3.2  Flow measures of saving[9]

The following discussion of the flow measure of saving is based on the difference between disposable income and current consumption. An alternative approach is to define saving as the sum of net investment and the current account balance. As shown in Figure 1, the two are practically identical, this internal consistency giving some degree of confidence in the estimate of national saving. “Implied national saving” here is equal to net investment plus the current account balance.

Figure 1 - Two alternative constructions of national saving

We use saving defined as the difference between income and consumption in this paper. As noted in Sections 2.3 and 2.4, there are two methods we consider in constructing sectoral saving estimates from the national accounts: The first is entirely based upon the Institutional Sector Accounts (ISA); these are available from 1987 to 2009, with the years from 1987 to 1998 denoted as “experimental.” In contrast, the “aggregate” measure using Crown accounts data for government saving rather than the ISA measure can be derived for a longer period, namely 1972 to 2012. Using this approach requires that an estimate of business savings be derived as a residual. Figure 2 presents three year moving averages of nominal government and business savings using the two approaches.

Figure 2 - A comparison of ISA and 'aggregate' sectoral saving (3YMA)

It is apparent that the two approaches give very similar results. Given closeness of the series, it was decided to use the aggregate sectoral estimates which are available for a much longer period. The three key sectoral saving components, namely household, business and government are shown in Figure 3 as a fraction of GDP.

Figure 3 - Sectoral saving rates: 1972-2012

Source: 

Household saving rates remained relatively stable from 1972 to 1992. This was followed by over a decade of decline. In 2011 household savings were positive for the first time since 2000, and then became negative again in 2012.

The boundary between the savings of households and businesses is blurred, as the household sector includes unincorporated businesses. Furthermore, households are “owners” of a significant share of the businesses (along with foreign investors). So when a firm invests retained earnings, these are arguably savings of households. For these reasons, it is appropriate for some purposes to combine the household and business sectors to form an estimate of private saving.

A further blurring occurs related to household income and net assets. With the rapid rise in income from trusts, it is possible that household income is under-reported. Bollard and Barrow (2012) note “...the use of trusts impacted quite significantly on the data sources used to estimate New Zealand's household saving rate” (p.7). Briggs (2006) notes that both the assets and income of households may be under-reported as a result of the extent of family trusts.

Three year moving averages of private and government savings rates are shown in Figure 4. It is evident that these rates tend to be quite strongly inversely correlated. In part this arises over the course of the business cycle. A strongly growing economy tends to generate additional revenues for the government while instilling a sense of confidence amongst households who tend to reduce their saving rate in the face of growing incomes. A fall in government surpluses in a recessionary period is associated with the tendency of households to reduce their liabilities in the face of uncertainty leading to a rise in household saving rates.[10]

Figure 4 - Government and private saving rates: 1972-2012 (3YMA)

In commenting on the swing in the US government's net position from a user to a supplier of savings between 1980 and 1998, Hall (1999, p.216) notes:

Government-federal, state, and local-went from being a user of saving in the aggregate to being a contributor of saving. Private saving fell to offset this change in the government's role in credit flows. Almost any reasonable general-equilibrium macroeconomic model would have predicted this offset, even if it did not imply full Ricardian neutrality.

Additionally, sluggish adjustment of household consumption to increased income taxation may be reflected in higher saving rates. Consumption patterns may adjust slowly due to habit persistence, either as a psychological phenomenon, or due to real constraints such has long term contracting arrangements.

Gross saving rates are substantially higher than the net saving rate. Net saving is equal to gross saving after subtracting consumption of fixed capital. Consumption of fixed capital is the decline over the accounting period in the present value of the remaining capital services, or in other words, it is the decline in value of the net stock of assets used in production. Consumption of fixed capital represents a substantial proportion of gross investment, as shown in Figure 5 below.

Figure 5 - Consumption of fixed capital as a proportion of gross investment: 1972-2012

Gross saving rates are often used for international comparison owing to differences in methods of calculating consumption of fixed capital. Figure 6 shows both gross and net saving rates for New Zealand.

Figure 6 - Net and gross national saving trends: 1972-2012