Corrective measures for New Zealand's savings problem are likely to be challenging, chair of the government appointed Savings Working Group Kerry McDonald said.
Rapid credit growth over the last decade had led to house and farm price bubbles, McDonald said.
As a result of these adverse developments the New Zealand economy was now in a vulnerable and unsustainable position, and corrective measures were likely to be challenging, he said.
"Recently there has been a sharp rise in household savings, mainly in response to the depressed economic conditions, but what was needed was an increase in national savings in order to help create the right conditions for a long term structural shift in the economy," McDonald said
McDonald's comments came the same week Standard and Poor's put New Zealand's sovereign AA+ credit rating on negative outlook, citing the country's poor savings record, and high international debts, as the main reasons for its action.
The Labour Party said Standard and Poor's decision indicated the National-led government had not acted on New Zealand's savings problem, and had instead made it worse by cutting Kiwisaver and contributions to the 'Cullen' Superannuation Fund. Key said nothing had changed in New Zealand's economic situation and S&P appeared to be reacting to international financial market volatility.
McDonald's comments also come at a time when the government would be looking at what goes into its next budget, due in May 2011. However Prime Minister John Key said on Monday the government had not yet started the process "of even really trying to formulate what will or won’t be in the budget".
The Savings Working Group is due to report back to the government by the end of January 2011, which is during the planning process for the 2011 budget, the last before the next election.
Here is the release from Treasury on McDonald's speech:
Shifting the structure of the New Zealand economy towards exports and savings, and lifting productivity, especially in the government sector, are critical issues for New Zealand.
Savings Working Group Chairman Kerry McDonald said in a speech to the Taihape Rotary Club tonight that economic growth had been skewed towards the non-tradeable areas of the economy over the past decade, while output and employment had actually declined from the middle of the decade in the vital export sectors of manufacturing and agriculture. This had contributed balance of payments deficits that are unsustainably large, and to a step increase in New Zealand’s net foreign liabilities – which are mainly debt rather than equity investments in New Zealand.
Also, over the past decade New Zealand’s productivity growth halved and, again, the performance of the non-tradeable sector was particularly unsatisfactory.
Mr McDonald highlighted a number of other adverse trends through the decade, including the rapid growth in credit and the consequent bubble growth in house and farm prices.
He emphasised that as a result of these adverse developments the New Zealand economy was now in a vulnerable and unsustainable position and that corrective measures were likely to be challenging.
Recently there has been a sharp rise in household savings, mainly in response to the depressed economic conditions, but what was needed was an increase in national savings in order to help create the right conditions for a long term structural shift in the economy.