John Armstrong: Timid report misses golden opportunity

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So much for stimulating public debate on New Zealand's hopelessly inadequate savings rate. The rather timid report produced by Bill English's savings working group has put paid to that.

In recommending against a compulsory savings scheme, the group has foregone the opportunity to really throw the cat among the pigeons and force the kind of discussion which it was asked to do in its terms of reference when it was established last August.

The report instead comes up with reasons why KiwiSaver should not be made compulsory. It suggest a number of refinements and improvements to that scheme which could bring some of the benefits of compulsion without making contributions mandatory.

If those do not have the desired affect, then Kerry McDonald, the group's chairman, believes compulsion becomes an option.

The caution in the group's recommendations overall make the report somewhat underwhelming. It warns that in economic terms that New Zealand is standing on top of a cliff which may collapse dramatically or crumble slowly. To reduce that economic vulnerability, national savings needs to increase by 2 to 3 per cent of GDP.

However, there is a disconnect between the severity of this warning and the lack of any "big bang" recommendations on how savings rates could be increased by that extent.

The report's best argument for change centres on the current distortions in the tax system which result in some investments - such as interest on bank term deposits - being heavily overtaxed.

It makes some recommendations for reducing though not necessarily eliminating those distortions. Critically, however, it gives no indication of how much such action would cost the Government.

That information is vital. Because for a cash-strapped finance minister like Bill English, there is a fine line between removing distortions and creating exchequer-draining tax incentives to boost savings.