By Alex Tarrant
The Savings Working Group identified the right issues for improving New Zealand's national savings rate, but there is limited scope and money for government to move on the recommendations, Prime John Key says.
The uncosted recommendations in the report, such as soft compulsion for Kiwisaver, where all employees are automatically enrolled but have the choice to opt out, could be quite expensive, Key told media in Wellington this afternoon.
If government were able to find savings in other areas of its budget, there would be greater liklihood of it implementing more options presented in the report. It had been a success that one and a half million New Zealanders had a Kiwisaver account and it would be a good thing if more had them, Key said.
But unfortunately there were costs for the government if more New Zealanders signed up, he said.
"If we continue with the NZ$1,000 (kickstart), that’s an initial cost. But also of course the matching [member tax credits] contribution that comes from the government is costing us around about NZ$1.1 billion, I think, at the moment, and that would obviously rise if there were more Kiwisaver accounts," Key said.
“I’m not saying there’s no money. I’m saying that we have very limited scope to move," he said.
“The reality is we are going to reduce our new [government] operating expenditure to about NZ$800-NZ$900 million. Now that doesn’t mean we won’t find larger savings than that NZ$200-NZ$300 million and redeploy some of that in other areas. Depending on the costs and the timing, that is a genuine option for us," Key said.
The Savings Working Group had identified "absolutely" the right issue, Key said, "which is, New Zealand’s level of foreign indebtedness is unsustainable and makes us vulnerable as a nation".
"I think New Zealanders having a diversified saving portfolio and an increased level of saving gives them higher levels of security and comfort and more options in their future. We all know that on average, we’ll live longer," Key said.
"So the merits of that objective are unquestionable. The question is just simply whether we can achieve that change,” he said.
It was a statement of fact that private sector debt was considerably larger than New Zealand's currently rising public sector debt, Key said.
"That’s one of the reasons why the government is keen to get back into surplus quicker than we had initially indicated, because that is the area where we have direct control. The challenge of course is putting in place incentives to get the private sector to save, but in a way which doesn’t substantially reduce public sector savings itself," he said.
'Public and private debt in this together'
When asked about Treasury figures out yesterday showing private sector debt had come down over the last 18 months, Key said that reflected New Zealanders’ perspective they need to be conservative at the moment.
“I think that’s why, ultimately, they will reject the plans that the Labour opposition are proposing, and that is to spend, borrow and hope. That is not what New Zealanders have been doing in the last 18 months. They’ve recognised the difficult international position that they’re in," Key said.
"If you go back between about the 2004 and 2008 period, I think the dis-saving rate was about NZ$1.15 for every dollar they earned – in other words I think they consumed about NZ$10 billion worth of additional debt. In the last 18 months they’ve been saving in the order of, I think, NZ$6 billion to NZ$7 billion, that sort of magnitude. So they’ve certainly switched around," he said.
The issue was the total level of indebtedness, and the amount of that debt borrowed from foreigners, Key said.
"That is the reason why Spain, who have a very similar profile to New Zealand, are in the gun from the rating agencies. You can’t just say it’s one or the other, it’s a combination of both,” he said.
'NZ's national debt extremely high'
National debt of 85% of GDP was extremely high, Key said.
“We borrow most of that debt from foreigners. No other OECD country borrows as much of its debt, as a proportion of its overall indebtedness, from foreigners. That puts us in a very weak position," he said.
"As we saw with [rating agency] Standard & Poor’s – they downgraded Japan on Friday, so this stuff is real. In Japan’s case, virtually all of its debt is funded from domestic savings in Japan, so having that high level of external indebtedness is a worry [for New Zealand].
"If you have a look at New Zealand’s total external liabilities, they’ve been sitting in that 70%-90% window for quite a long period of time now. So the long term objective has to be that New Zealanders fund more of their own investment through higher levels of savings," Key said.
Until the point when Standard and Poor's put New Zealand's AA+ sovereign credit rating on negative outlook in November last year, the rating agency was saying it was overall comfortable with the government’s debt, and reasonably comfortable with the position that New Zealand was in, Key said. "Notwithstanding that they have for quite some time outlined that the overall level of indebtedness is very high, and the reliance on foreign borrowings."
"What happened was we saw a flare up in the international markets again, and the credit spreads started blowing out in countries like Spain. So that position led the ratings agencies to put us on negative outlook," he said.
The message from the rating agencies was quite clear, Key said.
“If we don’t get that position under control in the next two years, they’ll downgrade us.”
Here's Bill English's Youtube video on National Savings and the government's economic agenda for the year. (Updated with further comments from Key on foreign debt, comments on Spain, 'Right Ideas' Bill English's Youtube video on national savings and the government's economic agenda for the year)