Part 3: Additional reference material

9  Additional analysis

The numbers in brackets of the headings refer to sections in Part 2.

9.1  Understanding saving, wealth and debt (2.2)

Summary

New Zealand data on the amount of saving and wealth accumulation that has taken place in the last two decades are perplexing. On one hand, macroeconomic saving data clearly indicate that national saving rates are low by OECD standards, and have been low for an extended period of time. On the other hand, estimates of household wealth suggest average wealth levels are not particularly low – or, more accurately, average wealth-to-income levels are not particularly low, for the data are clear that New Zealanders have low incomes by OECD standards. There has been considerable debate in New Zealand as to which set of data better reflects the underlying situation.

The position of the SWG is that New Zealand saving rates are low by OECD standards, and that the economy would be better placed if they were higher and if assets were accumulated more rapidly. We agree with the careful analysis of the situation in the Reserve Bank of New Zealand submission, that saving rates need to be increased by 2% – 3% of GDP for New Zealand to reach OECD norms. These amounts may not seem large, but overseas experience suggests that increasing saving rates by this amount in the medium term is not simple.

It is possible to reconcile some of the differences between the macroeconomic saving data and the microeconomic wealth data. New Zealand has experienced very large asset price increases in the last two decades, which means wealth has increased much more quickly than assets have accumulated through saving. The SWG has not taken a view as to whether these price increases are sustainable, but suspects that they are not, and it is unlikely that such large increases will occur again in the near future. Since wealth accumulation depends on both the returns to savings, and the amount of saving (or more particularly, the extent households delay their spending), an increase in the saving rate is likely to be the most sustainable way to increase assets and wealth in the future.

New Zealand's wealth and assets

New Zealand's domestic assets refer to the quantity of investments located in this country, while New Zealand's wealth refers to the amount of real and financial assets located in New Zealand and around the world that are owned by New Zealanders. New Zealand domestic assets partially determine New Zealand labour incomes, as these depend on the amount of capital equipment that New Zealand workers have to work with. New Zealand wealth determines New Zealand capital incomes, which depend both on the amount of wealth owned and the amount these assets earn. The difference between New Zealanders' wealth and the stock of real assets located in New Zealand is the net foreign liability position. According to Table 5 below, in 2010 the assets[35] located in New Zealand were worth $574 billion (in current dollars). However, New Zealanders had incurred NFL of $161 billion, and consequently New Zealand had net wealth of $413 billion. Net wealth increased by 149% between 1992 and 2010, but the value of local assets increased by 163%. The difference is due to foreign investment. As foreign investment increases the amount of capital available to work with, and increases labour incomes, it is generally beneficial.

New Zealand's overall asset and liability position raises three questions:

1. Is the quantity and type of capital located in New Zealand adequate to generate high labour incomes?
2. Is the quantity and the type of wealth owned by New Zealanders adequate to generate high capital incomes?
3. Is the high net foreign liability position likely to cause economic problems?

There is some difficulty answering these questions with certainty, because of the poor quality of much of the data. Statistics New Zealand has made much useful progress improving the data in the last few years, but major gaps remain. Nonetheless, in broad terms the data suggest:

1. By OECD standards, there are relatively low quantities of capital located in New Zealand
2. By OECD standards, per capita wealth is relatively low, although the high value of land raises the ratio of wealth to income to levels similar to those in other countries, and
3. The high NFL position makes the New Zealand economy vulnerable to shocks.

If this diagnosis is correct – and we must stress the limitations of the data – the solution is to increase the rate at which domestically located assets and wealth are accumulated, without further increases in the net foreign liability position.

There are two basic causes of low wealth accumulation. The first is inadequate saving, which can be caused by a variety of factors including low incomes and low saving rates and the investment requirements of a growing population. The second is poor asset choice – investment is made in the wrong classes of assets. Ultimately choosing the right assets is as important as choosing the right amount of saving, for savings that are wasted in unproductive investments improve neither the domestic asset position nor domestic wealth.

The SWG believes that wealth accumulation in New Zealand has been inadequate for reasons that reflect inadequate national saving rates, poor asset choices and demographic effects. This section presents the evidence supporting this contention. The evidence is not unambiguous, not only because of data problems, but because the links between saving levels and wealth levels are not straight forward.