Savings rise could boost pay by 7pc, says NZIER

A sustained rise in the country's savings rate could boost real wages by 7 per cent over the next 15 years, modelling done by the New Zealand Institute of Economic Research for the savings working group has found.

NZIER has interrogated its elaborate mathematical model of the economy about what the effects would be if we were to consume 4c less of every dollar of national income - at least until New Zealand's net foreign liabilities dropped to 60 per cent of GDP, which is where Australia is, from 86 per cent now.

It compares that scenario with a business-as-usual one, which would see net foreign liabilities climb to 120 per cent of GDP by 2025.

New Zealand is already in the vicinity of Portugal, Ireland, Greece and Spain by this measure (though not in terms of government debt levels), which is seen as a source of vulnerability and as raising the country risk premium built into interest rates.

A higher savings rate would reduce household consumption, compared with business as usual. This trend is already being seen as households reduce debt. While it is painful for them and for retailers, it is an essential part of a sustainable economic recovery, the institute says.

A larger pool of domestic savings would make the country less reliant on overseas borrowing for investment purposes, reducing offshore interest payments by $10 billion a year by 2025.

"What was previously a flow of money into the country becomes a flow out of the country as we repay debt. This increases the supply of New Zealand dollars to the foreign exchange market and causes a depreciation of the currency."

The economy would become more export-driven.

If the higher savings rate is rewarded by the financial markets with a lower risk premium and lower cost of capital - which should happen, but is not a given - investment and productivity rise enough to drive real wages 7 per cent higher by 2025 than they would otherwise be.

The NZIER modelling suggests GDP would be 4 per cent higher by 2025 and national income 9 per cent higher.

The NZIER research does not consider how the higher national savings rate could be achieved.