4.4 Adjusting measures of saving for investment goods

A critical issue is that of the distinction between consumption and investment. For example, consumer durables such as automobiles or kitchen appliances are typically treated as current expenditure rather than investment. The consequence is the flow measures of savings for any given level of income are reduced due to the higher expenditure levels. What we would ideally like to measure is consumption, rather than expenditure. Thus when consumption of a good is spread over multiple years, it suggests that allocating the full amount of the expenditure to one year is not appropriate. And indeed it can be argued that from the household's perspective, it is this expected consumption of service flows over time which is factored into their saving and borrowing decisions. The implication is that durable goods should be treated as an investment, where the purchase expenditure is classified as a capital expenditure, rather than a current expense in the income and outlay account.

This issue of classification arises also in the case of public expenditures. For example, spending by the state on education is counted as current consumption spending by government in the system of national accounts. To the extent that education confers benefits that flow to an individual over an extended period (arguably a lifetime), a legitimate case can be made to classify most of educational expenses as investments.[26]

Similarly, large lumpy items of defence expenditure (eg, a new frigate) represent an investment in the nation's defence capacity whose services can be expected to flow over many years. To count these items as current “consumption” may significantly reduce the estimate of national saving.

Intangible investments, and particularly intellectual property, are a further example. For example research and development expenditure, is currently treated as current consumption; yet successful research and development can generate long term returns. Indeed, the 2008 System of National Accounts (SNA2008, p.122) suggests:

“Research and development is treated as capital formation except in any cases where it is clear that the activity does not entail any economic benefit for its owner in which case it is treated as intermediate consumption”.

Other components of intellectual property which potentially should be capitalised include mineral exploration, computer software and databases (already included as intangible assets), and entertainment, literary or artistic originals which are more difficult to quantify. Statistics New Zealand is currently working on implementing the SNA2008 framework in the national accounts, including the capitalisation of research and development expenditure. Indeed the Australian Bureau of Statistics has now implemented the SNA 2008 in their national accounts (ABS, 2009).

While human capital is not a part of the SNA2008 framework, it is of interest from an economic perspective, and has implications for the measurement of savings. Education is a key component of human capital, and as discussed above, represents an investment in the future productive capacity of the economy (in addition to other positive externalities). A valid case exists for education expenditure to be treated as capital formation rather than a current expense.[27]

Similarly, good health can conceptually be considered as a component of human capital. This was posited by Grossman (1972), who derived a theoretical model for the demand for good health, in which individuals are endowed with a predetermined stock of health capital at birth. While this stock depreciates with age similar to any other form of capital, it can be augmented by inputs such as expenditure on medical care or sporting activities. The stock of health capital then contributes to the number of healthy days available to produce work or leisure outputs. In this framework, health is a key component of human capital which provides an extended flow of services to both the individual and society. Again treating some of health expenditures as investments in the stock of health capital has implications for the measurement of savings[28].

As expenditure on education and health have been increasing over time, reflecting increased enrolments in tertiary education and changing population demographics, this is likely to have been a contributing factor in declining measured saving rates. This has been noted by Gokhale et al., (1996) for the US, who argued that increasing medical consumption through in-kind health care transfers, particularly by the elderly, explained a large proportion of the decline in post-war aggregate saving. These structural trends, some of which are surely contributing to the productive capacity of the economy, are likely to explain some proportion of New Zealand's (and potentially other countries') declining aggregate saving rates. Figure 17shows the unadjusted household saving rate augmented by various adjustments discussed above: reclassifying education, health and consumer durables as investment, and subtracting the associated depreciation expenses.[29] These adjustments result in an upward adjustment to the household saving rate, of 3 percentage points on average over the sample period, and of 2 percentage points in 2011.

Figure 18 augments the net national saving rate in a similar fashion. Expenditure in health, education, consumer durables and research and development are now classified as investments. The average adjustment is 7 percentage points, with a 7 percentage point difference in 2011.[30]

Figure 17 – Net household saving rate adjusted for investment items: 1996-2011

Figure 18 – Net national saving rate adjusted for investment items: 1996-2011