Thrift won’t take hold soon

Credit rating Fitch’s announcement lastweek that it was placing a negative outlook on New Zealand’s AA+ sovereign ratingbecause of its large current account deficit and need to raise savings bringsinto stark relief a dilemma facing New Zealand’seconomic policy makers.   On the one hand there is a political imperativeto stoke spending and prevent soaring unemployment.   On the other hand NewZealanders are perceived as irresponsible spendthrifts living beyond theirmeans.   This conundrum has been publicly epitomised by Reserve Bank Governor DrAlan Bollard’s seemingly contradictory comments exhorting banks to lowerinterest rates for borrowers and castigating New Zealand households for notsaving enough.

Of Dr Bollard’s objectives it’s his desire to see anincrease in savings that is the most problematic. Leaving aside the contentiousdebate about whether New Zealanders are saving enough, there is scant chancethat New Zealanders will lift their rates of saving in the near future, despitethe urgings of Dr Bollard and others.   After almost two decades of economicexpansion New Zealanders have ingrained borrowing and spending habits.   Manybelieve that job security and reasonable economic times will continue to be thenatural course over their lifetimes, despite the current downturn.   Why savefor a rainy day when the sun shone for so long and the forecast is for finedays ahead?   Government policy, as opposed to its words, facilitates thesehabits and beliefs.

The Reserve Bank and the government are taking the edges ofthe worst effects of the downturn through low interest rates and fiscalstimulus.   This is partially mitigating the adjustments that would otherwiseneed to be made by businesses and individuals in response to the imprudence ofthe past 15 years.   The argument is made that many people affected by thedownturn are victims of the errors and greed of a relative few, so it is fairto support them.   Of course some individuals also chose to take maximum advantageof cheap and easy credit to buy that late model car or put in the Italianmarble bathroom.   Because of the central bank and government interventions itis likely that the current downturn won’t be sufficiently cathartic for NewZealanders to radically change their long-term saving and spending habits.   Idoubt that a year or two of 10% unemployment and moderately falling houseprices will do the trick.   Two of the developed world’s best savers, Japan andGermany, endured hyperinflation, humbling war defeats, and catastrophicdestruction of national wealth before saving habits were engrained.

Another reason why thrift won’t suddenly become trendy inNew Zealand is because we retain a generous universal state pension scheme relativeto our incomes.   There are some merits to our system, such as its simplicityand moderate effects on older peoples’ decisions to stay in the workforce.  However, for a significant proportion of people in the bottom half of theincome spectrum New Zealand Superannuation at current rates provides adisincentive to save more.   Kiwisaver has been designed to help New Zealanderssave for their retirement.   Time will tell whether it has this effect.   It may notimprove saving to a great degree as many people that can’t afford to save won’tenroll in Kiwisaver, while others may only switch their existing saving to Kiwisaverto 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 iscertainly more desirable than a traumatising disaster or cuts in publicentitlements being the catalyst for more saving.   New Zealand doesn’t have avast pool of unutilised land and people to stoke economic growth like China.  It will need to substantially raise its productivity to grow at a significantlyfaster pace.   As New Zealand’s experience shows, productivity is an elusive andslow evolving phenomenon that is not amenable to quick-fix policy solutions.   Weshouldn’t rely on improvements in this area to boost our savings any time inthe foreseeable future.  

If New Zealanders are to save more it will take more thantelling offs and gentle persuasion.   The government must look at what might bethe underlying causes of the perceived lack of saving and take meaningfulactions.   This is likely to include politically unpopular measures that reducethe advantages of conspicuous consumption or investing in housing, and improvethe payoff from saving.   Possible options to raise the benefits of saving includeincreasing taxes on consumption relative to those on income and saving, imposinga capital gains tax on housing investment, or reducing New ZealandSuperannuation entitlements through greater targeting or raising the ageeligibility.     The government can of course choose not to take consequential actionsthat will improve saving because they conflict with its other objectives, suchas income redistribution or favouring particular groups in the economy.   But ifthis is the path that continues to be followed, Dr Bollard and other supportersof higher saving should direct their comments toward government policy.   LecturingNew Zealanders about their lax saving habits won’t make much difference.

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