The Reserve Bank and Treasury have both joined the Inland Revenue Department (IRD) in suggesting the government encourage savings through term deposits and bonds by reducing tax paid on interest returns to take account of inflation.
This would involve exempting the inflation component of interest returns from term deposits and bonds when calculating tax returns. This idea was talked about in depth by Motu economist Andrew Coleman on Interest.co.nz back in November 2009.
Coleman is on the Savings Working Group which is looking at ways to improve New Zealand's savings rate. Last week the IRD estimated such an exemption could cost NZ$1 billion a year.
A Treasury study shows term deposits and bonds are taxed at an effective real rate of almost 50%, while property is taxed at half that rate.
Treasury Secretary John Whitehead endorsed the examination of such an inflation exemption in a speech on improving New Zealand's economic growth rate earlier on Wednesday.
Reserve Bank Governor Alan Bollard included the suggestion for the inflation exemption for interest returns in the Reserve Bank's submission to the Savings Working Group, which said an improvement in New Zealand's national savings rate would reduce its vulnerability to global shocks.
"The recent decision by Standard and Poor’s to put New Zealand sovereign debt on negative outlook reinforces this,” Bollard said.
“Most importantly, an improved savings level would reduce interest rates relative to foreign rates, thereby taking pressure off the exchange rate and promoting a more balanced growth mix across the export and domestic sectors,” he said.
Bollard said a number of measures would be expected to improve national savings over the medium term.
“Foremost could be a faster return to government operating surpluses than currently planned. The Government might also give consideration to moving towards a Nordic-type tax system where income on capital is taxed at a lower rate than labour income," he said.
"Savings would also be enhanced by inflation-indexing the tax treatment of interest.”