2.2 Understanding saving, wealth and debt
There are some conceptual issues that should be made clear at the outset. The first is to highlight the difference between saving (income not spent) and savings (a stock of wealth) (see Box 1). A second concept is the difference between wealth (assets located around the world and in New Zealand that are owned by New Zealanders) and domestic assets (capital equipment located in New Zealand that are partly financed by foreigners and used in the production of goods and services). Being clear on these concepts is important. The view of the SWG is that by OECD standards:
- There are relatively low quantities of capital in New Zealand and this lowers labour productivity and incomes.
- Per capita wealth (excluding land) is low.
- The high NFL position makes the New Zealand economy vulnerable to external events and results in low economic growth.
The SWG believes that wealth accumulation in New Zealand has been inadequate for reasons that reflect both inadequate national saving rates and poor asset choices.
Before looking at the problems of low saving, it is useful to:
- Describe the trends in national and sectoral saving rates.
- State our judgements regarding the adequacy of saving and whether the recent improvements in saving behaviour are permanent or not.
Box 1: What is national saving?
National saving is the amount saved (and not spent) out of the incomes of three sectors: government, households and businesses (including non-profit institutions).
Saving versus savings
In the National Accounts produced by Statistics New Zealand, “saving” is defined as the part of disposable income not spent on consumption. In contrast, net wealth (or “savings”), is a stock measure that is built up from the saving in each period plus changes in the value of the assets held. The usual convention in economics is to refer to the flow measure as saving and the stock measure as savings. We endeavour to apply this convention throughout this Report.
For more detail of the measurement of saving and savings, see Section 9.1 of the Report.
New Zealand's saving rate is low by international standards. Since 1975, net national saving (after adjustment for consumption of fixed capital) has averaged just 2.9% of GDP. Private saving has been declining for the last two decades and post 2003 has fallen steeply to become negative, with a pick-up in the last two years. A similar pattern is evident for household saving except that (a) negative saving has been recorded since the mid-1990s and (b) the steeper decline in the saving rate begins earlier (2001) and coincides with the growth in government saving. The government has been recording surpluses for much of this period, especially post–2002, but recent fiscal policies coupled with the economic downturn have seen government deficits re-emerge, resulting in a steep decline in government saving.
- Figure 2.11: National and sector saving rates (as % of national disposable income, 3-year moving average)
- Source: Statistics NZ
- Figure 2.12: Private sector saving rates (as % of national disposable income, 3-year moving average)
- Source: Statistics NZ
Despite recent upward revisions for the household saving rate in New Zealand, household saving appears to be much lower than rates for the other countries. Various causes of the low saving in New Zealand could include low income growth, the attractiveness of housing as an investment, population structure, high debt levels and government saving (refer to Section 9.1 of the Report for further comment).
- Figure 2.13: Household gross saving rates (% of household gross disposable income, 3 year moving average)
- Source: OECD; Statistics NZ; Statistics Denmark; Statistics Bureau, Ministry of International Affairs and Communication, Japan; Office for National Statistics, UK
Note: New Zealand, UK and Japan: Household sector only. All other countries: Household sector plus NPI serving households
The declining and negative household saving rate has been questioned by a number of analysts who have derived alternative measures based on different data sources. None of these are strictly comparable to the national accounting-based saving series. While there remain some doubts regarding the split between household and business saving in the official series, the level and trend of aggregate private saving is not in dispute.
The seeming accuracy of the aggregate saving data raises an apparent puzzle, because these measures suggest New Zealanders have not saved very much in the last two decades. Yet estimates of the change in national wealth over the same period suggest wealth has increased significantly. An obvious explanation is that the change in wealth has been dominated by increases in asset prices, particularly the price of land. This issue is explored further below for households.
- Non-profit institutions (NPIs) serving households are also recognised as a separate sector in the National Accounts. However, as NPI saving is quite small it is not addressed in this study. In the report text and tables, NPI saving is included within business saving.
- Even though there are internationally accepted definitions of saving, caution is needed when comparing saving rates across countries because of variations in actual sector coverage, and methodologies actually adopted. Nevertheless, such comparisons are useful to illustrate broad trends.