KEY POINTS:
The attitude towards superannuation is one of the biggest differences between the Australian and New Zealand economies.
Australia introduced compulsory savings in 1992 and now has total superannuation funds of A$736.5 billion, or A$35,500 a head (total funds under management passed A$1000 billion for the first time last March). A few years earlier New Zealand removed all tax incentives on savings and now has superannuation funds of only $19.3 billion or $4600 a head.
As the accompanying table shows, the gap between the two countries has widened considerably in recent years. In Australia, superannuation funds have grown from A$300.7 billion to A$736.5 billion since 1999, whereas in New Zealand they have fallen from $19.8 billion to $19.3 billion.
As one would expect, the different superannuation policies have had a major impact on corporate growth. Since 1999 the total value of domestic companies listed on the ASX has increased from A$653.5 billion to A$1390.3 billion whereas the value of all domestic listed companies on the NZX has risen from only $53.4 billion to $63.6 billion (these capitalisation figures have been standardised and exclude investment funds, exchange traded funds, listed foreign shares and companies whose only goal is to hold shares in other listed companies).
The ASX and NZX have both performed well in recent years, but for different reasons. The strong performance of the New Zealand market has been heavily influenced by the sale of companies to foreign interests as the number of domestic listed companies has risen from only 113 to 151 since December 1999.
In comparison, the ASX has been boosted by a huge number of new floats as the total number of domestic listings has risen from 1217 to 1751 in the same period.
Looking at it another way, the average value of an ASX-listed company has increased from A$537 million to A$794 million since December 1999, whereas the average size of an NZX-listed domestic entity has fallen from $473 million to $421 million over the same period.
New Zealand's superannuation policies - or lack of them - have given a big boost to residential housing, whereas compulsory superannuation in Australia has had a positive impact on the corporate sector.
New Zealand's superannuation reforms began in 1982 with the partial removal of tax concessions for lump sum superannuation schemes. Finance Minister Roger Douglas completed the process on December 17, 1987, when he announced the removal of all tax incentives for superannuation savings. The announcement was part of a major tax package that included a fringe benefit tax, dividend imputation and the removal of taxation rebates for charitable donations and school fees.
Douglas argued that the wealthy were the main beneficiaries of the superannuation tax incentives and the changes would end a scheme that had the potential to "influence investment decisions" and "distort the allocation of resources within the economy". He believed he was abolishing a tax regime that had been used for "the benefit of a few at the expense of the community as a whole".
These tax reforms had a dramatic impact on the superannuation sector, with the total funds rising from only $11.5 billion to $19.3 billion since 1987. In comparison total Australian superannuation funds have increased from A$98.1 billion to A$736.5 billion since compulsion began in 1992.
The dominant political philosophy during the Douglas era was that individuals would make rational economic decisions if all tax distortions were removed. The problem is that there will never be a totally neutral tax situation and when tax incentives are removed from one area they will be identified and utilised in other sectors.
There have been a number of reviews of the country's superannuation regime since the Douglas reforms but they have been given narrow terms of reference. They have assessed the issue from an individual, rather than a wider national point of view, and have not looked at overseas trends in detail to determine what policies might best benefit New Zealand.
The 1997 Todd report identified one of the present regime's major problems when it stated: "A neutral treatment of all forms of savings has been difficult to achieve in practice. The resulting uneven taxation treatment has been the source of understandable complaint. Savers are probably more inclined to switch to a tax-favoured form of investment, such as property, than to complain. Such tax-driven decisions can lead to a lack of diversification and an inefficient allocation of resources."
A survey by the Todd committee found "many people used residential property for retirement savings because of its tax advantages".
The report went on to say that individuals planned to trade down to smaller houses when they retired. This strategy is often not appropriate because they become reliant on an established community network and it is difficult for them to move to a completely new area.
The impact of the different tax treatment on superannuation and residential housing can be clearly seen from the table. Since 1999 New Zealand's superannuation funds have fallen by 3 per cent, the total value of the NZX has risen by only 19 per cent, while the total value of the country's residential housing stock has risen by a whopping 144 per cent to an estimated $557 billion.
The contrast with Australia is startling. Since 1999 the total value of Australian housing stock has remained static at just 2.2 times the total value of the ASX. Over the same period the total value of New Zealand's housing stock has risen from 4.3 times the value of the NZX to 8.8 times.
In other words we have become obsessed with residential housing, whereas Australia and most other countries have put a much stronger emphasis on financial assets and the development of the corporate sector.
The corporate sector should be the primary driver of economic growth and rising personal incomes. Our underinvestment in this area is the main reason why incomes remain low and this, rather than high house prices, is the major cause of housing affordability problems.
In light of this, the role of the Reserve Bank of New Zealand and its monetary policy is bizarre.
Once again this week Reserve Bank Governor Alan Bollard warned that he would have to raise interest rates "in the absence of clear indications of a moderation in housing and domestic demand".
But another interest rate increase will lead to a higher NZ dollar and will put further pressure on the corporate sector, both for exporters and companies that compete with imports. This is supposed to be the year of the exporter, yet the Reserve Bank is threatening to put another nail in their coffin.
Surely there must be a better way. If we are serious about the export sector then we must find another way to curtail the housing market than by higher interest rates and an appreciating NZ dollar.
The KiwiSaver scheme is a step in the right direction as far as the encouragement of superannuation and non-housing investment is concerned. However, based on the Reserve Bank Governor's interest rate warning this week, it is far too little and far too late.
Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.
