State of the economy: Cullen trains sights on savings

A major focus of the Budget will be measures to boost savings and investment.

Business investment is key to boosting productivity (how much we produce per hour worked) and that is the only way of sustainably raising living standards. So a better deal in the Budget on depreciation for firms investing in short-lived assets like computers has been foreshadowed.

But we can't expect to capture the returns on investment if it is other people's money funding it. Nearly one dollar in every three the banks lend comes from a foreign saver.

The statisticians reckon that collectively households spend $1.10 for every $1 of income. The savings rate, in other words, is negative and has been for years.

That figure is not exact. It represents the difference between two very big numbers (household income and household spending) so any errors in calculating them accumulate in the difference between them. But the statisticians are confident that the trend is a declining one.

Household debt rose 15 per cent in the year ended March, outstripping the 12 per cent growth in the value of their main asset, houses.

Some economists argue that if you look at how much wealth people have built up by middle age and assume no changes to New Zealand Superannuation, they may well be saving enough for their retirement.

But such conclusions depend heavily on the assumptions made and are in any case just averages.

Q: So what does Michael Cullen plan to do to lift household savings?

A: He is expected to tackle some of the anomalies and disincentives created by the tax treatment of the managed funds to which superannuation schemes entrust members' money.

He will also move to make it easier for people to get into workplace saving schemes.

Q: What anomalies?

A: One is that if a managed fund makes a profit when it sells assets such as shares a third of the profit is taken in tax. But most private investors who own shares directly pay no tax on such capital gains.

Dr Cullen has indicated he supports removing the capital gains tax from managed funds. A rough estimate of the cost to Inland Revenue, or benefit to savers, is $250 million a year. But it is not likely to come into effect until April 2007.

Savers on the 19.5 per cent marginal tax rate have a reason not to save through superannuation schemes because the returns on those savings are taxed at 33c.

Dr Cullen said in November that he would be surprised if the Budget did not include some provision to "look through" investment vehicles and tax the earnings on a person's savings at the same rate as their other income.

Q: And if you are not in a super scheme?

A: You are not alone. Only about one employee in seven belongs to a workplace scheme.

The Government is expected to back the proposal by a group headed by Peter Harris, Dr Cullen's former economic adviser, which recommended requiring employers with more than five staff to offer workplace superannuation schemes.

* The problem

New Zealand households have a "negative savings rate":
* We earn $1.00.
* We spend $1.10.