pro-saving policies to counter a perceived savings gap.

These concerns about the level of saving arise at a number of levels. First, if the level of domestic saving is by some measure inadequate, this may lead to less investment and higher interest rates, resulting in lower rates of capital accumulation. The growth of productivity and incomes could then be constrained as a result of being “capital shallow”. Second, if some individuals fail to save adequately they may be less able to meet the costs of health, education and retirement. Finally, low levels of domestic saving may be countered by heavier reliance on foreign savers; this manifests itself in greater capital inflows to fund current account deficits[1], leading to a greater stock of external liabilities. These in turn may expose the economy to greater vulnerability of unanticipated shocks. For example in the case of the USA:

“The declining saving rate has spawned much concern among economists and policymakers about the consequences of such low saving, which, in the view of some, include reliance on unsustainable levels of external financing for the Nation's investment needs and increased exposure of domestic financial markets to external factors.”

Marshall B. Reinsdorf (2005)

Clearly, a necessary condition for an adequate understanding of the savings “problem” is reliable evidence. That evidence must be built on the measurement of savings. The most widely quoted measure of saving in New Zealand is the household saving ratio published by Statistics New Zealand.[2] However given the manner in which this is constructed, it may well reflect issues of measurement and classification as much as genuine underlying changes in household saving behaviour. Misperceptions about the level of saving could potentially lead to policy interventions that reduce, rather than enhance economic welfare.

Generating appropriate policy responses in the absence of an accurate assessment of the actual level of savings becomes a task fraught with pitfalls. However in attempting to measure savings, the analyst is faced with a series of both conceptual and practical challenges. This paper attempts to clarify and illustrate some of these issues. Specifically it addresses the impact of inflation, the hidden economy and the distinction between consumption and investment.

It does not attempt to form a judgement about whether savings either at the individual or national level are adequate. Rather, it focuses on the different measures of saving, and provides a range of illustrative adjustments to the commonly cited measures. The results suggest that broader measures of saving might well be considered as complements to the official series when analysing the saving behaviour of firms and households, and the net saving of the nation as a whole.

The Treasury has undertaken an extensive series of studies relating to savings and continues to monitor closely current developments. The current paper is an extension of earlier work on measuring savings (Claus and Scobie, 2002). Other papers that address saving in New Zealand include: the theory and evidence on household saving (Coleman, 1998); savings and portfolio allocation (Joint Working Group, 1999); an empirical analysis of individual household saving behaviour (Gibson and Scobie, 2001); a discussion of saving and growth in an open economy (Claus, Haugh, Scobie and Törnquist, 2001); an international comparison of household net wealth (Claus and Scobie, 2001); an analysis of foreign investment (Haugh, 2001) and the current account (Kim, Hall and Buckle, 2001); financing superannuation (McCulloch and Frances, 2001); population ageing and the optimal national saving rate (Guest, Bryant and Scobie 2003; and Guest, Scobie and Bryant, 2003); saving for retirement (Scobie, Gibson and Le, 2004; and Gibson, Le and Scobie, 2004); household wealth (Scobie, Gibson and Le, 2005) housing and retirement savings (Scobie, Le and Gibson, 2006); savings in the context of financial markets (Cameron et al. 2007); an estimate of household saving rates based on net wealth data (Scobie and Henderson, 2009); an evaluation of saving incentive options (The Treasury, 2010); and the contribution of KiwiSaver to retirement saving (Law, Meehan and Scobie, 2011). In addition a major study of savings was contained in a report to the Minister of Finance by the Savings Working Group (2011).

This paper proceeds as follows. In the next section (Section 2), we set out the fundamental approaches to the measurement of saving, followed by an overview of the available New Zealand data for savings measurement. Measures of long term trends in savings for households, businesses and the government are presented in Section 3. We then introduce a series of adjustments and derive adjusted estimates of both household and national saving rates (Section 4). These adjustments address the impact of inflation, the boundary between consumption and investment, the so-called “hidden economy” and the role of the New Zealand Superannuation Fund. Conclusions are drawn in Section 5, and the paper presents an extensive series of appendices which document the data and the derivation of the adjustments.