Savings Working Group chairman says Government will need to step it up to boost national savings. Your view?

Budget 2011 ignored almost all the Savings Working Group ideas. Chairman says much more needed to boost national savings.

By Amanda Morrall

The head of a taskforce appointed by the Government last year to look at ways to boost national savings says National has "a lot of unfinished business" to attend to if it hopes to spare New Zealand a similar fate as Europe's economically-doomed PIGS.

While the Savings Working Group made some 43 recommendations on its January 2011 report to Government, several core suggestions (including a more effective tax rate on savings and a rebalancing of the marginal tax rate to correct a property bias) were sidelined in the Budget.

• Reducing the effective tax rate on savings providing an "indexation" mechanism so only real returns are taxed;
• Applying reduced rates of tax to all forms of investment income at standard discounts to marginal tax rates.

SWG chairman Kerry McDonald said while Government's constraints in the Budget were understandable it would undoubtedly have to take a closer look at policy recommendations that would achieve more significant savings.

"My judgement on it (SWG recommendations versus what was adopted in the Budget) is that quite a substantial amount of it was picked up but some of it was picked up in a fairly limited way. I think that over the next month to a year there will be a substantial amount of additional work on key recommendations that we  made.''

McDonald said proposed changes to KiwiSaver announced last week by Budget would achieve relatively minor savings compared to what was needed. National calculated changes to KiwiSaver would save NZ$2.6 billion over four years.

"We don't expect Kiwisaver to make much difference to the national savings picture so we saw that intervention being more of a fiscal efficiency, we thought we could improve the contribution Government is making on KiwiSaver.''

In its report to Government, the  SWG recommended that the Member Tax Credits be doubled from their present rate. Instead, Government has halved the Member Tax Credit.

McDonald said the public service sector was an obvious place to achieve greater overall savings.

Lift the game: cuts Government jobs

"Outwardly, they are working at it on a superficial level with performance improved in state sector, striving for higher productivity and performance improvement in the state sector and to some extent that was underway before our report was tabled, but I think we've given strong encouragement for them to pick up the game in that area. I think there will be an intense programme in that area over the next one to three years.''

Asked specifically how that would be achieved, McDonald suggested it would come as a result of public sector job losses.

"Employment numbers in the state sector should fall but that's not necessarily linked with a reduction in the quality of output. The ministers have referred to this and the results to date suggest there is big scope for improvement and that's my view as well.''

PriceWaterhouseCoopers chairman John Shewan agreed Government's Budget 2011 fell short of achieving necessary savings. (To see PWC's analysis of Budget 2011 click here).

"The quite substantive ones were deferred for future consideration. Some of the smaller ones were picked up but things on the tax side such as amendments to extend PIE rates to other investment instruments, and indexing the tax system against inflation; government kicked the touch on that and said `We might look at that in some point in the future.''

Shewan said he couldn't quantify the savings that could be realised by adopting such measurres and said there were complexities that would make them difficult to implement.

"Overall, it was not a budget targetted toward savings and welfare which is what we had expected so in that respect it was a little disappointing but we know the reasons why. Clearly there is much work to be done on both savings and welfare.''

The view was echoed by Working Group insider on the Budget:

"A pessimist might say that it appears as if a lot of what the SWG recommended has been passed by. An optimist might say that what has been picked up (so far) is not too bad a first step in a “policy-free,” austerity Budget.''

A rough break down of what was proposed by the SWG and what was adopted by Government

An excerpt from PWC report: Budget 2011; a Budget for an extraordinary year

In August 2010 the Government set up the Savings Working Group to consider how New Zealand’s national savings level could be improved. The Government was concerned that New Zealand’s ratio of national debt to national income had reached levels similar to those of Greece, Portugal, Ireland and Spain where there is major economic upheaval and in some cases civil unrest. While New Zealand has low levels of Government debt compared to those countries, there is significant private debt, mostly sourced from offshore via the major banks.

This places New Zealand in a vulnerable position if a national or international shock causes foreign lenders to lose confidence in New Zealand and withdraw their capital. The Group concluded the fastest way to reduce national debt is to reduce Government borrowing. Therefore its key recommendations were to return to and maintain budget surpluses and to improve public sector productivity. These objectives are the cornerstones of all aspects of this year’s Budget, as evidenced by constant references to the Group’s findings throughout the Minister’s Budget speech.

The Budget also picks up on two of the Group other recommendations – that the Government issue long dated inflation indexed bonds and that it consider whether to create broadly diversified, listed passive debt and equity vehicles to provide easily understood (and presumably low cost) access to local capital markets.

The Group’s tax recommendations included:

• reducing the effective tax rate on savings by providing an “indexation” mechanism so only real returns are taxed;

• applying reduced rates of tax to all forms of investment income at standard discounts to marginal tax rates. The Government signalled earlier this week that it regards the issues raised by the Group as complex and wants to take more time to consider policy changes. It is true that many of the recommendations could not be implemented easily in the short time between the Group’s report and the Budget.

However, it is likely the short term cost of a number of the recommendations is also an important factor in explaining the absence of further policy changes at this time given the fiscal constraints imposed by the Christchurch earthquake. It is ironic that the recommendations of a Group formed to determine how to protect the country from the consequences of a major economic shock, such as a natural disaster, cannot be implemented partly as the result of the very occurrence of such an event in the month following the Group’s report.

The Budget includes several positive references to recent increases in private and business savings reflecting that individuals and businesses have focused on paying down debt in tough economic conditions. We would be concerned if this reflects a view that private savings have now been “dealt with”. In the absence of changes to the savings environment, we would expect households and businesses to revert to previous behaviour once economic confidence returns.