Part 2

1  Introduction

1.1  Objectives

Reflecting its Terms of Reference, the Savings Working Group's objectives are to:

• recommend to the Government from a saving-based perspective a sound economic strategy for New Zealand, improvements to specific saving and saving-related policies, and any further work that is needed; and
• stimulate public discussion and understanding on issues of national saving in the New Zealand economy.

1.2  The saving problem

Saving is not spending current income to allow the accumulation of assets or debt reduction. Saving is important to economic activity in that it shifts resources from those who have no immediate use for them to those who can use them productively to enhance economic prosperity.

The main saving issue for New Zealand is that since the early 1970s New Zealand has not had sufficient savings for its own investment purposes. Consequently, New Zealand has had to rely on foreign savings to build its capital stock.

The long history of relying on foreign savings has left New Zealand with a level of foreign liabilities much larger than its foreign asset holdings. There is nothing wrong with foreigners holding assets in New Zealand and those holdings often bring significant economic benefits, particularly the transfer of knowledge and expertise. The issue is the gap between foreign liabilities and foreign assets, commonly referred to as the net foreign liabilities (NFL) position (also called the net international investment position).

New Zealand's level of NFL is now excessive at about 85% of GDP (arising mainly from private debt).

The large NFL position causes two economic problems that the SWG believes are serious and increasingly urgent. First, it makes the New Zealand economy very vulnerable to shocks - too vulnerable in the SWG's view. Second, it has an adverse impact on New Zealand's economic performance, especially growth.

The global financial crisis (GFC) has increased the sensitivity of markets to national balance sheets and New Zealand's position is extreme.

While there has been a recent significant lift in national saving it is unlikely to be sustained when economic growth recovers. Serious structural change is needed.

The continuing deterioration in New Zealand's fiscal position will increase its vulnerability and further discourage growth, as it increases the level of NFL.

In the present circumstances New Zealand has only limited capacity to deal with market shocks, natural disasters, climate change, an ageing population, and so on, and the risks to the community are much higher than is desirable.

There are also numerous areas where household-related saving policies and processes can be improved.