Have your say: Should we save the tax cuts or donate them to charity?

By Bernard Hickey Prime Minister John Key is reported to have told a conference for charities yesterday that he would prefer that tax cuts were donated to charity rather than saved.

"I'll be reminding people that if they can't bring themselves to spend their tax cuts, there are many organisations who could benefit."

Key also said he wanted to engender a culture of philanthropy similar to the one he'd seen in America.

Key would like to see New Zealanders become more like Americans, who give twice as much of their income to charity. When living in America he had admired its "culture of giving". This was partly because Americans earned more, but also because of a "culture of generosity and giving ingrained in them for generations. "That's the kind of attitude I want to foster here."

What I think It's hard to argue with a politician who is encouraging more philanthropy, which is obviously a good thing. But I have a problem with this assumption, which is very widely held at the moment, that saving is a bad thing to be avoided. The assumption is that money that is saved is stopped from circulating in the economy and therefore would trigger the so-called "Paradox of Thrift". This is where money is hoarded, which means it is not spent, which means employees are sacked, which means they earn less, which means less is spent, which means more people lose their jobs etc... In this video below I explain why I think this "Paradox of Thrift" idea is flawed. As long as the banks are still lending, money that is saved (and not just stuck under the mattress) will circulate through the economy as either investments by businesses or more spending by consumers borrowing against their homes or with their credit cards. The "Paradox of Thrift" idea has more justification in an economy where consumers hoard money rather than save it in a bank and where consumers are very, very heavy savers. New Zealanders put their money in the bank and we are still heavy borrowers as a nation. Our current deficit is still close to 10%. New Zealanders need to save more and rebalance the economy from being one based on foreign borrowing and consumption to one based on saving more and investing more in productive capacity to reduce our debts. I'm all for donating to charity rather than spending on consumption. But we should be saving more, not less, and saving is a good thing. If only the developed Western world had done more saving, we may not have created the imbalances and credit bubbles that has caused all this grief of the last year. Your view?

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