David Skilling: Think big on savings

David Skilling

During the past few months, the Government has repeatedly stated an interest in promoting personal savings and asset ownership. The Prime Minister's speech to open Parliament in February outlined a commitment to develop an ownership society and to lift the savings rate.

Budgets are the time when governments have the opportunity to convert statements of good intention into concrete policy action by committing dollars to priority policy areas. So Thursday's Budget will provide a good indication of how this Government prioritises policies to improve New Zealand's savings record and create an ownership society.

Does the fiscal commitment to savings and ownership policy reflect a seriousness of purpose about substantially improving these outcomes?

Encouragingly, it does appear from the myriad of pre-Budget speeches and announcements, that this Budget will be the first in many years to contain initiatives to deliberately promote personal savings and asset ownership.

In particular, initiatives are likely to be announced to encourage retirement savings through the workplace, as well as initiatives to assist those saving for a first-home deposit.

And, last week, the Government said it was considering the establishment of a tertiary education savings scheme, although it appears that many of the details are still to be confirmed and it is unclear how generous the Government contribution will be.

It is also likely that changes will be made to the tax system to implement the Stobo Review recommendations, so as to remove the tax disincentive to investing through professionally managed funds. It has been argued that these changes will be positive for savings.

Such policy action to promote savings and asset ownership is long overdue, and is to be commended. The past decade or so of a hands-off policy approach to savings and asset ownership has not generated good outcomes, with negative and declining household savings, declining rates of home ownership, sharply rising household debt - including student loan debt - and among the highest levels of external debt in the OECD. And many of these poor outcomes are projected to worsen. So the sooner corrective action is taken, the better.

The rather less encouraging aspect of the likely Budget initiatives is their scale. Michael Cullen has cautioned that these initiatives will be "necessarily modest", citing fiscal constraints. But modest solutions are unlikely to make a material difference to the substantial savings and ownership challenge that New Zealand faces.

To make a real difference, the policies need to be sufficient to assist many more New Zealanders to build an asset ownership stake and also to substantially raise the level of national savings. Achieving this will require a substantial, sustained commitment - particularly given New Zealand's present outcomes.

So, using this as the standard, are the likely Budget initiatives sufficient in magnitude to achieve a material improvement in outcomes?

Until the full details of the Budget initiatives are released on Thursday, it is difficult to be precise about the extent to which the initiatives will assist many New Zealanders to get ahead. But the initiatives have been described as targeted, suggesting that many Kiwis will not receive assistance around savings and asset ownership. And yet these are issues facing many, if not most, New Zealanders.

But we can be much more certain that a modest policy response won't generate a material improvement in the level of national savings.

Consider our savings performance. The OECD reports that New Zealand has the lowest household savings rate in the OECD at -6.5 per cent of household income (the Reserve Bank estimate is -9 per cent). As the Economist recently noted, this reflects that "people borrow to consume more than they earn".

This low level of domestic saving means that New Zealand is heavily reliant on importing foreign savings. This is reflected in the country's large, persistent current account deficits - now 6.4 per cent of GDP, one of the largest in the OECD - and in New Zealand's net international investment position of -$118 billion, more than $29,000 per capita or 84 per cent of GDP, one of the highest in the OECD.

This low level of savings leads to higher interest rates, less investment and lower growth.

Increasing domestic savings and reducing the reliance on foreign capital ought to lead to higher rates of investment, productivity and growth. A focus on increasing national savings should, then, be a key focus of economic policy.

To meaningfully address a challenge of this magnitude requires a substantial and sustained policy commitment - this is not a challenge that can be remedied with some minor initiatives. So although the Budget initiatives that have been signalled are welcome, they are likely to be inadequate to materially improve national savings outcomes.

The New Zealand Institute's view is that a big challenge demands a big response. That is why, last month, we proposed a series of bold policies designed to assist many more Kiwis to build a meaningful asset ownership position and to lift national savings.

Although we have been criticised for being radical, we believe our proposals are a measured, proportionate response to a substantial challenge.

So while it is encouraging to see Budget initiatives to promote savings, much more needs to be done if we are serious about addressing the savings and ownership challenge. Having at last overcome the powerful force of inertia around savings policy, the pressing task now is to implement policies that generate meaningful improvements in savings and ownership outcomes for individual New Zealanders and the country as a whole.

And now is the time for bold action by politicians. There is a window of opportunity to improve savings and asset ownership outcomes with a healthy fiscal position and a growing economy. And as shown in an opinion poll the institute released last week, there is strong public support for bold policy action to promote savings. This is not the time for half-measures.

* Dr David Skilling is chief executive of the New Zealand Institute, a policy think-tank comprising business, community and education leaders. The institute's reports are available at www.nzinstitute.org

Timely action

* New Zealand has the lowest household savings rate in the OECD at -6.5 per cent of household income.
* New Zealanders are seen as "people who borrow to consume more than they earn".
* There is strong public support for bold policy action to promote savings.
* A healthy fiscal position and a growing economy provide a window of opportunity to improve savings and asset ownership.
* Now is the time for bold political action.