Thrift won’t take hold soon
Fri 24 Jul 2009 by Infometrics Ltd.

Credit rating Fitch’s announcement last week that it was placing a negative outlook on New Zealand’s AA+ sovereign rating because of its large current account deficit and need to raise savings brings into stark relief a dilemma facing New Zealand’s economic policy makers.   On the one hand there is a political imperative to stoke spending and prevent soaring unemployment.   On the other hand New Zealanders are perceived as irresponsible spendthrifts living beyond their means.   This conundrum has been publicly epitomised by Reserve Bank Governor Dr Alan Bollard’s seemingly contradictory comments exhorting banks to lower interest rates for borrowers and castigating New Zealand households for not saving enough.

Of Dr Bollard’s objectives it’s his desire to see an increase in savings that is the most problematic. Leaving aside the contentious debate about whether New Zealanders are saving enough, there is scant chance that New Zealanders will lift their rates of saving in the near future, despite the urgings of Dr Bollard and others.   After almost two decades of economic expansion New Zealanders have ingrained borrowing and spending habits.   Many believe that job security and reasonable economic times will continue to be the natural course over their lifetimes, despite the current downturn.   Why save for a rainy day when the sun shone for so long and the forecast is for fine days ahead?   Government policy, as opposed to its words, facilitates these habits and beliefs.

The Reserve Bank and the government are taking the edges of the worst effects of the downturn through low interest rates and fiscal stimulus.   This is partially mitigating the adjustments that would otherwise need to be made by businesses and individuals in response to the imprudence of the past 15 years.   The argument is made that many people affected by the downturn are victims of the errors and greed of a relative few, so it is fair to support them.   Of course some individuals also chose to take maximum advantage of cheap and easy credit to buy that late model car or put in the Italian marble bathroom.   Because of the central bank and government interventions it is likely that the current downturn won’t be sufficiently cathartic for New Zealanders to radically change their long-term saving and spending habits.   I doubt that a year or two of 10% unemployment and moderately falling house prices will do the trick.   Two of the developed world’s best savers, Japan and Germany, endured hyperinflation, humbling war defeats, and catastrophic destruction of national wealth before saving habits were engrained.

Another reason why thrift won’t suddenly become trendy in New Zealand is because we retain a generous universal state pension scheme relative to our incomes.   There are some merits to our system, such as its simplicity and moderate effects on older peoples’ decisions to stay in the workforce.  However, for a significant proportion of people in the bottom half of the income spectrum New Zealand Superannuation at current rates provides a disincentive to save more.   Kiwisaver has been designed to help New Zealanders save for their retirement.   Time will tell whether it has this effect.   It may not improve saving to a great degree as many people that can’t afford to save won’t enrol in Kiwisaver, while others may only switch their existing saving to Kiwisaver to take advantage of government subsidies.

Another way to increase saving is to take the China approach – generate income faster than the population can possibly spend.   This is certainly more desirable than a traumatising disaster or cuts in public entitlements being the catalyst for more saving.   New Zealand doesn’t have a vast pool of unutilised land and people to stoke economic growth like China.  It will need to substantially raise its productivity to grow at a significantly faster pace.   As New Zealand’s experience shows, productivity is an elusive and slow evolving phenomenon that is not amenable to quick-fix policy solutions.   We shouldn’t rely on improvements in this area to boost our savings any time in the foreseeable future.

If New Zealanders are to save more it will take more than telling offs and gentle persuasion.   The government must look at what might be the underlying causes of the perceived lack of saving and take meaningful actions.   This is likely to include politically unpopular measures that reduce the advantages of conspicuous consumption or investing in housing, and improve the payoff from saving.   Possible options to raise the benefits of saving include increasing taxes on consumption relative to those on income and saving, imposing a capital gains tax on housing investment, or reducing New Zealand Superannuation entitlements through greater targeting or raising the age eligibility.     The government can of course choose not to take consequential actions that will improve saving because they conflict with its other objectives, such as income redistribution or favouring particular groups in the economy.   But ifthis is the path that continues to be followed, Dr Bollard and other supporters of higher saving should direct their comments toward government policy.   Lecturing New Zealanders about their lax saving habits won’t make much difference.

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