By Alex Tarrant
Prime Minister John Key has announced the government will reduce its annual matching tax credit contributions for KiwiSaver of NZ$1,042 per person, but will continue to offer the NZ$1,000 kickstart contribution for new KiwiSavers.
Key told a BusinessNZ luncheon in Wellington he expected employees and employers to contribute more once the economy had "well and truly recovered."
Key also said the government would "slightly reduce" the amount spent on Working for Families" over time.
Key said Budget 2011 due to be delivered on May 19 would be responsible, measured and affordable.
“Budget 2011 will set a credible path back to surplus while at the same time continuing to protect the most vulnerable New Zealanders, boosting frontline health and education services, and helping to pay for the rebuilding of Christchurch,” Key said.
“It will contain significant savings, but will by no means be a slash and burn Budget. It will be a responsible Budget which helps ensure growth is built on the solid foundation of savings, exports and productive investment.”
Some KiwiSaver fund managers questioned whether the changes would undermine confidence, while others said such moves were the most sensible if the government was to to change the scheme. See more here from Amanada Morrall.
Key said KiwiSaver, Working for Families and interest-free student loans cost almost NZ$5 billion a year.
"These programmes were introduced during a debt and consumption-driven economic bubble, and it is clear that they are unaffordable,” Key said.
“None of the changes we will be making will affect people before the election so New Zealanders will be voting with all the information they need and can make their own choices.”
The Government planned to reduce the amount of money it had to borrow from overseas to put into KiwiSaver, and increase the amount of genuine savings from the private sector.
"The mix of contributions to KiwiSaver accounts will change, with less coming from the Member Tax Credit and more coming from both individuals and employers," Key said.
The NZ$1,000 kick-start for new KiwiSaver members will remain as it was now.
“The changes to KiwiSaver won’t happen immediately, and this will give people and businesses time to adjust,” Key said.
“Increased contributions from people and businesses will happen at a time when the economy will have well and truly recovered, and both wages and employment will be increasing.”
Key said the changes would maintain total contributions into KiwiSaver funds, "which are expected to accumulate rapidly."
Officials had advised that KiwiSaver changes would modestly improve the rate of national savings.
See more here from Bernard Hickey on why these cuts were the wrong type of cuts.
Working for Families changes
Key said Working for Families would also be better targeted at lower-income families, "who have a much greater need for assistance, and a little less generous to families higher up the Working for Families scale."
“We will do this gradually, in a way that minimises the impact on families,” Key said.
The student loan scheme will also be adjusted but will remain interest-free, he said.
“The changes we are making in the Budget will make all of these programmes more affordable and ensure they survive into the future,” Mr Key said.
“Here in New Zealand we have a chance, now the economy is gathering steam again, to build a solid platform for future growth."
'Foreign creditors means savings not real'
Key said the NZ$5 billion borrowed to pay for KiwiSaver and Working for Families was mostly money borrowed from foreign creditors.
Since the Government has a large structural budget deficit, this is NZ$5 billion of money that has to be borrowed from foreign lenders, with around NZ$1 billion a year going to KiwiSaver.
"That does not constitute real savings," Key said.
"That’s because the government has to borrow to raise it, and the debt on one hand simply cancels out the saving on the other. It’s a bit like someone going to Westpac to borrow some money then taking it to ANZ to put in their savings account. It’s easy to see that this is not real savings," he said.
"So at the moment, the government contributions to KiwiSaver make no difference to the level of national savings. They do, however, increase our reliance on overseas lenders, who can at any time decide that our debt has grown too large and that we are just too much of a risk."
"National savings are only increased when the savings are genuine, that is, when they come from people or businesses or government actually reducing their spending," he said.
"Otherwise we are all just kidding ourselves."
'Net savings up 2% of GDP'
Key said total KiwiSaver funds are projected to rise from around NZ$8 billion currently to about NZ$25 billion by 2015, and to almost NZ$60 billion in 10 years.
"The advice we have had from officials, who have modelled the effect of the Budget changes, is that they will result in a modest improvement in the rate of national savings," Key said.
"As a result of the KiwiSaver changes alone, New Zealand’s net international liabilities – the amount the country owes to foreign lenders – will reduce by an estimated two per cent of GDP over the next decade."
Any other changes?
Meanwhile, asked by media after the speech whether the Member Tax Credit cuts, and increased contributions from employees and employers were the only changes the government would make to KiwiSaver, Key said: “You’ll have to wait and see next week, but they certainly are the substantial changes.”
Asked if he could rule out changing the Housing New Zealand first home deposit subsidy, Key replied: “Yes, I don’t think that changes from memory.”
'Now to see if it's sustainable for the private sector'
Business NZ chief executive Phil O’Reilly welcomed the Prime Minister’s comment that any rise in employer contributions would take place over time as the economy grew.
“Right now if you said that to business [that they would have to increase contributions immediately], they’d be talking about issues of affordability,” O’Reilly told media after the speech.
“We’ve always been concerned about the affordability of KiwiSaver from a government perspective. It did seem unaffordable to us, and it did seem like we were subsidising a particular form of saving when other forms of saving might be most relevant," he said.
"So from our perspective, any move to make it more affordable [for government] is a good thing. What’s more, employers, in principal, are generally supportive of KiwiSaver, so we’ll just need to see whether or not it’s sustainable from a privates sector position now, as it certainly wasn’t sustainable from a public sector position.”
(Updated with Business NZ CEO Phil O'Reilly comments, comments from Key post-speech, more details from speech, links to Amanda's reaction article and Bernard's opinion piece)
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