Savings Working Group eyes govt savings first; says compulsory savings may not be magic wand

7th Oct 10, 4:45pm by Alex Tarrant

By Alex Tarrant

The earliest gains in national savings can be made by government reducing spending and reversing its deficit, the chair of the government's Savings Working Group Kerry McDonald said.

McDonald also said the group would be looking very closely at evidence on whether Australia's compulsory savings regime was increasing the level of savings there, or whether it just shifted savings around the economy.

"The public sector, which after running surpluses for a number of years has gone sharply into deficit, and the level of government expenditure has lifted strongly," McDonald said.

"It’s a very real question as to what the options are to reverse that situation, because the most direct and effective way to lift national savings is to do it through the public sector – particularly through the government’s expenditure and balance sheet."

McDonald was speaking to a media briefing in Wellington, ahead of the group's third meeting on Friday, at which it will discuss the public and export sectors.

The Savings Working Group was established by Finance Minister Bill English to look at how to lift national savings. It will present its final report in January next year. See it's terms of reference here.

Compulsory savings

There has been plenty of talk in New Zealand lately on whether to make Kiwisaver compulsory, and whether government should resume contributions to the national superannuation fund, which it halted after getting into power.

The savings working group was looking at Australia as a laboratory for compulsory savings, McDonald said.

"You would only go to compulsion if it increases the national levels of savings, so does it actually achieve that?

"There’s quite a few views around that say ‘no it doesn’t achieve that - all it does is shift savings'. So we are literally up to our ears in data on that question."

McDonald said he did not have a view on whether resuming super fund contributions would boost national savings, but the issue would be clearly implicit in what the group was working on.

“The first question with compulsion is, does it lift the level of national savings?"

"That’s why the Australian evidence is so interesting for us, because it’s in a context that’s much closer to New Zealand than some of the other economies.

“You could get into a situation in which a policy decision is made in relation to national savings, and all that does is people say, ‘oh government’s doing it on our behalf, so we don’t need to do anything'."

McDonald said that sort of reaction was not uncommon in the savings environment.

"People might have a precautionary view: they’ve got a life-cycle approach to how much savings they’re going to need for their retirement, they factor in the contribution of the state, they form a view that that’s going to be there throughout their entire retirement life, and so they consequently decide they personally are not going to save so much - they’ll set a lower target.

"I’m not giving you a conclusion – I’m just saying that’s the sort of trade-off that’s embedded in the process. We haven’t reached a conclusion on that."

Wider issues - NZ's net foreign debt a big issue

McDonald said the group had decided to work in the context of wider issues facing the New Zealand economy, rather than just starting in the detail of savings.

“There’s clearly quite a few issues that are of significance at the present time," he said.

"The continuing balance of payments deficit is clearly one of them, and that's leading to a pretty rapid rate of growth in New Zealand’s net foreign obligations."

McDonald said New Zealand's net foreign asset position (the difference between what New Zealanders owe and what they own overseas), was one of the critical indicators about the state of the economy at the present time.

Treasury papers show the country's net foreign asset position at about negative 90% of GDP currently, while this is forecast to grow to negative 100% of GDP by 2014 (figure 9, pg 19).

Furthermore, while New Zealand's gross government debt was quite low at around 30% of GDP, when it was plotted against New Zealand's net foreign assets, it shared a group with Ireland, Greece, Spain, Portugal and Hungary (see figure 1, pg 7).

"There are some differences [between New Zealand and the rest of that group]," McDonald said.

"Most of their net foreign asset positions have deteriorated very rapidly over the last 18 months or so. New Zealand has always been unsatisfactory and in a reasonably high level, and it has only deteriorated by about 10% in the last 12 to 18 months.

"Nevertheless it puts it at a level which does give serious grounds for concern. And we have a number of papers and views that say that this situation represents a high vulnerability for the New Zealand economy."

So how did we get here?

McDonald pointed to the alarming gap in growth between New Zealand's tradeable and non-tradeable sectors (figure 7, pg 17).

"Basically what’s been happening is output and employment have been growing strongly in the non-tradeable sector – that’s basically the domestic sectors, including government. The tradeable goods sector – that’s mainly the export sector – has actually been shrinking since 2004.

"So when you hear people talking about the need for a structural rebalancing of the New Zealand economy, that is fundamentally what they are talking about.

"We are not exporting enough. We are not earning enough foreign currency or producing stuff here that replaces imports."

...And that has led to a balance of payments deficit

“The deficit is met effectively out of foreign savings, so we are either borrowing abroad to fill the deficit, or we’re dependent on inward foreign investment," McDonald said.

"The sum of all of that is our net foreign asset position, so all of this is an inter-related process.

"We’re not exporting enough, it’s leading to deficits, the deficits have to be covered by foreign capital. As the balance of foreign capital builds up, so the New Zealand economy becomes more vulnerable to unexpected market shocks."

McDonald said the obvious policy change to deal with this situation was to lift national savings.

...And higher interest rates, exchange rate

"One of the problems with this high level of net foreign obligations, or high level of debt or foreign investment in New Zealand, is there is pretty strong evidence that this is leading to a higher interest rate for New Zealand," McDonald said (figure 6, pg 16).

"So we’re probably paying in the order of 1.5 – 2.5 percentage points more in interest (than Australia and the USA) as a result of the very high level in foreign obligations."

McDonald said there was also good evidence this was increasing the level of the New Zealand dollar on a trade-weighted basis, which was clearly not helpful for the export sector.

"So if you think in those terms, there are implications for investment.

"Our productivity is very low – it halved over the last decade. There are strong indications that one of the key reasons for the low productivity is that we haven’t invested enough in the business sector in productive capital."

Compared to Australia or the OECD average, New Zealand's capital-labour ratio was quite low, he said.

"And the high interest rate clearly is not attractive for investment, and a stronger exchange rate isn’t attractive for investing in exports.

"When you see that tradable vs non-tradable graph that is quite alarming.

"It is showing the consequences of what I think are the wrong policy and market signals through the last decade, which made life particularly difficult for the export or foreign currency-earning sector."

Household sector, de-leveraging and retail spending

McDonald said it was important to focus on the household sector, largely because a large portion of the foreign debt that had entered the country had ended up in the household sector, particularly through mortgages.

"Household balance sheets became highly leveraged, to a point that was regarded as high risk," he said.

"More recently, over the last 12 months or so, [there has been] quite a strong effort by households to de-leverage. The data shows that is taking place, and while it’s negative in terms of keeping the level of economic activity going - it’s undoubtedly reducing consumption – it is rebuilding household balance sheets.

"There is the question of, if household savings are increased, what does that do to retail trade and consumption generally?

"That applies if you’re increasing savings generally - what are the macro economic effects that flow from that? That’s quite a tricky issue, because the government’s trying to stimulate the economy, and appropriately so, but if you try to increase savings, that’s likely to offset some of the stimulus.

"But given the level of net foreign obligations, something has to be done."

A look at the free market

McDonald pointed to a phrase - 'the consenting adult’s approach'.

"It basically means we’ve got a free market economy, so you leave it to the market to decide who borrows [and] under what terms and conditions the money gets used.

"So it’s basically that approach that led to the very high proportion of the foreign funds being used firstly in the household sector, secondly in the farm sector.

"We are looking at that directly, and we need to understand firstly, how the processes work and is there anything in them that we should be alarmed at, secondly, given where the money is, what are the implications of that?"

House price falls?

"Now if there’s de-leveraging and the average price of houses fall, what does that do to household balance sheets? What does it do to the position of banks?"

McDonald was chairman of BNZ for 12 years, through to the first half of the global financial crisis.

“I can say that the bank balance sheets are in good shape. Barring a major catastrophe, if you look to their loan to asset ratios, it would have to be a very, very large fall in the price of most assets for the banks to have a problem."

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6 Comments

by Justice | 7th Oct 10, 9:04pm 1286438677

What i do with MY money is MY business! What Government does with MY taxes is MY business! Try to reverse it at your peril a**holes

by Gummy Bear Hero | 8th Oct 10, 2:59am 1286459949

The Retirement Policy & Research Centre has cast doubt upon the need for a compulsory savings scheme in NZ . They found that Australian's had more munny at retirement , but more debt too . And the balance of assets that Kiwis owned at retirement was healthy . For instance 22 % of Kiwi retirement assets were in directly owned businesses , compared to only 9 % for Ozzie retirees .

by Wolly | 8th Oct 10, 7:41am 1286476886

Amazing....simply amazing...are you amazed?...I'm amazed....what a shock....we didn't know the govt needed to reduce spending did we!....these working groups are amazing.

by Robert M | 8th Oct 10, 9:27am 1286483230

McDonald says: "More recently, over the last 12 months or so, [there has been] quite a strong effort by households to de-leverage. The data shows that is taking place, ..."

Let's see now... go to www.rbnz.govt.nz...

Mortgage debt in August 2009: $165.441b

Mortgage debit in August 2010: $169.446b

an increase of $4b, or $1000 per capita.

Consumer debt in August 2009: $11.943b

Consumer debit in August 2010: $11.791b

a decrease of $152m, or $38/capita.

So we managed to pay off $38 from the credit cards and hire purchase, great stuff, unfortunately we whacked another $1000 onto the mortgage. Quite a strong effort indeed. Well done everyone.

Anyone know what McDonald is referring to here?

by Gummy Bear Hero | 8th Oct 10, 10:52am 1286488320

Still paying the mortgage , Iain ! Oh those nasty predatory international bankers who offered you the munny to get a roof over your head ........ 'cos you weren't able to stump up the dosh to buy it freehold . ...............Horrid rotten little borderless bankers . How dare they offer you some of their excess liquidity , and entrap you into an abode ............ Scoundrels !

by David B | 8th Oct 10, 10:53am 1286488422

"We are not exporting enough. We are not earning enough foreign currency or producing stuff here that replaces imports."

This notion that exporting will somehow be the salvation of NZ is somewhat naive as much as it is an empty slogan. It's a little bit like standing in the middle of a desert looking at your neighbour's shack burning down and saying water would put that out. Yes it would but it denies the reality of the environment.

Exporting implies that we have stuff to sell to people who want to buy it. What stuff do we have and who are the people who want to buy it? The American consumer is broke, the Europeans are busy swallowing bitter pills again (is that all they ever do?), and the Japanese make their own stuff. Thank God for food, that's all I can say, or else we would be really in the shit.

I had the good fortune once to work in one of the most preeminent scientific research institutions in the world. And three things about that place really impressed me. One is that they worked very hard at keeping on top. Two, was their can-do attitude. "I don't know how to do that, but leave it with me and I will find a way” was something I often encountered and which contrasted so dramatically with the New Zealanders mindset of, “No, you can’t do that”, or “No, we don’t do that”. And three, was a critical mass of researchers and technology all under the one roof that provided all the resources that were needed to support and encourage innovation and productivity. And it was done that way deliberately. These were smart people working in a smart organisation that consistently and persistently delivered.

In order for us to become a great exporting nation we need to have these kinds of places too in our factories, businesses, etc., so that we can produce innovative products that people around the world clamour to buy. But by and large, we don’t have them. And the reason for that is quite simple; we simply don’t have enough of those people who come up with the ideas nor the environment (attitude) that supports them when they do that together creates the critical mass that really gets things going. And until we can find a way to create those kinds of places here, we will not be making stuff that people really really want to buy.

So yes let’s export ourselves to salvation. Anybody got a bucket of water?

Savings Working Group eyes govt savings first; says compulsory savings may not be magic wand

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