Savings rate fuels fears for the future

The big parties are pressured to improve an environment where investing for retirement is increasingly shaky, Brian Fallow reports.

WELLINGTON - New Zealanders, it seems, are an increasingly improvident people.

The proportion of household income that is saved has fallen sharply since the late 1980s and is projected, by the Reserve Bank, to remain around zero for the next couple of years. This raises doubts about whether people are making adequate provision for retirement income.

It implies that the current account deficit - we don't earn enough abroad to cover what we spend - will continue to pose a risk to the economy. To fill the gap we sell more assets to foreigners and borrow more from them. And it suggests that we are unwilling to undertake the level of investment needed to pull productivity and incomes out of the bog they are in now.

Economists warn that measuring savings and investment is a tricky and imprecise business.

The 8 per cent of adults in tertiary education are investing in a way the national accounts do not capture. The half a million households paying off a mortgage are increasing their net worth.

Some of the borrowing recorded as being by the household sector may in fact be funding business growth, as small business operators borrow against their homes.

But the overall trends are clear. New Zealand's national savings rate (which includes business and Government as well as household savings) has been falling for five years and is low compared with other developed countries.

While business and Government sectors more or less finance their investments from their savings, the household sector has been heavily reliant on foreigners' savings via the banking system to fund its investment in housing. That is reflected in a blowout in the current account deficit.

In 1997/98, of $6 billion in investment by households, mainly into housing, $5.5 billion was funded by foreigners' savings, which in turn represented the lion's share of the $7 billion inflow needed to fund the current account deficit that year.

Such investment in housing does little for employment or New Zealand's ability to earn its living as a trading nation and service its mounting external debt.

The individuals were responding to a tax system which favours bricks and mortar over other forms of savings, and memories of two decades of high inflation, when highly leveraged housing investment made all kinds of sense. Some economists argue that as experience of a low inflation environment grows and memories fade, the preference for housing over financial forms of investment will decline.

So if there are problems about investment - the quantity, the quality and the amount of it we fund ourselves - what are major parties proposing to do about it?

National's position is that individual households and firms are best placed to know what saving and investment decisions make sense for them. The best contribution the Government can make is to provide a sound economic environment and keep cutting taxes when it can.

Tax cuts, it argues, increase the disposable incomes out of which individuals can choose to save, and in the case of business increases the incentive to invest by boosting after-tax profits.

Labour offers an industry policy to address areas where it sees the market has failed to deliver, especially in venture capital, regional development, export financing and research and development.

At the micro-economic level Treasurer Bill English points to producer board reform, such as the proposed mega-merger in the dairy industry. Returns on rural investment - a big chunk of all capital investment in New Zealand - has declined to low levels.

"We went to them [producer boards] and said, `What are your plans for turning around rural incomes?' and found they didn't have a lot of plans. So we've been working with them.

"Another example would be the roading proposals. We have billions of dollars invested in roads. We have to move it form a cash rationing system to a long-term investment system. And there is plenty of politics on the way, but it's another piece of the jigsaw."

On household savings, Labour proposes to start moving New Zealand Super from one funded by current tax receipts to one financed by Government investment. That is mainly about lessening the load on future taxpayers, but it involves shifting some national income from consumption to investment.

On the private savings side, Labour's planned comprehensive review of the tax system will have the encouragement of savings as one of its key terms of reference.

Finance spokesman Dr Michael Cullen has criticised as a "very large inter-generational tax grab" the present taxed-taxed-exempt regime. This means people are taxed on the income they plan to save, then they are taxed on the income and capital gains of the investments but they receive at the end a tax-free payout.

He says it is not feasible to change that for existing schemes. It would cost too much and be unfair to those in or approaching retirement.

"But I do think there is a need to look at putting alongside that regime alternative savings vehicles where, in return for locking in their savings and so providing a longer-term capital flow, there is a more favourable tax regime."

The one Labour has been looking at is a taxed-exempt-taxed regime. People would still invest after-tax income but the investment would be untaxed while it was in the programme, allowing it to grow faster. The payout would be taxed.

It would address two complaints about the current system: if you entrust savings to a fund manager or superannuation fund the income the savings generate is taxed at the top rate even if you are not; and they are subject to capital gains tax.